UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

 
FORM 10-K


 
FORM 10-K
 
xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 20082009
 
OR
oTRANSITION 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 (I.R.S. Employer
Incorporation or Organization) 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 Registered
Common 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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o 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. ox
 
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 x
Non-accelerated filer o
Smaller reporting company o
(Do not check if a smaller reporting company) 
 
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 $230,695,120$173,352,170 based on a closing price of $4.68$3.49 on June 30, 2008,2009, as quoted on the NASDAQ Global Market.
 
As of February 28, 2009, 50,220,43819, 2010, 50,950,851 shares of the registrant’s common stock, par value $0.001 per share, were issued and outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Part III—Portions of the registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders to be filed with Securities and Exchange Commission within 120 days after the end of our 20082009 fiscal year. Except as expressly incorporated by reference, the registrant’s Proxy Statement shall not be deemed to be a part of this report on Form 10-K.
 


 
 

 
 
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FORWARD-LOOKING STATEMENTS
 
This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. 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 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 our beliefs and expectations after consideration of 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 us that could cause or contribute to such differences include, but are not limited to, those set forth in this Form 10-K under Item 1A “Risk Factors.” We undertake no obligation to update any forward-looking statements as a result of new information, future events or otherwise.
 
As used herein, except as otherwise indicated by context, references to “we,” “us,” “our,” “Internap” 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 is (404) 302-9700. Our common stock trades on the NASDAQ Global Market under the symbol “INAP.” Our website address is www.internap.com.
 
We market products and services that optimize the performance and reliability of strategic businessare an 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 colocationsolutions and data center company providing a suite of network optimization and delivery services and managed securityproducts that manage, deliver and distribute applications and content with a 100% availability service level agreement, as well as a global provider of secure and reliable data center services. We alsohelp our customers innovate their business, improve service levels and lower the cost of information technology operations. Our services and products, combined with progressive and proactive technical support, enable our customers to migrate business-critical applications from private to public networks.
We provide products and services for storing and delivering audio and video digital media to large audiences over thethrough 73 Internet following our acquisition of VitalStream Holdings, Inc.,Protocol, or VitalStream, in February 2007. OurIP, service points, which include 20 content delivery network, or CDN, was purpose-built for streaming digital mediapoints of presences, or POPs, and enables content owners to monetize their digital media assets via both subscription and advertising-based business models. Additionally, we offer Internet television solutions, professional services, small business services and pre- and post-installation services.
As of December 31, 2008, we delivered services through our 64 service points47 data centers across North America, Europe Asia, India and Australia,the Asia-Pacific region. We also have two additional international standalone CDN POPs and two additional domestic standalone data center locations through which we provide IP services by extension. However, through December 31, 2009, neither revenues generated nor long-lived assets located outside the United States were significant (all less than 10%).
Our Private Network Access Points, or P-NAPs, feature multiple direct high-speed connections to multiple major Internet backbones, also referred to as network service providers, or NSPs, such as AT&T Inc.; Sprint Nextel Corporation; Verizon Communications Inc.; Global Crossing Limited; and Level 3 Communications, Inc.; XO Holdings Inc.; and Cogent Communications Group, Inc. We operate in two business segments: IP services and data center services. These segments reflect a change from our historical segments, which also included CDN services as a separate segment. We now operate our IP services and the majority of our CDN services on a combined basis while we operate the managed hosting portion of our CDN services as part of our data center services. We discuss the determination of and changes in our business segments below in “Segments” and in notes 2 and 4 to the accompanying consolidated financial statements.
Our proprietary route optimizationintelligent routing technology monitors thefacilitates traffic over multiple carriers, as opposed to just one carrier’s network, to ensure highly-reliable performance of Internet networks allowing our customer traffic to be “intelligently” routed over the optimal pathInternet. Our data center, or colocation, 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 a way that maximizes performance and reliability of the transactions by minimizing loss and delays inherent across the Internet.secure, high-performance facilities. We believe that 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 multiple networks and a broader segment of the entire Internet in the United States, excluding local connections, whereasthan providers of conventional Internet connectivity which typically only guarantee performance on their own network.
On February 20, 2007, we closed the acquisition of VitalStream in an all-stock transaction accounted for using the purchase method of accounting for business combinations. Our results of operations include the activities of VitalStream from February 21, 2007 through December 31, 2009.
We servecurrently have approximately 2,900 customers inacross more than 25 metropolitan markets, serving a variety of industries, including entertainment and media, financial services, healthcare, travel, e-commerce, retail and technology. As of December 31, 2008, we provided services to approximately 3,600 customers in the United States and abroad.
 
As discussed below in “—Segments,” we operate in three business segments: IP services, data center services and CDN services.

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Developments in 2008
Impairments
          Goodwill. We are required to assess goodwill for impairment under generally accepted accounting principles in the United States, or GAAP, on at least an annual basis. Our annual assessment date is August 1 of each year, following our annual strategic planning cycle, which includes an update of our long-term financial outlook. 
As a result of our August 1, 2008 assessment, we concluded that the current carrying value of our goodwill in the CDN services segment was impaired. We recorded the CDN services goodwill following our February 2007 acquisition of VitalStream. We recorded a $99.7 million goodwill impairment charge to adjust goodwill in our CDN services segment to an implied fair value of $54.7 million. The goodwill impairment charge was primarily due to declines in our CDN services revenues and operating results as compared to our projections and unfavorable changes in market factors used to estimate fair values.
The impairment also caused us to reverse a deferred tax liability and create an income tax benefit of $0.6 million associated with the CDN services goodwill. 
We also assessed the likelihood of triggering events and concluded that none had occurred that would cause us to re-assess goodwill for impairment subsequent to August 1, 2008.
          Other Intangible Assets. In conjunction with our August 1, 2008 review of our long-term financial outlook, we also performed an analysis of the potential impairment, and re-assessed the remaining asset lives, of other identifiable intangible assets acquired in the VitalStream acquisition. This analysis and re-assessment resulted in: (1) an impairment charge of $1.9 million in developed advertising technology due to a strategic change in market focus, (2) an impairment charge of $0.8 million in trade names as a result of discontinuing use of the VitalStream trade name and (3) a change in our estimates that resulted in acceleration of amortization expense of our customer relationships intangible asset over a shorter estimated useful life (four remaining years instead of the original estimated nine years) due to customer churn resulting in higher than expected attrition as of our acquisition date.
These non-cash charges to earnings and change in estimated useful life had no impact on our cash balance as of December 31, 2008 and did not result in a violation of any covenants in our debt instruments.
We discuss these impairments in note 8 to the accompanying consolidated financial statements and the sections captioned “Results of Operations—Other Operating Expenses—Goodwill Impairment” and “—Restructuring and Other Impairments” under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Restructuring. In conjunction with the preparation of our financial statements as of and for the year ended December 31, 2008 and in light of the recent and significant deterioration in the real estate market, we completed an analysis of our remaining accrued restructuring liability for leased facilities. After reviewing the analysis and specifically the underlying assumptions related to anticipated sublease recoveries, we concluded that certain of the facilities remaining in the restructuring accrual were taking longer than expected to sublease or were otherwise not generating the expected levels of sublease income. The analyses were based on discounted cash flows using the same credit-adjusted risk-free rate that we used to measure the initial restructuring liability for leases that were part of the 2007 restructuring plan and undiscounted cash flows for leases that were part of the 2001 restructuring plan. The cumulative effect of these changes was $1.1 million, which we recorded as additional restructuring expense and an increase to the liability. We discuss this charge in note 9 and report it in “Restructuring and other impairments” in the accompanying consolidated statements of operations, along with a $0.8 million impairment of the VitalStream tradename and a reduction of the accrued liability of $0.1 million for employee separations since we paid all such amounts. We estimated net related expenditures for the 2007 restructuring plan to be $12.2 million, of which we paid $4.2 million through December 31, 2008, and the balance continuing through December 2016, the last date of the longest lease term. We expect to pay these expenditures out of operating cash flows. We estimate cost savings from the restructuring to be approximately $0.8 million per year through 2016, primarily for rent. 
Credit Agreement. On September 30, 2008, we amended our credit agreement with Bank of America, N.A. The amendment consolidated a two-tiered debt facility into a single revolving loan. Under the amended credit facility, we converted the previously-existing $20.0 million term loan balance and outstanding letters of credit with Bank of America into a $35.0 million revolving loan facility. The amendment extended the principal settlement terms from quarterly payments, scheduled to begin in the third quarter of 2008, to a single principal repayment due in 2011. As of December 31, 2008, we had $10.8 million of borrowing capacity on the revolving credit facility. We discuss this amended credit agreement in note 11 to the accompanying consolidated financial statements and the section captioned “Liquidity and Capital Resources” under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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Global Economic Conditions. We are currently in a time of severe deteriorating economic conditions and have seen signs of slowdowns and cautious behavior from our customers. During the year ended December 31, 2008, we increased our provision for doubtful accounts, in part after taking into consideration current economic conditions. We are continuing to monitor and review our performance and operations in light of the continuing negative global economic conditions. In particular, 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.
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.architecture and routing protocols. Each network must connect to one another 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 and private 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 to avoid the increasing congestion and the potential for resulting data loss at the public network access points, a number of 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.points.
 
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 onover the Internet. Since the use of a public network access point or a private peering point typically involves no economic settlement, anAn ISP will often route the data from private connections, or peered 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 own transport network. Once the origination traffic leaves the network of an ISP, SLAs with that ISP typically do not apply since that carrier cannot control the quality of service on the network of another ISP. Consequently, 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. The quality of service can be further degraded by basic routing protocols that make assumptions about the “best” path or network to route traffic to, without consideration of the performance of that 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.
 
The Problem of Poor Application Performance over Distant Network Paths
 
The major application protocols often utilized over data networks perform poorly under congestion when network latency is largehigh or network paths are subject to packet and data loss. These applications may timeout, reset or cause user frustration and abandonment of an activity or session. 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 latencypoints, 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, potentially resulting in lower effective throughput. This throughputAdditionally, longer distances typically result in more network hops, or data transition points, and may be lower thanincrease the available network capacity and often results in poor utilizationlikelihood 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.encountering congestion. 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 andresultant user experience 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.

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degrade.
 
The Growing Importance of the Internet for Business-Critical Internet-Based Applications
 
Once primarily used for e-mail and basic information retrieval, theThe Internet is now used as a communications platform for an increasing number of business-critical Web- and Internet-based applications, such as those relating to electronic commerce, Voice over IP, or VoIP, supply chain management, customer relationship management, project coordination, streaming media and video conferencing and collaboration. Businesses are redesigning their information technology operations models to take advantage of new, more cost-effective application delivery models, such as software-as-a-service, hosting and cloud computing. In all cases, these new delivery models rely on the Internet as the primary means of communicating with customers and users, and result in enhanced expectations of performance, availability and transparent delivery for the business application to work as expected.
 
Businesses often 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, video conferencing and streaming, multimedia document distribution and streaming and audio and video conferencing and collaboration, are hindered by inconsistent performance. We believe that providerscompanies 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 drivelead the market for Internet services. We believe that our patented route optimization technologies facilitate such superior performance by mitigating the factors that inhibit efficient movement of traffic as described above.
 
The Growing Demand for Secure and Reliable Data Center Environments
Businesses and organizations continue to move more data, applications and operations online, creating a demand for secure and reliable data center environments. Many companies do not have the capital dollars or the time to manage ongoing data center space and power requirements for their business. As a result, we provide companies secure, offsite environments for their equipment or an outsourced hosting service for their applications and business-critical websites. Our data centers improve a company’s ability to directly connect to NSPs, which avoids local loops and mitigates online risk. As our customers’ business models evolve to leverage rich media content, we help them stream it globally, and as their media library grows we provide scalable, secure storage for their content.
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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 distributiondelivery network, or CDN. Because of the inheritinherent 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, ISPs have maintained at-will agreements to deliver Internet traffic on a “best efforts” basis without guaranteeing various levels of quality of service.service on other networks. 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.
 
TheWe believe we are well positioned through our patented and patent-pending network route optimization technologies and data center services to help businesses overcome the inherent limitations and unpredictable performance of the Internet. This is especially relevant for companies that use the Internet serves as a core component of manytheir business operations such as direct sales, supply chain and collaboration strategies and has extended our customers’ abilityor rely on the Internet to reach global partners, suppliers and customers. This changing landscape, combined with an increasingly dispersed workforce and the adoption of emerging technologies, likeincluding VoIP and streaming media, has increased the need for fast, reliable connectivity and delivery of content richcontent-rich media. We believe Internap meets this requirementAdditionally, the emergence of bandwidth-intensive video and is well positionedthe general and rapid increase of digital information creation and delivery will further drive the need for highly-available and performance-optimized network transport service.
Our suite of technology services and products increase reliability, decrease network latency and optimize routing to help businessesenable customers to effectively leverage the Internet to attain improvedpromote productivity, decreaseddecrease transactional costs and generate new revenue streams.
 
Segments
 
During the year ended December 31, 2009, we changed how we view and manage our business. We now operate in three business segments:our IP services and the majority of our CDN services on a combined basis while we operate the managed hosting portion of our CDN services as part of our data center services. The change from our historical segments reflects management’s views of the business and aligns our segments with our operational and organizational structure. We have integrated the primary components of our CDN services with our IP services in the IP services segment. This includes integration of our CDN POPs into our P-NAPs along with combining engineering and operations teams and internal financial reporting.  In addition, a single manager reports directly to our chief executive officer for the integrated IP services. Historically, CDN services also included managed hosting, or maintaining network equipment on behalf of customers. Since these CDN services are a hosting activity, they are more similar to our data center services, and CDN services. The following is a brief descriptiontherefore we have included these services in our data center services segment. We have reclassified financial information for prior periods to conform to the current period presentation.
We discuss the determination of each ofand changes in our reportable business segments. Financial information regarding our segments can be found in note 4 to our accompanying consolidated financial statements andbelow in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations.Operations—Segment Information.
 
IP Services
 
          High PerformanceIP services represent our IP transit activities and include our high-performance Internet Protocol,connectivity, CDN services and flow control platform, or IP. FCP, products.
Our patented and patent-pending network performanceroute optimization technologies address the inherent weaknesses of the Internet, allowing enterprisesbusinesses to take advantage of the convenience, flexibility and reach of the Internet to connect to customers, suppliers and partners.partners, and to adopt new information technology delivery models, in a reliable and predictable manner. Our solutionsservices and products take into account the unique performance requirements of each business application to ensure performance as designed, without unnecessary cost. Prior toWhen recommending an appropriate network solutionssolution for our customers’ applications, we consider key performance objectives including (1) performancesuch as bandwidth capacity needed, expected bandwidth usage, location of services and cost optimization, (2) application control and speed and (3) delivery and reach.objectives. Our fees for IP services are based on a fixed-fee, usage or a combination of both.

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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 SLAs with 100% network availability, excluding local connections. Our team of certified network engineers supportsCDN services enable our customers 24 hours a day, every dayto quickly and securely stream and distribute rich media and content, such as video, audio software and applications to audiences across the globe through strategically located data POPs. Providing capacity-on-demand to handle large events and unanticipated traffic spikes, we deliver high-quality content regardless of audience size or geographic location and the year.analytic tool to allow our customers to refine their marketing programs.
 
          Flow Control Platform. Our IP services segment also includes our flow control platform, or FCP. Our FCP isproducts are 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 our 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 useful for carrier SLA verification, monitoring and overall network management.
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.P-NAP. 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, 2008.installation.
 
Data Center Services
 
Data center, or colocation, 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 and the managed hosting portion of CDN services. Throughout this Annual Report on Form 10-K, we refer to data center services and colocation services interchangeably.
Our data center or colocation, 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. Throughout this Form 10-K, we refer to data center services and colocation services interchangeably. 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. Our data center services provide a single source for network infrastructure, IP connectivity 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 also provide a managed hosting solution that leverages our IP services. With this service, our customers own and manage the software applications and content, while we provide and maintain the hardware, operating system, colocation and bandwidth.
 
To maximize this footprint, weWe use a combination of facilities managedoperated by us and facilities managed by third parties, referred to as company-controlled facilities and partner sites.sites, respectively. We offer a comprehensive solution at 4649 service points, consisting of eight locations managed by usnine company-controlled facilities and 38 locations managed by third parties.40 partner sites, summarized below. We charge monthly fees for data center services based on the amount of square footage and power that the customer leases in our facilities.customers use. We also have relationships with various data center providers to extend our P-NAP model into markets with high demand.

CDN Services
Our CDN services enableDuring 2009, we established Statement on Auditing Standards No. 70, or SAS 70, Type II compliance over controls and processes in our customers to quickly and securely stream and distribute video, audio and software to audiences across the globe through strategically locatedcompany-controlled data centers. Providing capacity-on-demand to handle large eventsSAS 70 Type II compliance provides assurances that controls and unanticipated traffic spikes, we deliver high-quality content regardless of audience size or geographic location. Our MediaConsole® content management tool providesprocesses around 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, view network conditions and gain insight into habits of their viewing audience. Prior to our acquisition of VitalStream in February 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.
We offer the following products and services based on our CDN:
          Next Generation Route-Optimized Hybrid Content Delivery. Our route-optimized hybrid content delivery model is a blend of both decentralized, or “edge caching,” and centralized storage content delivery models. It incorporates large geographically-distributed caches strategically located at “route-optimized” locations throughout the provider’s network along with a small number of large content storage locations. Our integration of route optimization technology within the CDN overcomes the issues that arise when the content is being delivered by a poorly performing network. The route optimization technology analyzes the traffic situation on every major Internet backbone and then detects the best route for the content to take. The technology also allows for the adjustment of additional locations in which popular content is cached, so that popular files may end up on many servers, as opposed to less popular or larger-sized files that may only exist on a handful of servers. It also directs the end-user to the most appropriate data center for streaming or downloading content based on capacitysecurity and availability, improving delivery performance at the source by avoiding overload at one location (thus eliminating stuttering videos or plain stops in the stream).
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Our network is protected by security systems, including firewalls, proxiesenvironmental protection have been suitably designed and private networkingare operating effectively to protect critical systems from intruders. We continuously monitorand safeguard customers’ equipment and data. The underlying providers for security vulnerabilities and malicious activity and employ a staffseveral 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 closely with Adobe and Microsoft to develop streaming platforms. We are an experienced Flash video and Windows Media streaming service provider, supporting Flash 8 and Flash Media Server 2.5, and we have been a Microsoft Premier Certified Hosting Service provider since 2002. These methods of delivering video on demand and other content are reliable, interactive and easy to use, giving our customers the opportunity to utilize their existing development environment and streamlining their workflow. Our video streaming services permit our customers to upload files to our streaming network without having to set up and maintain video servers.
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.
Value-Added Services. We also provide a suite of value-added services that provides our customers with a comprehensive solution including Managed Server, Content Management, Transcoding, Video Players, Authentication and various virtualization technologies. This single-solution provider approach enables our customers to accelerate time-to-market, lower operating expenses and simplify implementation and on-going support.
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, India and Australia. Our network access points andpartner data centers feature direct high-speed connections to multiple major Internet backbones, also referred to as network service providers or NSPs, including AT&T Inc.; Sprint Nextel Corporation; Verizon Communications Inc.; Global Crossing Limited; and Level 3 Communications. Through our CDN points of presence, or POPs, we provide access to the Internet for our CDN customers. As of December 31, 2008, we provided services worldwide through 62 IP service points, 25 CDN POPs and 46 data center locations. We directly operate eight of these data center sites and have operating agreements with third parties for the remaining locations in the following markets, some of which have multiple sites:
Internap operatedOperated under third party agreements
AtlantaAtlantaOaklandAmsterdam
BostonBostonOrange County/Hong Kong
HoustonChicagoSan DiegoLondon
New YorkDallasPhiladelphiaMumbai
SeattleDenverPhoenixOsaka (1)
Los AngelesSan FranciscoSingapore
MiamiSan JoseSydney
New YorkWashington DCTokyo (1)
Toronto
____________________
(1)Through our joint venture in Internap Japan Co., Ltd. with NTT-ME Corporation and Nippon Telegraph and Telephone Corporation.
We are dependent upon the NSPs noted above as well as other ISPs, telecommunications carriers and other vendors in the United States, Europe, Asia, India and Australia.maintain SAS 70 Type II compliance.
 
Other
 
Other revenues and direct costs of network, sales and services consistduring the year ended December 31, 2007 consisted of third partythird-party CDN services. Throughout 2007, other revenues and direct costs of network, sales and services decreased steadily as the revenue streams from our acquisition of VitalStream replaced the activity of the former third-party CDN service provider.
Network Access Points, Points of Presence and Data Centers
We provide our services through our network access points across North America, Europe and the Asia-Pacific region. Our P-NAPs and data centers feature multiple direct high-speed connections to major Internet backbones, also referred to as network service providers or NSPs, such as Verizon Communications Inc.; Global Crossing Limited; Level 3 Communications, Inc.; XO Holdings Inc.; and Cogent Communications Group, Inc. We provide access to the Internet for our CDN customers through our CDN POPs. As of December 31, 2009, we provided services worldwide through 73 IP service points, which includes 20 CDN POPs and 47 data centers. We also have two additional international standalone CDN POPs and two additional domestic standalone data center locations through which we provide IP services by extension. We directly operate nine of these data center sites and have operating agreements with third parties for the remaining locations. We have P-NAPs, CDN POPs and/or data centers in the following markets, some of which have multiple sites:
Internap operated
Domestic sites operated
under third party agreements
International sites operated
under third party agreements
AtlantaAtlantaOaklandAmsterdamParis
BostonBostonOrange County/FrankfurtSingapore
HoustonChicagoSan DiegoHong KongSydney
New YorkDallasPhiladelphiaLondon
Tokyo(1)
SeattleDenverPhoenixMumbaiToronto
Los AngelesSan Francisco
Osaka(1)
MiamiSan Jose
New YorkWashington DC

(1)Through our joint venture in Internap Japan Co., Ltd. with NTT-ME Corporation and Nippon Telegraph and Telephone Corporation.
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We are dependent upon the NSPs noted above as well as other ISPs, telecommunications carriers and vendors in the United States, Europe and Asia-Pacific region.
Financial Information about Geographic Areas
 
For each of the three years in the period ended December 31, 2008, 2007 and 2006,2009, we derived less than 10% of our total revenues 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 onean office each in the United Kingdom, and Singapore.or U.K.
 
Our sales and service organization includes 106approximately 82 employees in direct and channel sales, professional services, account management and technical consulting. As of December 31, 2008,2009, we had approximately 6648 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,advertising, participation at trade shows, direct response programs, new service point launch events, an active public relations campaign and continuing customer communications. As of December 31, 2008,2009, we had sevenfour 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. Research and development costs, which we include in product developmentgeneral and administrative cost and expense as incurred, primarily consist of compensation related to our development and enhancement of IP routing technology, progressive download and streaming technology for our CDN, acceleration and cloud technologies. Acceleration technologies improve the performance (throughput) of applications that depend upon IP for network transport. Cloud technologies enable the delivery of on-demand, scalable service consumption with self-service and automated subscription, management, provisioning and billing capabilities. Product development costs, which we also include in general and administrative cost and expense as incurred, are primarily related to network engineering costs associated with changes to the functionality of our proprietary services and network architecture. Research and development costs were $3.8 million, $5.0 million and $3.1 million and $2.4 million forduring the years ended December 31, 2009, 2008 2007 and 2006,2007, respectively. These costs do not include $0.9 million, $1.4 million $1.6 million and $0.9$1.6 million in internal software development costs capitalized during the years ended December 31, 2009, 2008 2007 and 2006,2007, respectively. We also expense as incurred those costs that do not qualify for capitalization as software development costs.
 
Customers
 
As of December 31, 2008,2009, we had approximately 3,6002,900 customers. We provide services to customers in multiple vertical industry segments including entertainment and media, financial services, healthcare, travel, e-commerce, retail and technology. However,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% or more of our net sales. Werevenues. Similarly, in each of the past three years, we did not derive any significant amounts of revenue for any of the years ended December 31, 2008, 2007 and 2006 from contracts or subcontracts terminable or renegotiationrenegotiable at the election of the federal government, and we do not expect such contracts to be a significant percentage of our total revenue in 2009.2010.
 
Competition
 
The market for managedour 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:
 NSPs that provide connectivity services, including AT&T Inc.; Sprint Nextel Corporation; Verizon Communications Inc.; Level 3 Communications, Inc.; Global Crossing LimitedLimited; 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, BT Infonet, and Savvis, Inc.;
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 providers of specific applications or solutions,services, such as content delivery, security or storage such as Akamai Technologies, Inc.; Limelight Networks, Inc.; CD Networks Co., Ltd.; Mirror Image Internet, Inc.; Symantec Corporation; Network Appliance, Inc. and Virtela Communications, Inc.;

 
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 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.; Switch & Data Facilities Company, Inc.; Terremark Worldwide, Inc.; Navisite, Inc.; 365 Main Inc.; Quality Technology Services;Services and Savvis, Inc. and Neon Communications Group, Inc.
 
Competition has resulted, and will likely continue to result, in declining prices forprice pressure on 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 orintroduce emerging technologies on a broader scale and adapt to 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 productsservices or servicesproducts based on new or emerging technologies and customers that choose to develop their own network solutions.services or products. 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.
 
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, 2008,2009, we had 1419 patents (nine(14 issued in the United States and five issued worldwide)internationally) that extend to various dates between approximately 2017 and 2027,2026, and eight14 registered trademarks.trademarks in the United States. 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 effectimpact 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 rights 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 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, 2008,2009, we had approximately 430390 employees, substantially all of whom are 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 industries 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. We can offer no assurances that we will be successful in recruiting and retaining qualified employees in the future.
 
Other Matters
While we are dependent upon our proprietary technology and vendors, including NSPs, 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
The reports we file with the Securities and Exchange Commission, or SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy statements, are available free of charge on our website at www.internap.com. You may read and copy any materials we file 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 a website (www.sec.gov) that contains reports, proxy and information statements and other information that we file with the SEC. Our Code of Ethics is available on our website at www.internap.com under the “Investor Services” section. Copies of the information identified above may be obtained without charge from us by writing to Internap Network Services Corporation, 250 Williams Street, Suite E-100, Atlanta, Georgia 30303, Attention: Corporate Secretary. Information on our website is not incorporated by reference into this Form 10-K.

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ITEM 1A. RISK FACTORS
 
We operate in a changing environment that involves numerous known and unknown risks and uncertainties that could have a materially adversely affectadverse impact on our operations. The risks described below highlight some of the factors that have affected, and in the future could affect, our operations. You should carefully consider these risks. These risks are not the only ones that we may face. Additional risks and uncertainties thatof which we are unaware of, or that we currently deem immaterial also may become important factors that affect us. If any of the following events or circumstances described in the followings risks occurs, our business, consolidated financial condition, results of operations, or cash flows, or any combination of the foregoing, could be materially and adversely affected.
 
Risks Related to Our Businessrisks are described in detail below; however, the more significant risks we face can be summarized into several broad categories, including:
 
FailureThe future evolution of the technology industry in which we operate is difficult to sustainpredict, highly competitive and requires continual innovation, strategic planning, capital investment, demand planning and space utilization management to remain viable. We face on-going challenges to develop new services and products to maintain current customers and obtain new ones, whether in a cost-effective manner or at all. In addition, technological advantages typically devalue rapidly creating constant pressure on pricing and cost structures and hinder our ability to maintain or increase our revenues may cause our business and financial results to suffer.margins.
 
We are dependent on numerous suppliers, vendors and other third-party providers across a wide spectrum of products and services to operate our business. These include real-estate, network capacity and access points, network equipment and supplies, power and other vendors. In many cases the suppliers of these products and services are not only vendors, they are also competitors. While we maintain contractual agreements with these suppliers, we have considerable fixed expenses, andlimited ability to guarantee they will meet their obligations, or that we planwill be able to continue to incurobtain the products and services necessary to operate our business in sufficient supply, or at an acceptable cost.
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Our business model involves designing, deploying, and maintaining a complex set of network infrastructures at considerable capital expense. We invest significant expenses, particularly withresources to help maintain the expansionintegrity of our colocationinfrastructure and data center facilities.support our customers; however, we  face constant challenges related to our network infrastructure, including capital forecasting, demand planning, space  utilization management, physical failures, obsolesce, maintaining redundancies, security breaches, power demand, and other risks.
Our financial results have fluctuated over time and we have a history of losses, including in each of the past three years. We incurhave also incurred significant charges related to impairments and restructuring efforts, which, along with other factors, may contribute to volatility in our stock price.
Risks Related to our Industry
We cannot predict with certainty the future evolution of the market for technology and products, and may be unable to respond effectively and on a timely basis to rapid technological change.
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 or products obsolete and unmarketable to a sufficiently large number of customers. 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 portiontime and expense, and we may be unable to successfully adapt our network and services to alternative access devices and technologies. If the Internet becomes subject to a form of these expenses upfront,central management, or if NSPs establish an economic settlement arrangement regarding the exchange of traffic between Internet networks, the demand for our IP services could be materially and are only able to recover these costs from customers over time. We must, therefore, at least sustainadversely affected. Likewise, technological advances in computer processing, storage, capacity, component size or generate higher revenues to maintain profitability. Although revenue fromadvances in power management could change which could result in a decreased demand for our data center services segment is growing, that segment has lower margins than our other segments. services.
If we are unable to increasedevelop new and enhanced services and products that achieve widespread market acceptance, or if we are unable to improve the performance and features of our margins in that segment,existing services and products or adapt our business model to keep pace with industry trends, our business and operating results could be adversely affected.
Our industry is constantly evolving. The process of expending research and development to create new services and products, and the technologies that support them, is expensive, time and labor intensive and uncertain. We may suffer.fail to understand the market demand for new services and products or not be able to overcome technical problems with new services. The demand for top research and development talent is high, and there is significant competition for these scarce resources.
Our future success may depend on our ability to respond to the rapidly changing needs of our customers by expending research and development in a cost-effective manner to acquire talent, develop and introduce new services, products and product upgrades on a timely basis. New product development and introduction involves a significant commitment of time and resources and is subject to a number of risks and challenges, including:
sourcing, identifying, obtaining, and maintaining qualified R&D staff with the appropriate skill and expertise;
managing the length of the development cycle for new products and product enhancements, which historically has been longer than expected;
adapting to emerging and evolving industry standards and to technological developments by our competitors and customers services and products
entering into new or unproven markets where we have limited experience;
managing new product and service strategies and integrating those with our existing services and products;
incorporating acquired products and technologies;
trade compliance issues affecting our ability to ship new products to international markets;
developing or expanding efficient sales channels; and
obtaining required technology licenses and technical access from operating system software vendors on reasonable terms to enable the development and deployment of interoperable products.
 
In addition, if we cannot adapt our business models to adding new customers, to increasekeep pace with industry trends, our revenue could be negatively impacted. If we must sell additionalare not successful in managing these risks and challenges, or if our new services, to existing customersproducts and encourage existing customers to increase their usage levels. If our existing and prospective customersproduct upgrades are not technologically competitive or do not perceiveachieve market acceptance, we may lose market share, resulting in a decrease in our servicesrevenues and earnings.
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Our capital investment strategy for data center expansion may contain erroneous assumptions causing our return on invested capital to be materially lower than expected.
Our strategic decision to invest capital in expanding our data center space in 2010 and beyond is based on significant assumptions relative to expected growth of sufficiently high valuethis market, our competitor’s plans, current and quality,expected occupancy rates and similar factors. We have no way of ensuring the data or models used to deploy capital into existing markets, or to create new markets, will be accurate. Errors or imprecision in these estimates, especially those related to customer demand, could cause actual results to differ materially from expected results and have a material negative impact on revenue in future periods.
Our management of existing data center space or estimation of future data center space needs may be inaccurate, leading to lost revenue through missed sales opportunities or additional expenses through unnecessary carrying costs for our data center space.
Adding data center space involves significant capital outlays well ahead of planned usage. We strive to maintain accurate records related to data center space by classification; however, we may not be able to retain our current customers or attract new customers. Our customers have no obligation to renew their contracts for our services after the expirationensure accuracy of their initial commitment, and these service agreements may not be renewed at the same or higher level of service, if at all. Moreover, under some circumstances, some of our customers have the right to cancel their service agreements prior to the expiration of the terms of their agreements. Due to the significant upfront costs of managingexisting data centers, if our customers fail to renew or cancel their service agreements, we may notcenter space nor be able to recover the initial costs resulting from the expansion of our facilities. Numerous factorsaccurately project future space needs due to significant estimates and assumptions required for these projections. Errors or imprecision in these estimates could affect our abilitycause actual results to increase revenue, either alone or in combination with other factors, including:
failure to increase sales of our products and services;
pricing pressures;
significant increases in bandwidth and data center costs or other operating expenses;
failure of our services or software to operate as expected;
loss of customers or inability to attract new customers or loss of existing customers at a rate greater than our increase in new customers;
inability of a customer to pay our fees on a timely basis or at all or failure to continue to purchase our services in accordance with their contractual commitments; or
network failures and any breach or unauthorized access to our network.
Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including:
their satisfaction or dissatisfaction with our services;
the prices of our services and those of our competitors;
discontinuation by our customers of their Internet or web-based content distribution businesses;
mergers and acquisitions affecting our customer base; and
reduction in our customers’ spending levels.
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If our customers do not renew their service agreements with us or if they renew on less favorable terms, our revenue may declinediffer materially for expected results and our business may suffer. Similarly, our customer agreements often provide for minimum commitments that are often significantly below our customers’ historical usage levels. Consequently, even if we have agreements with our customers to use our services, these customers could significantly curtail their usage without incurring any penalties under our agreements. In this event, our revenue would be lower than expected and our operating results could suffer.
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, such as the one the worldwide economy is now experiencing, could further contribute to this effect. We currently charge, and expect to continue to charge, premium prices for our high performance IP services compared to the 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 revenue and could materially and adversely affect our results of operations if we are unable to control or reduce our costs. Because we rely on NSPs 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 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.
In addition, prices for content delivery services have fallen in recent years and may continue to fall further in the future. If the price that we are able to charge customers to deliver their content falls to a greater extent than we anticipate, if we over-estimate future demand for our services or if our costs to deliver our services do not fall commensurate with any future price declines, we may not be able to achieve acceptable rates of return on our infrastructure investments, and our gross profit and results of operations may suffer dramatically.
Wecorrespondingly have a history of losses and may not sustain profitability.
We incurred net lossesmaterial negative impact on revenue 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, 2008, 2007 and 2006, we recognized net loss of $104.8 million, net loss of $5.6 million and net income of $3.7 million, respectively. As of December 31, 2008, our accumulated deficit was $966.8 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.future periods.
 
We may not be able to compete successfully against current and future competitors.
 
The Internet connectivity and IP services market isand data center services markets are highly competitive, as evidenced by recent declines in pricing for Internet connectivity services. The content delivery market is also highly competitiveservices and rapidly changing.the significant capital invested in data center expansions by our competitors. 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, capital or support capabilities to compete successfully. Our competitors currently include: regional Bell operating companiesNSPs that offer Internet access; global, national and regional NSPs and ISPs; providers of specific applications or solutionsservice offerings such as content delivery, security or storage; software-based and other Internet infrastructure providers and manufacturers; and colocation and data center providers. In addition, NSPs and 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 productsservices and services.products.
 
In addition, we expect that 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, NSPs 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.

Failure to retain existing customers or add new customers may cause declines in revenue.
In addition to adding new customers, we must sell additional services to existing customers as well as encourage them to increase their usage levels to increase our revenue. If our existing and prospective customers do not perceive our services to be of sufficiently high value and quality, we may not be able to retain our current customers or attract new customers. Our customers have no obligation to renew their contracts for our services after the expiration of their initial commitment, and these service agreements may not be renewed at the same or higher price or level of service, if at all. Moreover, under some circumstances, some of our customers have the right to cancel their service agreements prior to the expiration of the terms of their agreements. Due to the significant upfront costs of managing data centers, if our customers fail to renew or cancel their service agreements, we may not be able to recover the initial costs associated with the expansion of our facilities.
Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including:
their satisfaction or dissatisfaction with our services;
    ●  our ability to provide features and functionality demanded by our customers;
the prices of our services and products as compared with those of our competitors;
mergers and acquisitions affecting our customer base; and
reduction in our customers’ spending levels.
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We previously identified a material weakness inIf our internal control over financial reporting which preventedcustomers do not renew their service agreements with us from accurately reportingor if they renew on less favorable terms, our financialrevenue may decline and our business may suffer. Similarly, our customer agreements often provide for minimum commitments that may be significantly below our customers’ historical usage levels. Consequently, even if we have agreements with our customers to use our services, these customers could significantly curtail their usage without incurring any incremental fees under our agreements. In this event, our revenue would be lower than expected and our operating results in a timely manner. We cannot guarantee that in the future we will not identify another material weakness, which could prevent us from accurately reporting our financial results in a future period in a timely manner, which could in turn adversely affect our business.suffer.
 
We must maintain effective internal controls 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 for the year ended December 31, 2007, we identifiedhave a material weakness related to effective controls over the analysis of requests forlong sales credits and billing adjustments to provide timely information for management to assess the completeness, accuracy, valuation and disclosure of sales adjustments. We remediated these weaknesses during the year ended December 31, 2008. However, we may also discover in the future additional areas of our internal controls that need improvement. We cannot be certain that any remedial measures we may be required to take in the future will sufficiently address and eliminate any identified 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. 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.
If we are unable to develop new and enhanced products and services that achieve widespread market acceptance, or if we are unable to improve the performance and features of our existing products and services or adapt our business model to keep pace with industry trends, our business and operating results could be adversely affected.
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’ needscycle for our services and render our products and the implementation efforts required by customers to activate our services obsolete.and products can be substantial.
 
Our future success depends on our abilityservices and products are complex and require substantial sales efforts and technical consultation to respondimplement. A customer’s decision to the rapidly changing needs of our customers by developinguse datacenter space or introducing new products, product upgrades andacquire IP services on a timely basis. New product development and introductiontypically involves a significant commitment of resources. Some customers may be reluctant to enter into an agreement with us due to their inability to accurately forecast future demand, delay in decision-making or inability to obtain necessary internal approvals to commit resources. We may expend time and resources and is subjectpursuing a particular sale or customer that does not result in revenue. Delays due to a number of risks and challenges including:
managing the length of the development cycle for new products and product enhancements, which historically has been longer than expected;
adapting to emerging and evolving industry standards and to technological developments by our competitors and customers;
extending the operation of our products and services to new platforms and operating systems;
entering into new or unproven markets where we have limited experience;
managing new product and service strategies and integrating those with our existing products and services;
incorporating acquired products and technologies;
trade compliance issues affecting our ability to ship new products to international markets;
developing or expanding efficient sales channels; and
obtaining required technology licenses and technical access from operating system software vendors on reasonable terms to enable the development and deployment of interoperable products.
In addition, if we cannot adapt our business models to keep pace with industry trends, our revenue could be negatively impacted. If we are not successful in managing these risks and challenges, or if our new products, product upgrades and services are not technologically competitive or do not achieve market acceptance, we may lose market share, resulting in a decrease in our revenues and earnings.

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Many of our currentsales cycle may harm our ability to meet our forecasts 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. Deteriorating global economic conditions may make it more difficult for our customers to achieve successful and sustainable returns from business models. A reduction in spending on CDN services by such customers could materially and adversely affect our financial condition.revenues and operating results.
 
We may lose customers if they elect to develop solutionsIP or content delivery services or products internally.
 
Our customers and potential customers may decide to develop their own IP or content delivery solutionsservices or products rather than outsource these solutions to services providers like us. These in-house services or products could be perceived to be superior to our services and products. In addition, our customers could decide to host their Internet applications internally, bypassing outside vendors like us. This is particularly true as our customers increase their operations and spendexpend greater resources on delivering their content using third-party solutions.services. If we fail to offer IP, data center or CDN services that compete favorably with in-sourced solutions,services, if we fail to differentiate our services and products or if competitors introduce new products or services that compete with or surpass the quality or the price/performance of our services, we may lose customers or fail to attract customers that may consider pursuing this in-sourced approach, and our business and financial results would suffer as a result.
In addition, our customers’ business models may change in ways that we do not anticipate and these changes could reduce or eliminate our customers’ needs for our services or products. If this occurred, we could lose customers or potential customers, and our business and financial results would suffer. As a result of these or similar potential developments, in the future it is possible that competitive dynamics in our market may require us to reduce our prices, which could harm our revenue, gross margin and operating results.
Pricing pressure may continue to decrease our revenue and threaten the attractiveness of our premium-priced IP services.
Pricing for Internet connectivity services has declined significantly in recent years and may continue to decline. We currently charge, and expect to continue to charge, premium prices for our high-performance IP services compared to the prices charged by our competitors for their connectivity services. By bundling their services and reducing the overall cost of their service offerings, 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 has eroded, and could continue to erode, our revenue and could materially and adversely affect our results of operations if we are unable to control or reduce our costs. Because we rely on NSPs 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 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.
In addition, prices for content delivery services have similarly fallen in recent years from technological improvements and intensified competition and may continue to fall in the future. If the price that we are able to charge customers to deliver their content falls to a greater extent than we anticipate, if we overestimate future demand for our services or if our costs to deliver our services do not fall commensurate with any future price declines, we may not be able to achieve acceptable rates of return on our infrastructure investments, and our gross profit and results of operations may suffer dramatically.
We may acquire other businesses, and these acquisitions involve integration and other risks that could harm our business.
We may pursue acquisitions of complementary businesses, products, services and technologies to expand our geographic footprint, enhance our existing services, expand our service offerings or 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.
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If we fail to identify and acquire needed companies or assets, if we acquire the wrong companies or assets or if we fail to address the risks associated with integrating an acquired company, we would not be able to effectively manage our growth through acquisitions which could adversely affect our results.
If governments modify or increase regulation of the Internet, or goods or services necessary to operate the Internet or our data centers, 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. In addition, federal and state agencies are actively considering regulation of various aspects of the Internet, including taxation of transactions, imposition of access fees for VoIP, enhanced data privacy and retention legislation and various energy regulations. 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. 
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 or otherwise increase the cost of doing business on the Internet. Any of these actions could significantly harm 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 are uncertain and developing. Additionally, potential laws and regulations not specifically directed at the Internet, but targeted at goods or services necessary to operate the Internet, could have a negative impact on us. Of specific concern are the legal, political and scientific developments regarding climate change. These factors may impact the delivery of our services or products by driving up the cost of power, which is a significant cost of operating our data centers and other service points.
We cannot predict the impact, if any, that future regulation or regulatory changes may have on our business.
Risks Related to our Business
 
We depend on a numberthird-party suppliers for key elements of NSPs to provide Internet connectivity to our network access points.infrastructure. If we are unable to obtain required connectivity servicesthese items on a cost-effective basis, or at all, or if such services are interrupted, limited 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 tothird parties. To provide high performance connectivity services to our customers through our network access points, we purchase connections from several NSPs. We can offer no assurances that these NSPs 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 NSPs 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 NSPs that may emerge or that are significant in geographic areas, such as Asia, India 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.business.
 
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 NSPs, wealso depend on other companies to supply various key elements of our infrastructure, including the network access loops between our network access points and our NSPs and theNSP, local loops between our network access points and our customers’ networks and certain end-user access networks. Pricing for such network access loops and local loops has risen significantly over time and we generally billoperators of these chargesnetworks may take measures, such as the deployment of a variety of filters, that could degrade, disrupt or increase the cost of our or our customers’ access to certain of these end-user access networks by restricting or prohibiting the use of their networks to support or facilitate our services, or by charging increased fees to us, our customers at low or no margin.end-users in connection with our services. Some of our competitors have their own network access loops and local loops and are, therefore, not subject to the same or similar availability and pricing issues.
In addition, we currently purchase routers and switches from a limited number of vendors. Furthermore, weWe 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.results.
 
Our business depends on continued and unimpeded access to third-party controlled end-user access networks.
Our CDN servicesWe depend on our ability to access certain end-user access networks. We achieve this access through mutually beneficial cooperation with these end-user access networks in order to complete the delivery of rich media and other online content to end-users. Some operators of these networks may take measures, such as the deployment of a variety of filters, that could degrade, disrupt or increase the costthird-party suppliers for key elements of our or our customers’ access to certain of these end-user access networks by restricting or prohibiting the use of their networks to support or facilitate our services, or by charging increased fees to us, our customers or end-users in connection with our services. This or other types of interference could result in a loss of existing customers, increased costs and impairment of our ability to attract new customers, thereby harming our revenue and growth. If in the future a significant percentage of these network operators elected to no longer allow unimpeded access to our CDN, our costs could increase as we replace the network operators, the performance of our infrastructure could be diminished, or both, and our business could suffer.

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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-power 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.center infrastructure. 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. In addition, 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 data centers and P-NAPs are susceptible to regional costs and supply of power, electrical power shortages, planned or unplanned power outages or natural disasters and limitations, especially internationally, and 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 and uninterruptible 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, our energy costs have recently increased and may continue to increase for a variety of reasons including increased pressure on legislators to pass green legislation. As energy costs increase, we may not be able to pass on to our customers the increased cost of energy, which could harm our business and operating results.
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 SLAs, 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 our revenues and results of operations. In addition, interruptions in service to our customers could harm our customer relations, expose us to potential lawsuits and require additional capital expenditures.
In each of our markets, we rely on utility companies to provide a sufficient amount of power for current and future customers. We generally do not control the amount of power our customers draw from their installed circuits. Because we rely on third parties to provide power, we cannot ensure that these third parties will deliver such power in adequate quantities orobtain datacenter facilities on a consistent basis. 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 incost-effective basis, or at 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 data center and limit our ability to grow our business, which could have a negative impact on our relationships with our customers as well as our consolidated financial condition, results of operations and cash flows.
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.
Any failure of the physical infrastructure in our data service centers 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, hurricane, flood, tornado and other natural disasters;
improper building maintenance by the landlords of the buildings in which our data centers are located;
water damage;
extreme temperatures;

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fiber cuts;
power loss or equipment failure;
sabotage and vandalism; and
failures experienced by underlying service providers upon which our business relies.
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. We have service level commitment obligations to most of our customers. As a result, service interruptions or equipment damage in our data centers could result in difficulty maintaining service level commitments to these customers and potential claims related to such failures. We have in the past given credits to our customers as a result of service interruptions due to equipment failures. Because our data centers are critical to many of our customers’ businesses, service interruptions or significant equipment damage in our data centers also could result in lost profits or other indirect or consequential damages to our customers. We cannot guarantee that a court would enforce any contractual limitations on our liability in the event that a customer brings a lawsuit against us as the result of a problem at one of our data centers.
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 NSPs and telecommunications carriers in the United States, Europe, Asia, India and Australia, 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 ultimate 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 continued 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 NSPs;
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;
general economic conditions; and
any impairments or restructurings charges that we may incur in the future.

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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 data center facilities, the deployment of additional network access points and the terms of our network connectivity purchase agreements. These and other factors discussed in this Form 10-K 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 we expect them 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 integration and other risks that could harm our business.
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 or achieve the level of quality in such businesses to which our customers are accustomed;
diversion of management’s attention from other ongoing business concerns;
insufficient revenue to offset significant unforeseen costs, including transaction 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 entering markets in which we have little or no prior experience or 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 and business consolidated financial condition, results of operations and cash flows.
Any failure to meet our debt obligations would damage our business.
As of December 31, 2008, our total long-term debt, including capital leases, was $23.2 million. If we use more cash than we generate in the future, our level of indebtedness could adversely affect our future operations by increasing our vulnerability to adverse changes in general economic and industry conditions and by limiting or prohibiting our ability to obtain additional financing for future capital expenditures, acquisitions and general corporate and other purposes. In addition, if we are unable to make interest or principal payments when due, we would be in default under the terms of our long-term debt obligations, which would result in all principal and interest becoming due and payable which, in turn, would seriously harm our business.

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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. Our credit agreement contains certain covenants, including covenants that restrict our ability to incur further indebtedness, make acquisitions or investments, make certain capital expenditures, create liens on our assets and require us to maintain minimum liquidity.
If we do not satisfy these covenants we would be in 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, 2008, 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, 2008, we held $6.4 million of auction rate securities classified as non-current 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 seven, 28 or 35 days. Auction rate securities generally trade at par value and are callable at par value 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. 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, 2008. Although these securities are issued and rated as long-term bonds, they have historically been priced and traded as short-term instruments because of the liquidity provided through the interest rate resets. While we continue to earn and accrue interest on our auction rate securities at contractual rates, these investments are not currently trading. Due to the uncertainty as to when the auction rate securities markets will improve, we have classified our auction rate securities as non-current investments as of December 31, 2008.
In October 2008, we received an offer providing us with rights, or ARS Rights, from one of our investment providers to sell at par value auction rate securities originally purchased from the investment provider ($7.2 million) at anytime during a two-year period beginning June 30, 2010. On November 14, 2008, we accepted the offer and intend to exercise the ARS Rights if we are otherwise unable to recover par value on the securities at an earlier date.
Continued overcapacity in the Internet connectivity and IP services market, adverse experience in the CDN services market or delay in subleasing certain of our locations may result in our recording additional goodwill and other intangible asset impairment charges, restructuring charges or both.
We are required to assess goodwill for impairment under GAAP at least annually. We perform our annual goodwill impairment test as of August 1 of each calendar year, following our annual strategic planning cycle, which includes an update of our long-term financial outlook. As a result of our August 1, 2008 assessment, we concluded that the current carrying value of our goodwill in the CDN services reporting unit was impaired. We recorded the CDN services goodwill following our February 2007 acquisition of VitalStream. For the year ended December 31, 2008, we recorded a $99.7 million goodwill impairment charge to adjust goodwill in our CDN services segment to an implied fair value of $54.7 million. The impairment also caused us to reverse a deferred tax liability and create an income tax benefit of $0.6 million associated with the CDN services goodwill for the year ended December 31, 2008.
In conjunction with our review of our long-term financial outlook, we also performed an analysis of the potential impairment, and re-assessed the remaining asset lives, of other identifiable intangible assets acquired in the VitalStream acquisition. This analysis and re-assessment resulted in, during the year ended December 31, 2008: (1) an impairment charge of $1.9 million in developed advertising technology due to a strategic change in market focus, (2) an impairment charge of $0.8 million in trade names as a result of discontinuing use of the VitalStream trade name and (3) a change in our estimates that resulted in acceleration of amortization expense of our customer relationships intangible asset over a shorter estimated useful life (four remaining years instead of the original estimated nine years) due to customer churn resulting in higher than expected attrition as of our acquisition date.
We also assessed the likelihood of triggering events and concluded that none had occurred that would cause us to re-assess goodwill for impairment subsequent to August 1, 2008. However, we may incur additional restructuring or impairment charges in the future, which could materially and adversely affect our business, consolidated financial position, results of operations and cash flows.

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Furthermore, 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, we 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 our best expectations based on known facts and circumstances at the time of estimation. Should circumstances warrant, we will adjust our previous estimates to reflect what we then believe to be a more accurate representation of expected future costs.
Because our estimates and assumptions regarding restructuring costs include probabilities of future events, such as the ability to find a sublease tenant within a reasonable period of time or the rate at which a sublease tenant will pay for the available space, such estimates are inherently vulnerable to changes due to unforeseen circumstances that could materially and adversely affect our results of operations. If we do not find a sublease tenant for one of our more significant restructured locations by the end of the second quarter of 2010 or if we do not obtain a certain rate per square foot for the available space, we will need to take an additional charge in our statement of operations that may be material. We monitor market conditions at each period end reporting date and will continue to assess our key assumptions and estimates used in the calculation of our restructuring accrual.
If we are unable to deploy new network access points or do not adequately control expenses associated with the deployment of new network access points, our results of operations could be adversely affected.
 
As part of our strategy, we may continue to expand our network access points, particularly into new geographic markets. We face various risks associated with identifying, obtaining and integrating attractive network access point sites, negotiating leases forIn establishing data 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 new network access points. 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 expenses, including expenses associated with hiring, training, retaining and managing new employees, provisioning capacity from NSPs, purchasing new equipment, implementing new systems, leasing additional real estate and incurring additional depreciation expense. If we are unable to control our expenses 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 or CDN POPs in London, Hong Kong, Singapore, Sydney, Amsterdam and Mumbai. We also participate in a joint venture with NTT-ME Corporation and Nippon Telegraph and Telephone Corporation, or NTT Holdings, that operates network access points in Tokyo and Osaka, Japan. 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 NSPs 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;
potential loss of proprietary information due to misappropriation or laws that may be less protective of our intellectual property rights than the laws in the United States;
challenges in reducing operating expense or other costs required by local laws, and longer accounts receivable payment cycles and difficulties in collecting accounts receivable;
exposure to fluctuations in foreign currency exchange rates;
costs of customizing network access points for foreign countries and customers;
requirements of foreign laws and other governmental controls, including trade and labor restrictions and related laws that reduce the flexibility of our business operations;
protectionist laws and practices favoring local competition;
deteriorating economic conditions in foreign markets;
political and economic instability; and
compliance with governmental regulations.

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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.
Disputes with vendors regarding the delivery of services may materially impact our results of operations and cash flows.
In delivering our services,center facilities, we rely on a number of Internet network, telecommunication and other vendors. We work directly with these vendors to provide services such as establishing, modifyingphysical space, convert or discontinuing servicesbuild space to data center specifications, provide power, internal cabling and wiring, climate control and system redundancy. Physical space is typically obtained through long-term lease arrangements, while multiple other vendors are utilized to perform leasehold improvements necessary to make the physical space available for occupancy. The demand for premium data center space in several key markets has outpaced supply over recent years and the imbalance is projected to continue over the near term. This has increased, and will continue to increase, our customers. Because of the volume of activity, billing disputes inevitably arise. These disputes typically stem from disagreements concerning the startingcosts to add data center space. If we are not able to contain data center expansion costs, or are not able to pass these costs on to our customers, our results will be adversely affected.
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Our business operations depend on contracts with vendors and ending dates of service, quoted rates, usagesuppliers who may not meet their contractual obligations.
We maintain contracts with third-party vendors that govern our IP capacity, P-NAPs, data center space and various other factors. We researchservices and discuss disputed costs, bothproducts. Tracking, monitoring and managing these contract and vendor relationships is critical to our business operations; however, we have limited control over the performance of these contracts by the vendors related to the terms, conditions or contractual obligations contained therein. Even if these contracts contain terms favorable to us in the vendors’ favorevent of a breach, there is no guarantee the damages due us under the contract would cover the losses suffered or would even be paid. Also, each contract contains specific terms and our favor, with vendors on an ongoing basis until ultimately resolved. We record the cost and liabilityconditions that may change over time based on contract expiration, assignment, assumption or renegotiation. There is no guarantee that these changes would be favorable to us, and to the event they were not, our estimate ofoperations could be materially impacted.
In addition, these contracts may contain clauses, provisions, triggers, rights, options or obligations that result in favorable or non-favorable impacts on us depending on actions taken, or not taken. While we intend to pursue all contractual provisions favorable to our business, the most likely outcome ofappropriate actions under a particular contract may require estimates, judgments and assumptions to be made concerning future events for which we have limited basis for estimation. We cannot guarantee that we will take the dispute. We periodically review and, if necessary, modify these estimates in light of new information or developments, if any. Because estimates regarding disputed costs include assessments of uncertain outcomes, such estimates are inherently vulnerableappropriate action under a particular contract to changes duemaximize the benefit to unforeseen circumstances thatus, which could materially and adversely affect our consolidated financial condition, results of operations and cash flows.have a material, adverse impact on operations.
 
Our inability to renew our data center leases on favorable terms could have a negativenegatively impact on our financial results.
 
Our leased data centers have lease terms that expire between 2010 and 2023. The majority of these leases provide us with the opportunity to renew the lease at our option for periods generally ranging from five to 10 years. Many of these options however, if renewed, provide that rent for the renewal period will be equal to the fair market rental rate at the time of renewal. If the fair market rental rates are significantly higher than our current rental rates, we may be unable to offset these costs by charging more for our services, which could have a negative impact on our financial results.
Our business requires the continued development of effective business support systems to support our customer growth and related services.
The growth of our business depends on our ability to continue to develop effective business support systems. This is a complicated undertaking requiring significant resources and expertise. Business support systems are needed for:
implementing customer orders for services;
delivering these services; and
timely billing for these services.
Because our business plan provides for continued growth Conversely, if rental rates drop significantly in the number of customers thatnear term, we serve and services offered, there is a need to continue to develop our business support systems on a schedule sufficient to meet proposed service rollout dates. The failure to continue to develop effective business support systems could harm our ability to implement our business plans and meet our financial goals and objectives.
We depend upon our key employees and maywould not 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,take advantage of the drop in rates until the expiration of the lease as 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 provides that either party may terminate their employment at any time. Consequently, we may notwould be successful in attracting, hiring, training and retainingbound by the people we need, which would seriously impede our ability to implement our business strategy.
Our senior management team has not had time to develop a working relationship with our new Chief Executive Officer and President which could result in not being able to manage our business effectively.
We have hired a new Chief Executive Officer and President effective March 16, 2009. Accordingly, our senior management team has not had time to develop a working relationship with our new Chief Executive Officer and President. Ifterms of the full senior management team is not able to develop a strong and effective working relationship, our management team’s ability to quickly and efficiently respond to problems and effectively manage our business could be adversely impacted.

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Changes in our senior management team during the past several years also have resulted in paying significant severance and hiring costs. If we continue to experience similar levels of turnover in our senior management team, the costs of such changes could harm our consolidated financial condition, results of operations and cash flows.
existing lease agreement.
 
If we failare unable to deploy new service points (network access points and/or data center space) or do not adequately protect our intellectual property, we may lose rights to somecontrol expenses associated with the deployment 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. 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 onnew service points, our results of operations.operations could be adversely affected.
As part of our strategy, we may continue to expand our network access points and/or data center space, particularly into new geographic markets. We face various risks associated with identifying, obtaining and integrating new service points, negotiating leases for data 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 new service points. We can offer no assurance that our intellectual property protection measureswe 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 market would be materially impaired.
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, restrictopen and operate new service points on a timely or impose fees or other costs on our useprofitable basis. Deployment of such formats, leading tonew service points will increase operating expenses, including expenses associated with hiring, training, retaining and managing new employees, provisioning capacity from NSPs, purchasing new equipment, implementing new systems, leasing additional expenses or prevent our delivery of this type of content, which could materiallyreal estate and adversely affect ourincurring additional depreciation expense.  In addition, delays in opening and operating results.
We are currently subject to a securities class action lawsuit, the unfavorable outcome of whichnew service points could have a material, adverse effectnegative impact on our financial condition, results of operations and cash flows.results.
 
On November 12, 2008, a putative securities fraud class action lawsuit was filed against us and our Chief Executive Officer, James P. DeBlasio, in the United States District Court for the Northern District of Georgia, captioned Catherine Anastasio and Stephen Anastasio v. Internap Network Services Corp. and James P. DeBlasio, Civil Action No. 1:08-CV-3462-JOF. The complaint alleges that we and the individual defendant violated Section 10(b)Any failure of the Exchange Actphysical infrastructure in our data service centers could lead to significant costs and disruptions that the individual defendant also violated Section 20(a) of the Exchange Act as a “control person” of Internap. Plaintiffs purport to bring these claims on behalf of a class of our investors who purchased our stock between March 28, 2007 and March 18, 2008.
Plaintiffs allege generally that, during the putative class period, we made misleading statements and omitted material information regarding (1) integration of VitalStream, (2) customer issues and related credits due to services outages, and (3) our previously reported 2007 revenue that we subsequently reduced in 2008 as announced on March 18, 2008. Plaintiffs assert that we and the individual defendant made these misstatements and omissions in order to keep our stock price high. Plaintiffs seek unspecified damages and other relief.
While we intend to vigorously contest this lawsuit, we cannot determine the final resolution of this lawsuit or when it might be resolved. In addition to the expenses incurred in defending this litigation and any damages that may be awarded in the event of an adverse ruling, our management’s efforts and attention may be diverted from the ordinary business operations to address these claims. Regardless of the outcome, this litigation may have a material adverse impact on our results because of defense costs, including costs related to our indemnification obligations, diversion of resources and other factors. 

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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 onharm our business reputation, consolidated financial condition, results of operations and cash flows.
 
Risks RelatedOur 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 Our Industryfailure resulting from numerous factors, including:
 
We cannot predict with certainty the future evolution of the high performance Internet connectivity market, and therefore the role of our products and services.
human error;
 
physical or electronic security breaches;
fire, earthquake, hurricane, flood, tornado and other natural disasters;
improper building maintenance by the landlords of the buildings in which our data centers are located;
water damage, extreme temperatures, fiber cuts;
power loss or equipment failure;
sabotage and vandalism; and
failures experienced by underlying service providers upon which our business relies.
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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. Most of our customers have service level agreements that require us to meet minimum performance obligations. As a result, service interruptions or equipment damage in our data centers could impact our ability to maintain performance obligations in our service level agreements to these customers and we could face claims related to such failures. We facehave in the riskpast given credits to our customers as a result of service interruptions due to equipment failures. Because our data centers are critical to many of our customers’ businesses, service interruptions or significant equipment damage in our data centers also could result in lost profits or other indirect or consequential damages to our customers. We cannot guarantee that a court would enforce any contractual limitations on our liability in the market for highevent that a customer brings a lawsuit against us as the result of a problem at one of our data centers.
Any loss of services, equipment damage or inability to meet performance Internet connectivity services might develop more slowlyobligations in our service level agreements could reduce the confidence of our customers and could result in lost customers or differently than currently projected, or thatan inability to attract new customers, which would adversely affect both our ability to generate revenues and our operating results.
Furthermore, we are dependent upon NSPs and telecommunications carriers in the United States, Europe and Asia-Pacific region, some of whom have experienced significant system failures and electrical outages in the past. Users of our services may not achieve continued widespread market acceptance. Furthermore,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.
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 which could impact our ability to service our customers.
While we maintain multiple layers of redundancy in or operating facilities, if we experience a problem at our network operations centers, including the failure of redundant systems, 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 NSPs. If the Internet becomes subject to a form of central management, or if NSPs establish an economic settlement arrangement regarding the exchange of traffic between Internet networks, the demand for ourprovide 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 adoptioncustomers, provide customer service and support or monitor our network infrastructure or network access points, any of such new technologies or industry standards could renderwhich would seriously harm our existing services obsoletebusiness and unmarketable. Our failure to anticipate the prevailing standard, to adaptoperating results. Also, because we provide continuous Internet availability under 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, andSLAs, we may be unablerequired to successfully adaptissue a significant amount of customer credits as a result of such interruptions in service. These credits could negatively affect our revenues and results of operations. In addition, interruptions in service to our customers could potentially harm our customer relations, require us to issue credits, expose us to potential lawsuits or necessitate additional capital expenditures.
A significant number of our network access points are located in facilities owned and services to alternative access devices and technologies.
Rapidly evolving technologies or new business models could cause demand for our services to decline or could cause these services to become obsolete.
Customers oroperated by third parties may develop technological or business model innovations that address their requirements in a manner that is, or is perceived to be, equivalent or superior to our services. If competitors introduce new products or services that compete with or surpass the quality or the price/performanceparties. In many of our services, we may be unable to renew our agreements with existing customers or attract new customers at the prices and levels that allow us to generate attractive rates of return on our investment.
For example, one or more third parties might develop improvements to current peer-to-peer technology, which is a technology that relies upon the computing power and bandwidth of its participants, such that this technological approach is better able to deliver content in a way that is competitive to our CDN services, or even that makes CDN services obsolete. We may not anticipate such developments and may be unable to adequately compete with these potential solutions. In addition, our customers’ business models may change in ways thatthose arrangements, we do not anticipate and these changeshave 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 reducehave an adverse impact on the continued occupancy arrangement or eliminate our customers’ needs for CDN services. If this occurred, we could lose customers or potential customers, and our business and financial results would suffer. As a resultthe level of these or similar potential developments, in the future it is possible that competitive dynamics in our market may requireservice delivered to us to reduce our prices, which could harm our revenue, gross margin and operating results.under such arrangements.
 
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.occurred. 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, and negatively impact hosted customers’ on-line business transactions. Affected customers might file claims against us under such circumstances, and our insurance may not be adequate to cover these claims.
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-power density equipment, which could hurthas significantly increased the demand for power. The current demand for electrical power may exceed our designed capacity in these facilities. As electrical power, rather than 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 consolidated financial condition, results of operationscost-effectively could be materially and cash flows.adversely affected.

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If the world-wide financial crisis intensifies, potential disruptionsOur 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 and supply of power, electrical power shortages, planned or unplanned power outages and availability of adequate power resources. Power outages could harm our customers and our business. While we attempt to limit exposure to system downtime by using backup generators, uninterruptible power systems and other redundancies, we may not be able to limit our exposure entirely. Even with these protections in place we have experienced power outages in the capitalpast and credit markets may adversely affectin the future. In addition, our energy costs have increased and may continue to increase for a variety of reasons including increased pressure on legislators to pass green legislation. As energy costs increase, we may not be able to pass on to our customers the increased cost of energy, which could harm our business includingand operating results.
In each of our abilitymarkets, we rely on utility companies to meetprovide a sufficient amount of power for current and future customers. Because we rely on third parties to provide power, we cannot ensure that these third parties will deliver such power in adequate quantities or on a consistent basis. 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 commitmentspower 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 data center and limit our ability to grow our business.
The global economy is currently experiencing a significant contraction, with an almost unprecedented lack of availability of business, and consumer credit. We rely on the credit markets to meet our financial commitments and short-term liquidity needs if internal funds are not available from our operations. Long-term disruptions in the capital and credit market, similar to those that have been experienced during 2008, could result from uncertainty, changing or increased regulation, reduced alternatives or failures of significant financial institutions and could adversely affect our access to liquidity needed for our business. Any disruption could require us to take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding for our business needs can be arranged. Such measures could include deferring capital expenditures and reducing or eliminating discretionary uses of cash.
Besides our cash on hand and any financing activities we may pursue, customer collections are our primary source of cash. While we believe we have a well diversified customer base and no concentration of credit risk with any single customer, if the current market conditions continue to deteriorate, we may experience increased churn in our customer base, including reductions in their commitments to us. This could result in an increase in our provision for doubtful accounts and ultimatelywhich could have a material adverse effect on our liquidity.
Continued market disruptions could cause broader economic downturns, which may lead to lower demand for our services and increased incidence of customers’ inability to pay their accounts. Further, bankruptcies or similar events by customers may cause us to incur bad debt expense at levels higher than historically experienced. These events would adversely impact our results of operations, cash flows and financial position.
We may be unable to draw down on existing credit facilities if our current lender fails and we may be unable to access, at all or on acceptable terms, alternative sources of credit or the debt capital markets due to the global disruptions in these markets.
The turmoil in the financial services industry has led to the bankruptcy, failure, collapse or sale of several large financial institutions. Despite an unprecedented level of intervention from both the United States federal government and certain European governments, there can be no assurance that government responses to this crisis will stabilize the credit and debt capital markets or increase liquidity and the availability of credit generally.
Deteriorating market and liquidity conditions also may give rise to issues which may impact our lender’s ability to hold debt commitments to us to their full term. Accordingly, while this would be highly unusual, our lender could attempt to call this debt which would have a material adverse effect on our liquidity, even though no call provisions exist without being in default.
Our ability to meet our obligations depends on the financial health of our lenders, their ability to meet their own obligations under our credit facilities and the availability of the credit markets generally. Finally, our ability to access the capital markets may be severely restricted at a time when we would like, or need, to do so, which could have annegative impact on our flexibility to pursue additional expansion opportunities and maintainrelationships with our desired level of revenue growth in the future.
Terrorist activity throughout the world and military action to counter terrorism could adversely impactcustomers as well as 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. In addition, federal and state agencies are actively considering regulation of various aspects of the Internet, including taxation of transactions, imposition of access fees for VoIP and enhanced data privacy and retention legislation. 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 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.

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In 2007, the Internet Tax Freedom Act Amendment Acts of 2007 was signed into law which extended the 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. We cannot predict whether this moratorium will be extended in the future or whether future legislation will alter the nature of the moratorium. If this moratorium is not extended in its current form, state and local governments could impose taxes on our services, and these taxes could decrease our ability to compete and could have a material adverse effect on our business, financial condition, results of operations and cash flows.
 
In addition, laws relatingRisks Related to our Capital Stock and Other Business Risks
We have a history of losses and may not sustain profitability.
We have a history of quarterly and annual period net losses, including for each of three years in the period ended December 31, 2009. At December 31, 2009, our accumulated deficit was $1,036.5 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.
We may incur additional goodwill and other intangible asset impairment charges, restructuring charges or both.
As more fully described in notes 8 and 9 to the liabilityaccompanying consolidated financial statements, we have recently recorded significant impairment and restructuring charges and made changes in estimates that resulted in acceleration of private network operatorsamortization expense related to certain intangible assets.
The assumptions, inputs and information carriedjudgments used in performing the valuation analysis and assessments 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 disseminated through their networkschanges in circumstances could materially affect the results of the valuation and assessments. Due to the inherent uncertainty involved in making these estimates, actual results could differ from our estimates.

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, we 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 our best expectations based on known facts and circumstances at the time of estimation. Should circumstances warrant, we will adjust our previous estimates to reflect what we then believe to be a more accurate representation of expected future costs. Because our estimates and assumptions regarding impairment and restructuring charges include probabilities of future events, such as expected operating results, future economic conditions, the ability to find a sublease tenant within a reasonable period of time or the rate at which a sublease tenant will pay for the available space, such estimates are unsettled, bothinherently vulnerable to changes due to unforeseen circumstances that could materially and adversely affect our results of operations. Adverse changes in any of these factors could result in an additional impairment and restructuring charges in the United States and abroad. Network operatorsfuture.
Our results of operations have been suedfluctuated in the past basedand likely will continue to fluctuate, which could negatively impact the price of our common stock.
We have experienced fluctuations in our results of operations on a quarterly and annual basis. Fluctuation in our operating results may cause the contentmarket price of material disseminated through their networks.our common stock to decline. We expect to experience continued 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;
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;
general economic conditions; and
any impairments or restructurings charges that we may incur in the future.
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In addition, fluctuations in our results of operations may become subjectarise from strategic decisions we have made or may make with respect to legal claimsthe timing and magnitude of capital expenditures such as defamation, invasion of privacy, obscenity and copyright infringement in connectionthose associated with content stored on or distributed through our network. Also, our reputation could suffer as a resultthe expansion of our perceived associationdata center facilities, the deployment of additional network access points and the terms of our network connectivity purchase agreements. 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. 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.
Failure to sustain or increase our revenues may cause our business and financial results to suffer.
We have considerable fixed expenses, and we expect to continue to incur significant expenses, particularly with the type of content that someexpansion of our customers deliver.data center facilities. We incur a substantial portion of these expenditures upfront, and are only able to recover these costs over time. We must, therefore, at least sustain or generate higher revenues to maintain profitability. Although revenue from our data center services segment is growing, this segment has lower margins than our IP services segment. If we are unable to increase our margins in the data center services segment, our business may suffer.
 
The adoption of any future lawsNumerous factors could affect our ability to increase revenue, either alone or regulations might decrease the growth of the Internet, decrease demand for our services, impose taxes orin combination with 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 significantly harm 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.factors, including:
 
Risks Related to Our Capital Stock
failure to increase sales of our services and products;
pricing pressures;
significant increases in bandwidth and data center costs or other operating expenses;
failure of our services or products to operate as expected;
loss of customers or inability to attract new customers or loss of existing customers at a rate greater than our increase in new customers;
inability of customers to pay for services and products on a timely basis or at all or failure to continue to purchase our services and products in accordance with their contractual commitments; or
network failures and any breach or unauthorized access to our network.
 
Our common stockholders may experience significant dilution, which could depress the market price of our common stock.
 
Holders of our stock options may exercise theirthose options to purchase our common stock, which would increase the number of outstanding shares of our common stock that are outstanding in the future. As of December 31, 2008,2009, options to purchase an aggregate of 2.84.3 million shares of our common stock at a weighted average exercise price of $11.91$7.16 were outstanding. Also, the vesting of 0.81.1 million outstanding shares of restricted stock awards will increase the weighted average number of shares used for calculating diluted net incomeloss per share. We issued approximately 12.2 million shares of our common stock to VitalStream’s stockholders in connection with the acquisition in February 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 our common stock. Furthermore, greaterGreater 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, the future vesting and issuance of stock awards to our executives and employees or in financing transactions, could depress the market price of our 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.
 
ProvisionsAny failure to meet our debt obligations and other long-term commitments would damage our business.
As of December 31, 2009, our total long-term debt, including capital leases, was $23.2 million. If we use more cash than we generate in the future, our level of indebtedness could adversely affect our future operations by increasing our vulnerability to adverse changes in general economic and industry conditions and by limiting or prohibiting our ability to obtain additional financing for future capital expenditures, acquisitions and general corporate and other purposes. In addition, if we are unable to make interest or principal payments when due, we would be in default under the terms of our charter documents,long-term debt obligations, which would result in all principal and interest becoming due and payable which, in turn, would seriously harm our stockholder rights planbusiness.
We also have other long-term commitments for operating leases and Delaware law may have anti-takeover effects that could preventservice contracts totaling $226.7 million over the next 15 years with a changeminimum of $36.2 million payable in control even if the change in control2010. If we are unable to make payments when due, we would be beneficial toin breach of contractual terms of the agreements, which may result in disruptions of our stockholders.services which, in turn, would seriously harm our business.
 
Provisions
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Our existing credit agreement puts limitations upon us.
Our existing credit agreement, which expires in September 2011, puts operating and financial limitations on us and requires us to meet certain financial covenants. These limitations may negatively impact our business, consolidated financial condition, results of operations and cash flows by limiting or prohibiting us from engaging in certain transactions. Our credit agreement contains certain covenants, including those that limit our certificate of incorporation, bylawsability to incur further indebtedness, make acquisitions or investments, make certain capital expenditures and Delaware law could make an acquisition more difficult, even if doing socreate liens on our assets, in addition to covenants that require us to maintain minimum liquidity levels.
If we do not satisfy these covenants, we would be beneficialin default under the credit agreement. Any defaults, if not waived, could result in our 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 stockholders. In addition,business, consolidated financial condition, results of operations and cash flows.
Finally, our boardability to access the capital markets may be limited at a time when we would like or need to do so, which could have an impact on our flexibility to pursue expansion opportunities and maintain our desired level of directors adopted a stockholder rights planrevenue growth in 2007 that renders the consummationfuture.
Our ability to use U.S. net operating loss carryforwards might be limited.
As of an acquisition withoutDecember 31, 2009, we had net operating loss carryforwards of $179.5 million for U.S. federal tax purposes. These loss carryforwards expire between 2020 and 2026. To the approvalextent these net operating loss carryforwards are available, we intend to use them to reduce the corporate income tax liability associated with our operations. Section 382 of the boardU.S. Internal Revenue Code generally imposes an annual limitation on the amount of directors more difficult.net operating loss carryforwards that might be used to offset taxable income when a corporation has undergone significant changes in stock ownership. To the extent our use of net operating loss carryforwards is significantly limited, our income could be subject to corporate income tax earlier than it would if we were able to use net operating loss carryforwards, which could result in lower profits.
 
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;

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●             changes in expectations of future financial performance or changes in estimates of securities analysts;
 
changes in expectations of future financial performance or changes in estimates of securities analysts;
 fluctuations in stock market prices and volumes;
 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.
We previously identified a material weakness in our internal control over financial reporting. Although we have remediated this weakness, any additional control deficiencies could 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.
We must maintain effective internal controls to provide reliable and accurate financial reports and prevent fraud. These controls are designed and implemented to help ensure reliable financial statement reporting, including accurate reserves, estimates, judgments and disclosures. In connection with our evaluation of internal control over financial reporting for the year ended December 31, 2007, we identified a material weakness related to effective controls over the analysis of requests for sales credits and billing adjustments. We remediated this weakness during the year ended December 31, 2008; however, any additional control 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. 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.
Our business requires the continued development of effective and efficient business support systems to support our customer growth and related services.
The growth of our business depends on our ability to continue to develop effective, efficient business support policies, processes and systems. This is a complicated undertaking requiring significant resources and expertise. Business support systems are needed for:
sourcing, evaluating and targeting potential customers and managing existing customers;
- 15 - -

implementing customer orders for services;
   
 announcements by us ordelivering these services;
timely billing for these services;
budgeting, forecasting, tracking and reporting our competitorsresults of acquisitions, investments or strategic alliances.operations; and
providing technical and operational support to customers and tracking the resolution of customer issues.
 
If the number of customers that we serve or our services portfolio increases, we may need to develop additional business support systems on a schedule sufficient to meet proposed service rollout dates. The failure to continue to develop effective and efficient business support systems could harm our ability to implement our business plans and meet our financial goals and objectives.
We depend upon our key employees and may be unable to attract or retain sufficient numbers of qualified personnel.
Our future performance depends 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, research and development, 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 provides 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.
Additionally, changes in our senior management team during the past several years, both through voluntary and involuntary separation, have resulted in loss of valuable company intellectual capital and in paying significant severance and hiring costs. With reduced staffing, or staffing new to the organization, we may not be able to maintain an adequate separation of duties in key areas of monitoring, oversight and review functions and may not have adequate succession plans in place to mitigate the impact of future personnel losses. If we continue to experience similar levels of turnover in our senior management team, the execution of our corporate strategy could be affected and the costs of such changes could negatively impact our operations.
Our international operations may not be successful.
We have limited experience operating internationally and have only recently begun to achieve some success in our international operations. We currently have network access points or CDN POPs in Amsterdam, Hong Kong, London, Mumbai, Singapore, Sydney and Toronto. We also participate in a joint venture with NTT-ME Corporation and Nippon Telegraph and Telephone Corporation, or NTT Holdings, that operates network access points in Tokyo and Osaka, Japan. 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 NSPs 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;
potential loss of proprietary information due to misappropriation or laws that may be less protective of our intellectual property rights than the laws in the United States;
challenges in reducing operating expense or other costs required by local laws, and longer accounts receivable payment cycles and difficulties in collecting accounts receivable;
exposure to fluctuations in foreign currency exchange rates;
costs of customizing network access points for foreign countries and customers;
compliance with requirements of foreign laws, regulations and other governmental controls, including trade and labor restrictions and related laws that may reduce the flexibility of our business operations or favor local competition;

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.
- 16 - -

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. 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 impact 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 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, or at all.
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 services or products 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 impact 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 services or products to avoid infringement, our ability to compete successfully in our market would be materially impaired.
We are currently subject to a securities class action lawsuit and a derivative action lawsuit, the unfavorable outcomes of which could have a material adverse impact on our financial condition, results of operations and cash flows.
In November 2008, a putative securities class action lawsuit was filed against us and our former chief executive officer and in November 2009, a putative derivative lawsuit was filed purportedly on our behalf against certain of our directors and officers. While we are, and will continue to, vigorously contest these lawsuits, we cannot determine the final resolution of these lawsuits or when they might be resolved. In addition to the expenses incurred in defending this litigation and any damages that may be awarded in the event of an adverse ruling, our management’s efforts and attention may be diverted from the ordinary business operations to address these claims. Regardless of the outcome, this litigation may have a material adverse impact on our results because of defense costs, including costs related to our indemnification obligations, diversion of resources and other factorsWe discuss these lawsuits further in “Legal Proceedings” below.
ChangesWe may become involved in financial accounting standardsother litigation that may adversely affect our reported results of operationsus.
 
A changeIn the ordinary course of business, we are or may become involved in financial accounting standards or practices thatlitigation, administrative proceedings and governmental proceedings. Such matters can be time-consuming, divert management’s attention and resources and cause a change in the methodology or procedures by which we track, calculate, record or report ourus to incur significant expenses. The results of operations orany such actions could have a material adverse impact on our business, consolidated financial condition, or both could cause fluctuations in and adversely affect our reported results of operations and causecash flows.
Provisions of our historical financial informationcharter documents 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 not be reliableour stockholders.

Provisions of our Certificate of Incorporation and Bylaws, as an indicatorwell as provisions of future results. New pronouncementsDelaware law, could discourage, delay or prevent a merger, acquisition or other change in control of our company. These provisions are intended to protect stockholders’ interests by providing our board of directors a means to attempt to deny coercive takeover attempts or to negotiate with a potential acquirer in order to obtain more favorable terms. Such provisions include a board of directors that is classified so that only one-third of directors stand for election each year. These provisions could also discourage proxy contests and varying interpretations of pronouncements have occurredmake it more difficult for stockholders to elect directors and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.take other corporate actions.
 
ITEM 1B. UNRESOLVED STAFF COMMENTS
 
None.
- 17 - -

 
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. Our Atlanta facility, included in the table below, 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 our service 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. The following table shows the number and gross square footage of our facilities in our top markets as of March 9, 2009:December 31, 2009, and includes both company-controlled facilities and partner sites:
             
Top Markets 
Number of
our Facilities
 
Approximate
Gross Square
Footage
  
Number of
our Facilities
 
Approximate
Gross Square
Footage
Atlanta   1 120,298
Boston area   2 116,699
Houston   1 36,649
Los Angeles   1 15,320
New York Metro area  2  152,848    2 152,848
Boston area  2  116,699 
Atlanta  1  120,298 
Houston  1  36,649 
Northern California   8 27,586
Seattle  3  70,535    3 70,535
Los Angeles  1  15,320 
Top Markets Total  10  512,349    18 539,935
We have entered into leases or will expand our presence in 2010 for additional space in Seattle, Northern California and Houston, which are not included in the table above.
 
ITEM 3. LEGAL PROCEEDINGS
Securities Class Action Litigation
 
On November 12, 2008, a putative securities fraud class action lawsuit was filed against us and our Chief Executive Officer,former chief executive officer, James P. DeBlasio, in the United States District Court for the Northern District of Georgia, captioned Catherine Anastasio and Stephen Anastasio v. Internap Network Services Corp. and James P. DeBlasio, Civil Action No. 1:08-CV-3462-JOF. The complaint alleges that we and the individual defendant violated Section 10(b) of the Exchange Act and that the individual defendant also violated Section 20(a) of the Exchange Act as a “control person” of Internap. Plaintiffs purport to bring these claims on behalf of a class of our investors who purchased our stock between March 28, 2007 and March 18, 2008.
 
Plaintiffs allege generally that, during the putative class period, we made misleading statements and omitted material information regarding (1)(a) integration of VitalStream, (2)(b) customer issues and related credits due to services outages, and (3)(c) our previously reported 2007 revenue that we subsequently reduced in 2008 as announced on March 18, 2008. Plaintiffs assert that we and the individual defendant made these misstatements and omissions in order to keep our stock price high. Plaintiffs seek unspecified damages and other relief.

 
On August 12, 2009, the Court granted plaintiffs leave to file an Amended Class Action Complaint (“Amended Complaint”). The Amended Complaint added a claim for violation of Section 14(a) of the Exchange Act based on alleged misrepresentations in our proxy statement in connection with our acquisition of VitalStream. The Amended Complaint also added our former Chief Financial Officer, David A. Buckel, as a defendant and lengthened the putative class period.
- 23 - -

 
On September 11, 2009, we and the individual defendants filed motions to dismiss. Those motions are currently pending before the Court. On November 6, 2009, plaintiffs filed a Corrected Amended Class Action Complaint. On December 7, 2009, plaintiffs filed a motion for leave to file a Second Amended Class Action Complaint to add allegations regarding, inter alia, an alleged failure to conduct due diligence in connection with the VitalStream acquisition and additional statements from purported confidential witnesses. We opposed plaintiffs’ motion for leave to file the Second Amended Class Action Complaint and that motion is also currently pending before the Court.
Derivative Action Litigation
 
On November 12, 2009, stockholder Walter M. Unick filed a putative derivative action purportedly on behalf of Internap against certain of our directors and officers in the Superior Court of Fulton County, Georgia, captioned Unick v. Eidenberg, et al., Case No. 2009cv177627. This action is based upon substantially the same facts alleged in the securities class action litigation described above. The complaint seeks to recover damages in an unspecified amount. On January 28, 2010, the Court entered the parties’ agreed order staying the matter until the motions to dismiss are resolved in the securities class action litigation.

While we intend to vigorously contest this lawsuit,these lawsuits, we cannot determine the final resolution of this lawsuitthe lawsuits or when itthey might be resolved. In addition to the expenses incurred in defending this litigation and any damages that may be awarded in the event of an adverse ruling, our management’s efforts and attention may be diverted from the ordinary business operations to address these claims. Regardless of the outcome, this litigation may have a material adverse impact on our results because of defense costs, including costs related to our indemnification obligations, diversion of resources and other factors.
 
We currently, and from time to time, are involved in other 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
- 18 - -
None.
 
PARTITEM 4. RESERVED
P ART II
 
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Our common stock is listed on the NASDAQ Global Market under the symbol “INAP”.“INAP.” The following table presents, for the periods indicated, the range of high and low per share sales prices of our common stock, as reported on the NASDAQ Global Market.
On July 11, 2006, we implemented a one-for-10 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.
       
Year Ended December 31, 2008: High  Low 
Fourth Quarter $3.72  $2.00 
Third Quarter  5.08   2.65 
Second Quarter  5.90   4.20 
First Quarter  9.02   3.63 

Year Ended December 31, 2007 High  Low 
Year Ended December 31, 2009: High  Low 
Fourth Quarter $17.18  $8.14  $4.81  $2.94 
Third Quarter  16.15   13.04   3.82   2.57 
Second Quarter  19.33   12.95   3.92   2.22 
First Quarter  20.98   15.60   3.30   2.10 
        
Year Ended December 31, 2008: High  Low 
Fourth Quarter $3.72  $2.00 
Third Quarter  5.08   2.65 
Second Quarter  5.90   4.20 
First Quarter  9.02   3.63 
 
As of March 5, 2009,February 17, 2010, we had approximately 1,2341,000 stockholders of record of our common stock.
 
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 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.

- 24 - -


 
The following table provides information regarding our current equity compensation plans as of December 31, 20082009 (shares in thousands):
           
Equity Compensation Plan Information
Plan 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  4,253
(1)
$7.16  4,644(2)
           
Equity compensation plans not approved by security holders       
           
Total  4,253 $7.16  4,644 
 
Equity Compensation Plan Information
Plan 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  2,781(1)$11.91  6,988(2)
           
Equity compensation plans not approved by security holders       
           
Total  2,781 $11.91  6,988 
__________________

(1)
Excludes purchase rights accruing under the 2004 Employee Stock Purchase Plan, or the Purchase Plan. Under the Purchase Plan, each eligible employee may purchase up to $12,500 worth of our 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(based on the basis of the fair market value per share on the purchase date(s) such rights are granted)) per calendar year that the purchase right remains outstanding.year. The purchase price payable per share is equal to 95% of the closing selling price per share of our common stock on the purchase date.
(2)
 
(2)Includes 229,0000.2 million shares available for issuance under the Purchase Plan.
 
- 2519 - -

 
STOCK PERFORMANCE GRAPH
 
The following graph compares, for the five-year period ended December 31, 2008,2009, the cumulative total stockholder return on our common stock with that of the NASDAQ Market Index and the Hemscott Group Index. The graph assumes that $100 was invested on December 31, 20032004 and assumes reinvestment of any dividends. The information in the following table has been adjusted to reflect the one-for-10 reverse stock split implemented in July 2006. Our fiscal year ends on December 31. The stock price performance on the following graph is not necessarily indicative of future stock price performance.
 
This performance graph shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities under that Section and shall not be deemed to be incorporated by reference into any filing we make under the Securities Act of 1933, as amended, or the Exchange Act.
 
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN AMONG INTERNAP NETWORK SERVICES CORPORATION, NASDAQ MARKET INDEX AND HEMSCOTT GROUP INDEX

  As of December 31, 
   2004  2005  2006  2007  2008  2009 
              
Internap Network Services Corporation $100.00 $46.24 $213.55 $89.57 $26.88 $50.54 
Hemscott Group Index  100.00  86.54  82.14  87.81  56.38  87.36 
NASDAQ Market Index  100.00  102.20  112.68  124.57  74.71  108.56 
                   
  12/31/03  12/31/04  12/31/05  12/31/06  12/31/07  12/31/08 
                   
Internap Network Services Corporation $100.00  $37.96  $17.55  $81.10  $34.00  $10.20 
Hemscott Group Index  100.00   126.04   109.07   103.53   110.68   71.06 
NASDAQ Market Index  100.00   108.41   110.79   122.16   134.29   79.25 

- 2620 - -

 
ISSUER PURCHASES OF EQUITY SECURITIES
 
The following table sets forth information regarding our repurchases of securities for each calendar month in the quarter ended December 31, 2008:2009:
  (a) (b) (c) (d) 
          
Period 
Total Number of Shares
(or Units) Purchased(1)
 
Average Price Paid
per Share (or Unit)
 
Total Number of
Shares (or Units)
Purchased as Part
of Publicly
Announced Plans
or Programs
 
Maximum Number
(or Approximate
Dollar Value) of
Shares (or Units) that
May Yet Be
Purchased Under the
Plans or Programs
 
October 1 to 31, 2009   $     
November 1 to 30, 2009  2,500  3.67     
December 1 to 31, 2009  7,666  4.41     
Total  10,166 $4.23     

(1)
Employees surrendered these shares to us as payment of statutory minimum payroll taxes due in connection with the vesting of restricted stock.

 
                 
 
Period
  (a)






Total Number of Shares
(or Units) Purchased* 
   (b)






Average Price Paid
per Share (or Unit) 
   (c)


Total Number of
Shares (or Units)
Purchased as Part
of Publicly
Announced Plans
or Programs 
   (d)

Maximum Number
(or Approximate
Dollar Value) of
Shares (or Units) that
May Yet Be
Purchased Under the
Plans or Programs 
 
October 1 to 31, 2008  2,382  $2.60       
November 1 to 30, 2008  811   2.71       
December 1 to 31, 2008  8,921   2.54       
Total  12,114  $2.57       
* These shares were surrendered to us by employees to satisfy tax withholding obligations in connection with the vesting of restricted stock.

 
- 2721 - -

 
 
ITEM 6. SELECTED FINANCIAL DATA
 
TheWe have derived the selected financial data shown below for each of the five years in the period ended December 31, 2008 has been derived2009 from our accompanying consolidated financial statements. The following data should be read in conjunction with the accompanying consolidated financial statements and related notes contained and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Annual Report on Form 10-K (in(in thousands, except per share data).
                              
 Year Ended December 31,  Year Ended December 31, 
 
2008(1)
  
2007(2)
  
2006(3)
  2005  2004  
2009(1)
  
2008(2)
  
2007(3)
  
2006(4)
  2005 
Consolidated Statement of Operations Data:               
Consolidated Statements of Operations Data:               
Revenues $253,989  $234,090  $181,375  $153,717  $144,546  $256,259  $253,989  $234,090  $181,375  $153,717 
                                        
Operating costs and expenses:                                        
Direct costs of network, sales and services, exclusive of depreciation and amortization, shown below  135,877   118,394   97,338   81,958   76,990   143,016   135,877   118,394   97,338   81,958 
Direct costs of customer support  18,527   16,217   16,547   11,566   10,670 
Direct costs of amortization of acquired technologies  6,649   4,165   516   577   579   8,349   6,649   4,165   516   577 
Direct costs of customer support  16,217   16,547   11,566   10,670   10,180 
Product development  8,477   6,564   4,475   4,864   6,412 
Sales and marketing  30,888   31,533   27,173   25,864   23,411   28,131   30,888   31,533   27,173   25,864 
General and administrative  30,675   30,251   21,556   18,665   22,357   44,152   44,235   39,076   26,579   24,960 
Provision for doubtful accounts  5,083   2,261   548   1,431   2,415 
Depreciation and amortization  23,865   22,242   15,856   14,737   15,461   28,282   23,865   22,242   15,856   14,737 
Goodwill impairment  99,700             
Restructuring and other impairments  1,741   11,349   323   44   3,644 
Acquired in-process research and development     450          
Gain on disposals of property and equipment  (16)  (5)  (113)  (19)  (3)
Loss (gain) on disposals of property and equipment  26   (16)  (5)  (113)  (19)
Impairments and restructuring  54,698   101,441   11,349   323   44 
Other     50      60            500      60 
Total operating costs and expenses  359,156   243,801   179,238   158,851   161,446   325,181   359,156   243,801   179,238   158,851 
(Loss) income from operations  (105,167)  (9,711)  2,137   (5,134)  (16,900)  (68,922)  (105,167)  (9,711)  2,137   (5,134)
Non-operating (income) expense  (245)  (937)  (1,551)  (87)  772 
(Loss) income before income taxes and equity in earnings of equity-method investment  (104,922)  (8,774)  3,688   (5,047)  (17,672)
Non-operating expense (income)  461   (245)  (937)  (1,551)  (87)
(Loss) income before income taxes and equity in (earnings) of equity-method investment  (69,383)  (104,922)  (8,774)  3,688   (5,047)
Provision (benefit) for income taxes  174   (3,080)  145         357   174   (3,080)  145    
Equity in earnings of equity-method investment, net of taxes  (283)  (139)  (114)  (83)  390 
Equity in (earnings) of equity-method investment, net of taxes  (15)  (283)  (139)  (114)  (83)
Net (loss) income $(104,813) $(5,555) $3,657  $(4,964) $(18,062) $(69,725) $(104,813) $(5,555) $3,657  $(4,964)
                                        
Net (loss) income per share:                                        
Basic $(2.13) $(0.12) $0.11  $(0.15) $(0.63) $(1.41) $(2.13) $(0.12) $0.10  $(0.15)
Diluted $(2.13) $(0.12) $0.10  $(0.15) $(0.63) $(1.41) $(2.13) $(0.12) $0.10  $(0.15)
                    
Weighted average shares used in per share calculations:                    
Basic  49,238   46,942   34,748   33,939   28,732 
Diluted  49,238   46,942   35,739   33,939   28,732 
 
  December 31, 
Consolidated Balance Sheets Data: 
2009(1)
  
2008(2)
  
2007(3)
  2006  2005 
Cash and cash equivalents, investments in marketable securities and other related assets and restricted cash(5)
 $80,926  $61,096  $75,719  $58,882  $40,494 
Total assets  267,502   330,083   427,010   173,702   155,369 
Revolving credit facility, due after one year, note payable and capital lease obligations, less current portion  23,217   23,244   17,806   3,364   7,903 
Total stockholders’ equity  184,402   248,195   346,633   126,525   109,728 
 
- 28 - -

  Year Ended December 31, 
Other Financial Data: 2009  2008  2007  2006  2005 
Purchases of property and equipment $17,278  $51,154  $30,271  $13,382  $10,161 
Net cash flows provided by operating activities  37,520   37,951   27,526   29,387   5,493 
Net cash flows used in investing activities  (9,900)  (41,690)  (36,393)  (10,399)  (9,428)
Net cash flows (used in) provided by financing activities  (598)  (821)  15,240   1,957   (5,454)
 
                
  December 31, 
  
2008(1)
  
2007(2)
  2006  2005  2004 
Consolidated Balance Sheet Data:               
Cash, cash equivalents and short-term investments in marketable securities $54,069  $71,599  $58,882  $40,494  $45,985 
Non-current marketable securities  6,378            4,656 
Total assets  330,083   427,010   173,702   155,369   168,149 
Note payable and capital lease obligations, less current portion  23,244   17,806   3,364   7,903   12,837 
Total stockholders’ equity  248,195   346,633   126,525   109,728   113,738 
  Year Ended December 31, 
  2008  2007  2006  2005  2004 
Other Financial Data:               
Purchases of property and equipment $51,154  $30,271  $13,382  $10,161  $13,066 
Net cash flows provided by (used in) operating activities  37,951   27,526   29,387   5,493   (1,150)
Net cash flows used in investing activities  (41,690)  (36,393)  (10,399)  (9,428)  (29,659)
Net cash flows (used in) provided by financing activities  (821)  15,240   1,957   (5,454)  45,747 

(1)__________________We completed an assessment of goodwill and other intangible assets for impairment as of June 1, 2009, in connection with our decision to consolidate our business segments, which resulted in aggregate impairment charges of $51.5 million for goodwill and $4.1 million for other acquired intangible assets.

(1)
(2)
As a result of our annual goodwill impairment test on August 1, 2008, we recorded a $99.7 million impairment charge to adjust goodwill in our former CDN services segment to anits implied fair value of $54.7 million.value.
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(2)
(3)
On February 20, 2007, we completed our acquisition of VitalStream, whereby VitalStream became our wholly-owned subsidiary. Prior to this acquisition, 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 our common stock.
(4)
(3)
Effective January 1, 2006, we adopted Statement of Financial Accounting Standards, or SFAS, No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R) and related interpretations,new accounting guidance for stock-based compensation, using thea modified prospective transition method and therefore have not restated prior periods’ results. Prior to theour 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 Disclosure —an Amendment of FASB Statement No. 123. Accordingly,this new accounting guidance, we did not recognize expense for options to purchase our common stock that we granted with an exercise price equal to fair market value at the grant date and we did not recognize expense in connection with purchases under our employee stock purchase plansplan for any periods prior to January 1, 2006.
 
(5)The following table provides a reconciliation of total cash and cash equivalents, investments in marketable securities and other related assets and restricted cash to the amounts reported in our audited consolidated balance sheets (in thousands):
 
  December 31, 
  2009  2008  2007  2006  2005 
Cash and cash equivalents $73,926  $46,870  $52,030  $45,591  $24,434 
Investments in marketable securities and other related assets:                    
Short-term  7,000   7,199   19,569   13,291   16,060 
Non-current     7,027          
Restricted cash        4,120       
  $80,926  $61,096  $75,719  $58,882  $40,494 
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Investments in marketable securities and other related assets include auction rate securities and corresponding rights of $7,000, $7,027 and $7,150 as of December 31, 2009, 2008 and 2007. We classified these as short-term investments as of December 31, 2009 and 2007 and as non-current investments as of December 31, 2008.
 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion should be read in conjunction with the accompanying consolidated financial statements and notes provided under Part II, Item 8 of this Annual Report Form 10-K. Certain prior year disclosures within the following discussion have been reclassified to conform to the current year presentation.
 
Business Overview
 
We deliverare an Internet solutions throughand data center company providing a suite of network optimization and delivery services and products that manage, deliver and distribute applications and content with a 100% availability service level agreement, as well as a global provider of secure and reliable data center services. These solutionsWe help our customers innovate their business, improve service levels and ourlower the cost of information technology operations. Our services and products, combined with progressive and proactive technical support, enable companiesour customers to migrate business-critical applications including audiofrom private to public networks.
Financial Highlights and video streaming and monetizationOutlook

We continue to experience pricing pressure for our IP services, which has resulted in part in decreased IP services revenue year-over-year. We historically have priced our IP services at a premium compared to the Internet.services offered by conventional Internet connectivity service providers. Due to competitive forces, however, we have been required to lower pricing of our IP services, although this decrease in pricing has been offset by an increase in demand for our IP services. Our suiteIP traffic has increased as a result of products and services support a broad range of Internet applications. We currently have approximately 3,600our customers requiring greater overall capacity due to growth in the United Statesusage of their applications, as well as in the nature of applications consuming greater amounts of bandwidth. We expect that we will continue to experience pricing pressure as well as gains in IP traffic for the reasons noted.

Data center services continue to be a source of revenue growth for our business, and abroad, serving a varietywe expect this trend to continue. We have expanded the sites that we operate and expect to add additional space in the future as part of industries, including entertainmentour data center growth initiative. The growth in data center revenues and media, financial services, healthcare, travel, e-commerce, retail and technology. Our product and service offerings are complemented by Internet protocol, or IP, access solutions such asdirect costs of data center services largely follows our expansion of data center space, and content delivery networks, or CDN.we believe the demand for data center services continues to outpace industry-wide supply. We deliver services through our 64 service points across North America, Europe, Asia, India and Australia. Our Private Network Access Points, or P-NAPs, feature multiple direct high-speed connections to multiple major Internet backbones including AT&T Inc.; Sprint Nextel Corporation; Verizon Communications Inc.; Global Crossing Limited; and Level 3 Communications, Inc.experienced a net increase in customers in this segment.
 
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Segments
During the year ended December 31, 2009, we changed how we view and manage our business. We believenow operate our portfolioIP services and the majority of patented and patent-pending route optimization solutions differentiates usour CDN services on a combined basis while we operate the managed hosting portion of our CDN services as part of our data center services. The change from our competitors. Our portfolio addresses the inherent weaknesseshistorical segments reflects our view of the Internetbusiness and overcomesaligns our segments with our operational and organizational structure. We have reclassified financial information for prior periods to conform to 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.current period presentation.
 
We believeImpairments and Restructuring
Goodwill. Goodwill is not amortized. Instead, we assess goodwill for impairment at a reporting unit level on an annual basis. Our decision to consolidate segments as of June 1, 2009 required us to assess goodwill for impairment as of that date, which was earlier than the date of our unique managed multi-network approach provides better performance, controlannual assessment (August 1). As a result of this assessment, we recorded an aggregate goodwill impairment charge of $51.5 million during the year ended December 31, 2009 related to our former CDN services segment and reliabilityFCP products in the IP services segment. The goodwill impairment in 2009 was in addition to a $99.7 million goodwill impairment charge in 2008 in our former CDN services segment. The goodwill impairments in our former CDN services segment were primarily due to declines in CDN services revenues and operating results compared to conventional Internet connectivity alternatives. Our SLAs guarantee performance across the entire Internet in the United States, excluding local connections, whereas providersour expectations and declining multiples of conventional Internet connectivity typically only guarantee performance on theirour own network.
On February 20, 2007, we closed theand comparable companies.  The CDN services goodwill and technology arose from our acquisition of VitalStream in an all-stock transaction accounted for usingFebruary 2007. Similarly, the purchase method of accounting for business combinations. Our results of operations include the activities of VitalStream from February 21, 2007 through December 31, 2008.
We operate in three business segments: IP services, data center services and CDN services. The following is a brief description 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 solutionsgoodwill impairment 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 fees for IP services are based on a fixed-fee, usage or a combination of both.
OurFCP products in the IP services segment also includeswas due to declines in our flow control platform,FCP products revenues and operating results. The declines in FCP products revenues were primarily attributable to lower sales associated with a reduced marketing effort as we reevaluated our equipment sales strategy for FCP products. At December 31, 2009, the carrying value of our goodwill was $39.5 million. We further discuss goodwill in note 8 to the accompanying consolidated financial statements.
Other Intangible Assets. We assess other intangible assets for impairment in conjunction with our assessment of goodwill 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 atwhenever events or changes in circumstances indicate that 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 the routing in real-time to balance the traffic across multiple links to optimize performance. FCP cancarrying amounts may not 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 our customer to enjoy servicerecoverable. In conjunction with the optimized performancegoodwill impairments discussed above, we recorded impairments of other intangible assets of $4.1 million and economics. Another key feature is minute-by-minute visibility reports$2.7 million in 2009 and logs on2008, respectively, and made changes in estimates that resulted in acceleration of amortization expense related to certain intangible assets, as more fully described in note 8 to the performanceaccompanying consolidated financial statements. At December 31, 2009, the carrying value of other intangible assets was $20.8 million.
Restructuring. During the year ended December 31, 2009, we made adjustments in sublease income assumptions for certain properties included in our previously-disclosed 2007 and operation2001 restructuring plans, implemented a restructuring plan to reduce our workforce by 45 employees and ceased use of the customer’s network. Our customers find this information to be useful for carrier SLA verification, monitoring and overall network management. FCP is onefour smaller facilities. We recorded total restructuring charges of only a few$3.2 million in our accompanying consolidated statements 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. This product represents approximately 4% of our IP services revenue and approximately 2% of our consolidated revenueoperations for the year ended December 31, 2008.2009. The adjustments in sublease income assumptions for certain properties included in our 2007 and 2001 restructuring plans extended the period during which we do not anticipate receiving sublease income from those properties given our expectation that it will take longer to find sublease tenants and the increased availability of space in each of these markets where we have unused space. The workforce reduction of 45 employees in March 2009 represented 10% of our total workforce at that time and was primarily in back-office functions as well as the elimination of certain senior management positions. We further discuss restructuring activities in note 9 to the accompanying consolidated financial statements.
Liquidity
Cash flow from operations was $37.5 million during the year ended December 31, 2009 compared to $38.0 million and $27.5 million during the same periods in 2008 and 2007, respectively. We expect to meet our cash requirements in 2010 through a combination of net cash provided by operating activities and existing cash, cash equivalents and short-term investments in marketable securities. This includes a plan to commit $50.0 million in capital expenditures over the next nine to 18 months to grow our data center business in key markets. We may also utilize additional borrowings under our credit agreement, especially for capital expenditures, particularly if we consider it economically favorable to do so. 
Executive Transition

On March 16, 2009, J. Eric Cooney became our president and chief executive officer and a member of our board of directors following the resignation of James P. DeBlasio. Pursuant to the terms of a separation agreement with Mr. DeBlasio, he received a cash payment of $0.9 million and full vesting of all equity awards previously granted to him, which had an incremental value of $0.8 million. Mr. DeBlasio has until March 16, 2010 to exercise any stock options that were vested as of March 16, 2009. We recorded all executive transition costs with general and administrative costs and expenses in the accompanying statements of operations.

Subsequent Events

Rights Agreement and Preferred Stock

As previously disclosed in the Current Report on Form 8-K filed by us with the Securities and Exchange Commission, or the SEC, on November 23, 2009, we approved the termination of the Preferred Stock Rights Agreement between us and American Stock Transfer and Trust Company, as Rights Agent, dated as of April 11, 2007, or the Rights Agreement. Originally scheduled to expire on March 23, 2017, we amended the Rights Agreement to accelerate its expiration which occurred on the close of business on December 31, 2009. In connection with the expiration of the Rights Agreement, we filed a Certificate of Elimination with the Secretary of State of the State of Delaware on February 26, 2010, to eliminate our series B preferred stock. The Certificate of Elimination removed the previous designation of 0.5 million shares of series B preferred stock and caused such shares of series B preferred stock to resume their status as undesignated shares of our preferred stock.
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Data Center ServicesRestated Certificate of Incorporation
 
Our data center, or colocation, services allow usAs a result of the termination of the Rights Agreement and the filing of the Certificate of Elimination related to expandour previously-designated series B preferred stock, we filed a Restated Certificate of Incorporation with the reachSecretary of State of the State of Delaware on February 26, 2010. We previously filed our original Certificate of Incorporation in 2001 and subsequently amended it on a number of occasions (most recently with the filing of the Certificate of Elimination described above). As permitted by the Delaware General Corporation Law, our board of directors determined to restate our Certificate of Incorporation, as amended, to consolidate and integrate into a single instrument all of the provisions of our high performance IP servicesCertificate of Incorporation, as amended. The Restated Certificate of Incorporation simply restates and integrates but does not further amend our Certificate of Incorporation, as amended, and no stockholder vote was required.

Payment of Annual Performance Bonuses and Increases in Base Salary

On February 24, 2010, our compensation committee approved bonuses for employees (including executive officers) under our 2009 Short-Term Incentive Plan, which we previously filed as Exhibit 10.1 to customers who wish to take advantage of locating their network and application assets in secure, high-performance facilities. We operate data centers where customers can host their applications directlyour Current Report on our network to eliminate the issues associatedForm 8-K, filed with the qualitySEC on August 21, 2009. These bonuses were awarded based upon achievement of local connections. Data center services also enable us to have a more flexible product offering, such as bundling our high performance IP connectivityindividual objectives and managed services such as content delivery along with hosting customers’ applications. Our data center services provide a single source for network infrastructure, IP and security, allprogress toward the fulfillment 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.long-term strategic objectives. We will pay the bonuses in cash on or before March 15, 2010.
   
To maximize this footprint, we use
Name and Title   Bonus 
J. Eric Cooney, President and Chief Executive Officer  $200,000 
George E. Kilguss III, Chief Financial Officer    97,103 
Richard P. Dobb, Chief Administrative Officer    55,768 
Randal R. Thompson, Senior Vice President of Global Sales   36,885 

In addition, our compensation committee approved an increase in the base salary of certain executive officers effective April 1, 2010, as follows: Mr. Kilguss, from $275,000 to $290,000; Mr. Dobb, from $272,800 to $280,000 and Mr. Thompson, from $225,000 to $230,000.

2010 Long-Term Incentive Grants

On February 24, 2010, our compensation committee approved grants under our 2010 long-term incentive program. Under the program, named executive officers and other key contributors are eligible for the award of options to purchase common stock and restricted common stock. Of each award, 80% of the total grant is in the form of options to purchase common stock and 20% of the total grant is in the form of time-based restricted common stock. The options to purchase common stock vest 25% after one year and in equal monthly increments for three years thereafter. The time-based restricted common stock vests in four equal annual installments on the anniversary of the grant date.  The options have an exercise price of $5.03 per share (our fair market value on February 26, 2010, the grant date) and a combination10-year term. Our compensation committee made the following grants under the program:

   Number of Awards (#) 
Name and Title Options  
Restricted
Stock
  Total 
J. Eric Cooney, President and Chief Executive Officer 248,830   32,092   280,921 
George E. Kilguss III, Chief Financial Officer   103,530   13,352   116,883 
Richard P. Dobb, Chief Administrative Officer   58,905   7,597   66,502 
Randal R. Thompson, Senior Vice President of Global Sales 58,905   7,597   66,502 

2010 Short-Term Incentive Plan

On February 24, 2010, our compensation committee approved the 2010 Short Term Incentive Plan. Under the plan, all full time exempt and eligible non-exempt employees (including executive officers) may be eligible for the award of facilities managed by us and facilities managed by third parties, referred to as partner sites. We offer a comprehensive solution at 46 service points, including eight locations managed by us and 38 locations managed by third parties. We charge monthly fees for data center servicescash bonus after our 2010 fiscal year end. The cash bonus of each participant will be determined based on the amountachievement of square footage that the customer leases in our facilities. We have relationshipscorporate and individual/business unit objectives, with various providers to extend our P-NAP model into markets with high demand.
CDN Services
Our CDN services enable our customers to quicklya target award level expressed as a percentage of salary. The corporate objectives are based on revenue and securely streamearnings before interest, taxes, depreciation and distribute video, audio and software to audiences across the globe through strategically located data centers. Providing capacity-on-demand to handle large events and unanticipated traffic spikes, we deliver high-quality content regardless of audience sizeamortization, 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, view network conditions and gain insight into habits of their viewing audience. Prior to our acquisition of VitalStream in February 2007, we did not offer proprietary CDN services, but instead, we were a reseller of third party CDN servicesEBITDA. The personal/business unit objectives are individualized for which results of operations are included in “—Other” below.
Other
Other revenues and direct costs of network, sales and services consist primarily of third party CDN services. Throughout 2007, other revenues and associated direct costs of network, sales and services decreased steadily as the revenue streams from our acquisition of VitalStream replaced the activity of the former third party CDN service provider.
2008 Highlights and Outlook
Although we experienced pricing pressure for our IP services, our revenue increased year-to-year due to an increase in demand for our services. We historically have priced our IP services at a premium compared to the services offered by conventional Internet connectivity service providers. Due to competitive forces, however, we have been required to lower pricing of our IP services, although this decrease in pricing has been offset by an increase in demand for our IP services. Our IP traffic has increased as a result of our 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. We expect that we will continue to experience pricing pressure as well as gains in IP traffic for the reasons noted.
Data center services continue to be a source of revenue growth for our business, and we expect this trend to continue. We have expanded the sites that we operate and may add additional space in the future as part of our data center growth initiative. The growth in data center revenues and direct costs of data center services largely follows our expansion of data center space, and we believe the demand for data center services continues to outpace industry-wide supply. We experienced a net increase in customers in this segment as we structured our data center business to accommodate larger, global customers.
Although we experienced a net decrease in customers in our CDN segment, our revenue in that segment has increased. Revenues increased in our CDN segment, despite a net decrease in the number of our CDN customers, due to increased usage of our applications. Although this revenue growth has not met our initial expectations, we believe the growth will continue. In this regard, we have upgraded and expanded related infrastructure, including in Europe and Asia. We also have extended our 100% uptime SLA to customers purchasing or renewing CDN services. As discussed in note 8 to the accompanying financial statements and below, we recorded asset impairment charges of $102.3 million on our CDN services goodwill and other intangible assets.
each participant.
 
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The table below identifies the target incentives as a percentage of base salary and the split between corporate and personal/business unit objectives for executive officers.
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. 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. Although we are encouraged by our revenue growth among a smaller customer base, we will continue to strive to add additional customers to achieve these cost savings.
We have experienced impairments in our goodwill and other intangible assets and additional adjustments to our restructuring reserve, summarized as follows:
●          Goodwill. We are required to assess goodwill for impairment under generally accepted accounting principles in the United States, or GAAP, on at least an annual basis. Our annual assessment date is August 1 of each year, following our annual strategic planning cycle, which includes an update of our long-term financial outlook.
As a result of our August 1, 2008 assessment, we concluded that the current carrying value of our goodwill in the CDN services segment was impaired. We recorded the CDN services goodwill following our February 2007 acquisition of VitalStream. We recorded a $99.7 million goodwill impairment charge to adjust goodwill in our CDN services segment to an implied fair value of $54.7 million. The goodwill impairment charge was primarily due to declines in our CDN services revenues and operating results as compared to our projections and unfavorable changes in market factors used to estimate fair values.
The impairment also caused us to reverse a deferred tax liability and create an income tax benefit of $0.6 million associated with the CDN services goodwill.
We also assessed the likelihood of triggering events and concluded that none had occurred that would cause us to re-assess goodwill for impairment subsequent to August 1, 2008.
Other Intangible Assets. In conjunction with our August 1, 2008 review of our long-term financial outlook, we also performed an analysis of the potential impairment, and re-assessed the remaining asset lives, of other identifiable intangible assets acquired in the VitalStream acquisition. This analysis and re-assessment resulted in: (1) an impairment charge of $1.9 million in developed advertising technology due to a strategic change in market focus, (2) an impairment charge of $0.8 million in trade names as a result of discontinuing use of the VitalStream trade name and (3) a change our estimates that resulted in acceleration of amortization expense of our customer relationships intangible asset over a shorter estimated useful life (four remaining years instead of the original estimated nine years) due to customer churn resulting in higher than expected attrition as of our acquisition date.
These non-cash charges to earnings and change in estimated useful life had no impact on our cash balance as of December 31, 2008 and did not result in a violation of any covenants in our debt instruments.
We discuss these impairments in note 8 to the accompanying consolidated financial statements and the section below captioned “—Results of Operations—Other Operating Expenses—Goodwill Impairment” and “—Restructuring and Other Impairments.”
●          Restructuring. In conjunction with the preparation of our financial statements as of and for the year ended December 31, 2008 and in light of the recent and significant deterioration in the real estate market, we completed an analysis of our remaining accrued restructuring liability for leased facilities. After reviewing the analysis and specifically, the underlying assumptions related to anticipated sublease recoveries, we concluded that certain of the facilities remaining in the restructuring accrual were taking longer than expected to sublease or were otherwise not generating the expected levels of sublease income. The analyses were based on discounted cash flows using the same credit-adjusted risk-free rate that we used to measure the initial restructuring liability for leases that were part of the 2007 restructuring plan and undiscounted cash flows for leases that were part of the 2001 restructuring plan. The cumulative effect of these changes was $1.1 million which we recorded as additional restructuring expense and an increase to the liability. We discuss this charge in note 9 and report it in “Restructuring and other impairments” in the accompanying consolidated statement of operations, along with a $0.8 million impairment of the VitalStream tradename and a reduction of the accrued liability of $0.1 million for employee separations since we paid all such amounts. We estimated net related expenditures for the 2007 restructuring plan to be $12.2 million, of which we paid $4.2 million through December 31, 2008, and the balance continuing through December 2016, the last date of the longest lease term. We expect to pay these expenditures out of operating cash flows. We estimate cost savings from the restructuring to be approximately $0.8 million per year through 2016, primarily for rent.

 
STI Participation Level
 
Target Incentive %
 
Corporate Objectives
Personal/BU
Objectives
Section 16 OfficerUp to 100%70%30%

Our compensation committee may amend, modify, terminate or suspend operation of the plan at any time. Our compensation committee recommends to our full board of directors any changes to the compensation of our president and chief executive officer. If a participant is not an employee on the date awards from the plan are paid (other than by reason of death or disability), the participant forfeits all rights to any payments.
 
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The above description is qualified in its entirety by reference to the full text of the 2010 Short Term Incentive Plan, which is being filed as Exhibit 10.35 to this Annual Report on Form 10-K.
 
We amended our Credit Agreement. On September 30, 2008, we amended our credit agreement with Bank of America, N.A. The amendment consolidated a two-tiered debt facility into a single revolving loan. Under the amended credit facility, we converted the previously-existing $20.0 million term loan balance and outstanding letters of credit with Bank of America into a $35.0 million revolving loan facility. The amendment extended the principal settlement terms from quarterly payments, scheduled to begin in the third quarter of 2008, to a single principal repayment due in 2011. As of December 31, 2008, we had $10.8 million of borrowing capacity on the revolving credit facility. We discuss this amended credit agreement in note 11 to the accompanying consolidated financial statements and the section below captioned “—Liquidity and Capital Resources.”
We have increased our provision for doubtful accounts after taking into consideration current economic conditions. We are continuing to monitor and review our performance and operations in light of the continuing negative global economic conditions. A prolonged recession, if it were to occur, may have an adverse impact on spending by the businesses we serve, resulting in a decline in demand for our products and services. In addition, deteriorating economic conditions may make it more difficult for these businesses to meet their obligations to us, which could result in delayed collection of accounts receivable and an increase in our provision for doubtful accounts. For the year ended December 31, 2008, we increased our provision for doubtful accounts by $2.8 million, compared to the year ended December 31, 2007, in part after taking into consideration current economic conditions.
Critical Accounting Policies and Estimates
 
This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which we have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. 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 we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates.
 
Management believesIn addition to our significant accounting policies summarized in note 2 to our accompanying consolidated financial statements, we believe the following critical accounting policies affectare the most sensitive to 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. 
We derive our IP services revenuegenerate revenues primarily from the sale of high performance Internet connectivityIP services atand data center services. Our revenues typically consist of monthly recurring revenues from contracts with terms of one year or more. These contracts usually have fixed rates or usage-based pricing to our customers that desire a DS-3 or faster connection. We provide slower T-1 and fractional DS-3 connections at fixed rates. Data center revenues include 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 isminimum commitments based on occupied space and both allocated and variable-based usage. CDN product line revenue includes three components: (1) data storage; (2) streaming/delivery and (3) a user interface/reporting tool.certain level of usage with additional charges for any usage over a specified limit. We provide the CDN service components via internally developed and acquired technology that resides on our network. CDN services revenues are 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 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 both partieswe have signedentered into an enforceable contract, we have delivered the service to the customer, the fee for the service is fixed or determinable and collection is reasonably assured. If a customer’s usage of our services exceeds 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. Other ancillary products and services include our FCP product, server management and installation, virtual private networking, managed security, data backup, remote storage and restoration.
We use contracts and sales or purchase orders as evidence 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’ Statement of Position 97-2, Software Revenue Recognition.

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We also enter into multiple-element arrangements or bundled services, such as combining IP services with data center and/or CDN services. When we enter into such arrangements, we accountrecord an amount for each element separately over its respective service level agreements and other sales adjustments, which reduces net revenues and accounts receivable. We identify adjustments for service level agreements within the billing period or atand reduce revenues accordingly. We base the time of delivery, provided that there is objective evidence of fair valueamount for sales adjustments upon specific customer information, including customer disputes, credit adjustments not yet processed through 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,billing system and we have satisfied other revenue recognition criteria.
Deferred revenue consists of revenues for services to be delivered in the future and consists primarily of advance billings, which we amortize over the respective service period. We defer and amortize revenues associated with billings for installation of customer network equipment over the estimated life of the customer relationship, which was two to three years during the three-year period ended December 31, 2008. We defer and amortize revenues for installation services because the installation service is integral to our primary service offering and does not have value to customers on a stand-alone basis. We also defer and amortize the associated incremental direct costs. We amortize deferred post-contract customer support associated with sales of our FCP and similar products ratably over the contract period, which is generally one year.historical activity.
 
We routinely review the collectability of our accounts receivable 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.reasonably assured. Additionally, we maintain allowancesan allowance 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 alsoprimarily includes estimates based on our best understanding of the customers’ ability to pay and their payment status. Customers’ ability to pay takes into consideration payment history, legal status (i.e., bankruptcy)historical cash collection experience and the statusaging of services we are providing.our accounts receivable. We assess the payment status of customers by reference to the terms under which we provide services or goods, are provided, with any payments not made on or before their due date considered past-due. Once we have exhausted all collection efforts, we write the uncollectible balance off against the allowance for doubtful accounts.
 
We record an amount for service level agreementsGoodwill and other sales adjustments, which reduces net accounts receivable and revenues. Adjustments for service level agreements are identified within the billing period and revenues are reduced accordingly. 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 deteriorates, or if we become aware of new information impacting a customer's credit risk, we may make additional adjustments.
Investments. 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. Treasury bills. 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 seven, 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. 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, 2008. Although these securities are issued and rated as long-term bonds, they have historically been priced and traded as short-term instruments because of the liquidity provided through the interest rate reset. While we continue to earn and accrue interest on our auction rate securities at contractual rates, these investments are not currently trading. Due to initial uncertainty as to when liquidity in the auction rate securities markets would improve, we have classified our auction rate securities as non-current investments throughout 2008. Subsequently, in November 2008, we accepted a rights offer, or ARS Rights, on our auction rate securities. In conjunction with our acceptance of the ARS Rights, we changed the designation of the auction rate securities to trading from available for sale and continue to classify the securities as non-current investments as of December 31, 2008.
Our auction rate securities and ARS Rights do not have observable market information to determine their fair value. We estimated the fair value of the auction rate securities based on a wide array of market evidence related to each security’s collateral, ratings and insurance to assess default risk, credit spread risk and downgrade risk that we believe market participants would use in pricing the securities in a current transaction. These assumptions could change significantly over time based on market conditions. We then used a trinomial discount model where the future cash flows of the auction rate securities were priced by summing the present value of the future principal and forecasted interest payments. We also considered probabilities of default, auction failure, a successful auction at par value or repurchase at par value and recovery rates in default for each of the securities. We then discounted the weighted average cash flow for each period back to present value at the determined discount rate for each auction rate security.

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Other Intangible Assets
 
We estimated the fair value of the ARS Rights based on a valuation approach commonly usedassess goodwill for forward contracts in which one party agrees to sell a financial instrument (generating cash flows) to another partyimpairment at a particular time for a predetermined price. In this approach we subtracted the present valuereporting unit level on an annual basis. As discussed in “—Results of all expected future cash flows from the current fair value of the security,Operations—Segment Information” below and calculated the resulting value as a future value at an interest rate reflective of counterparty risk.
Seein notes 52 and 64 to our accompanying consolidated financial statements, we changed how we view and manage our business beginning June 1, 2009. We now operate our IP services and the majority of our CDN services on a combined basis while we operate the managed hosting portion of our CDN services as part of our data center services. Our decision to consolidate segments as of June 1, 2009 required us to assess goodwill for additional information aboutimpairment as of that date, which was earlier than the date of our investmentsannual assessment (August 1). Our newly-combined IP services operating segment continues to be comprised of two reporting units: services and their fair value measurement.products. Similarly, our data center services operating segment continues to be a single reporting unit; however, it does not have any recorded goodwill.
 
Goodwill and Other Intangible Assets. We account for goodwill using an impairment-only approach.
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Our assessment of goodwill for impairment includes comparing the fair value of our reporting units to the net book value of each of our four reporting units. Our IP services operating segment is comprised of two reporting units: services and products. Our data center center services and CDN services operating segments each represent a single reporting unit; however, the data center services segment does not have any recorded goodwill. As a result of our August 1, 2008 assessment, we recorded a $99.7 million goodwill impairment charge to adjust goodwill in our CDN services segment to an implied fair value of $54.7 million.
carrying value. We estimate fair value using a combination of discounted cash flow models and market approaches. If the fair value of a reporting unit exceeds its net bookcarrying value, goodwill is not impaired and no further testing is necessary. If the net bookcarrying value of a reporting unit exceeds its fair value, we perform a second test to measure the amount of impairment loss,to goodwill, if any. To measure the amount of any impairment, loss, we determine the implied fair value of goodwill in the same manner as if we were acquiring the affected reporting unit were being acquired in a business combination. Specifically, we allocate the fair value of the affected reporting unit to all of the assets and liabilities of that unit, including any unrecognized intangible assets, in a hypothetical calculation that would yield the implied fair value of goodwill. If the implied fair value of goodwill is less than the goodwill recorded on our consolidated balance sheet, we record an impairment charge for the difference.
 
TheWe base the impairment analysis of goodwill is based on estimated fair values. 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. These estimates and assumptions primarily include, but are not limited to, revenuediscount rates; terminal growth rates; projected revenues and costs; EBITDA for expected cash flows; market growth, operating cash flows, earnings before interest, taxes, depreciationcomparables and amortization, or EBITDA, capital expenditures forecasts, discount rates and terminal growth rates.forecasts. The use of different assumptions, inputs and judgments, or changes in circumstances, could materially affect the results of the valuation. Due to the inherent uncertainty involved in making these estimates, actual results could differ from our estimates. The followingestimates and could result in additional non-cash impairment charges in the future. Following is a description of the valuation methodologies we used to derive the fair value of our former CDN services segment:and the FCP products reporting units as of our assessment date of June 1, 2009:
 
Income Approach. To determine fair value, we discounted the expected cash flows of the CDN services and the FCP products reporting unit. Expectedunits. We calculated expected cash flows were calculated using a compounded annual revenue growth rate of approximately 20%, for CDN services and 3% for FCP products, forecasting existing cost structures and considering capital reinvestment requirements. We used a discount rate of 20%,16% for CDN services and 18% for FCP products, representing the estimated weighted average cost of capital, which reflects the overall level of inherent risk involved in our CDN servicesthe respective operations and the rate of return an outside investor wouldcould expect to earn. To estimate cash flows beyond the final year of our model,models, we used a terminal valuevalues and incorporated the present valuevalues of the resulting terminal valuevalues into our estimateestimates of fair value. Changing the discount rates by 1%, or 100 basis points, with all other factors remaining the same and disregarding market-based approaches below, would have increased the 2009 impairments related to the former CDN services goodwill and FCP products goodwill by $0.9 million and $0.2 million, respectively.
 
Market-Based Approach. To corroborate the results of the income approach described above, we estimated the fair value of our CDN services and FCP products reporting unitunits using several market-based approaches, including the enterprise value that we derive based on our stock price. We also used the guideline company method, which focuses on comparing our risk profile and growth prospects, to select reasonably similar/guideline publicly traded companies. Using the guideline company method, we selected revenue and EBITDA multiples below the median for our comparable companies.
 
We used similar valuation methodologies to derive the fair values of our other reporting units. After consolidating the former CDN services reporting unit with the IP services unit, the fair value of our IP services reporting unit exceeded the carrying value by 18% as of the valuation date. The portion of goodwill from the former CDN services reporting unit allocated to data center services was immediately impaired so that data center services continues to not have any recorded goodwill. Adverse changes in expected operating results and/or unfavorable changes in other economic factors used to estimate fair values could result in an additional non-cash impairment charge in the future.
 
We perform our annual goodwill impairment test as of August 1 of each calendar year followingabsent any impairment indicators or other changes that may cause more frequent analysis. We did not identify an impairment as a result of our annual strategic planning cycle.August 1, 2009 impairment test. We also assess on a quarterly basis whether any events have occurred or circumstances have changed that would indicate an impairment could exist. We have considered the likelihood of triggering events that might cause us to re-assess goodwill on an interim basis and concluded that none had occurred subsequent to August 1, 2008.2009.

Accruals for Disputed Telecommunication CostsOther intangible assets, including developed technologies and Other Accrued Liabilities. In delivering our services,patents, have finite lives and we relyhave recorded these assets at cost less accumulated amortization. We calculate amortization on a number of Internet network, telecommunication, utilities and other vendors. We work directly with these vendors to establish, modify or discontinue services for our customers. Becausestraight-line basis over the estimated economic useful life of the volume of activity, billing disputes inevitably arise,assets, which are three to eight years for developed technologies and it is often necessary to estimate certain costs of providing services to our customers given that we may not receive invoices on a timely basis or due to the complexity surrounding such costs. These disputes typically stem from disagreements concerning the starting and ending dates of service, quoted rates, usage and various15 years for patents. We assess other factors. For potential billing errors madeintangible assets for impairment in the vendor’s favor, for example a duplicate billing, we initiate a formal disputeconjunction with the vendor and record the related cost and liability up to 100% of the disputed amount, depending on our assessment of goodwill or whenever events or changes in circumstances indicate that the likely outcome ofcarrying amounts may not be recoverable. Our assessment for other intangible assets is based on estimated future cash flows directly associated with the dispute. Conversely, for billing errors in our favor, such asasset or asset group. If we determine that the vendor’s failure to invoice us for new service,carrying value is not recoverable, we may record an estimate based onimpairment charge, reduce the full amount that we should have been invoiced. If 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.estimated remaining useful life, or both.

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We researchIn addition to impairment of other intangible assets during the years ended December 31, 2009 and discuss all disputed costs with vendors on an ongoing basis until ultimately resolved. We periodically review2008, we also made changes in estimates that resulted in acceleration of amortization expense related to certain acquired CDN intangible assets. Changes in estimates reflect historical churn for acquired CDN customers and modify estimatesthe decreased value of acquired CDN trade names and noncompete agreements to our business. These acquired CDN intangible assets either have a remaining estimated economic useful life of less than one year at December 31, 2009 or were fully amortized during 2009. Additional information is included in light of new information note 8 to the accompanying consolidated financial statements. Similar to goodwill as noted above, adverse changes in expected operating results and/or developments, if any. We recognize any resolved disputes that willunfavorable changes in other economic factors used to estimate fair values could result in a credit over the disputed amountsadditional non-cash impairment charges or acceleration of amortization in the appropriate month whenfuture. We believe that our remaining intangible assets are not impaired.

None of the resolution has been determined. Because estimates regarding disputed costs include assessments of uncertain outcomes, such estimates are inherently vulnerable toimpairment charges or changes due to unforeseen circumstances that could materially and adversely affectin estimated remaining asset lives had any impact on our consolidated financial condition, results of operations and cash flows.balances or covenants in our credit agreement.
 
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, we 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 our best expectations based on known facts and circumstances at the time of estimation. Should circumstances warrant, we will adjust our previous estimates to reflect what we then believe to be a more accurate representation of expected future costs. Because our estimates and assumptions regarding restructuring costscharges include probabilities of future events, such as our ability to find a sublease tenant within a reasonable period of time or the rate at which a sublease tenant will pay for the available space, such estimates are inherently vulnerable to changes due to unforeseen circumstances that could materially and adversely affect our results of operations. A 10% changeIf the amount of time that we expect it to take to find sublease tenants in ourall of the vacant space already in restructuring estimates in a future period, comparedwere to increase by three months and assuming no other changes to the $9.0properties in restructuring, we would record an additional $0.3 million in restructuring liability at December 31, 2008, would result in a $0.9 million expense or benefitcharges in the consolidated statement of operations during the period in which the change in estimate occurred. If we do not find a sublease tenant for one of our more significant restructured locations by the end of the second quarter of 2010 or if we do not obtain a certain rate per square foot for the available space, we will need to take an additional charge in our statement of operations that may be material. We monitor market conditions at each period end reporting date and will continue to assess our key assumptions and estimates used in the calculation of our restructuring accrual.
 
DeferredIncome 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 net income in the period such determination was made. We may recognize deferred tax assets in future periods if and when they are estimatedwe estimate them to be realizable, such as establishing our expected continuing profitability or that of us or certain of our foreign subsidiaries.
 
Based on an analysis of our projected future U.S. pre-tax income, we maydo not have sufficient positive evidence within the next 12 months to release the valuation allowance currently recorded against our U.S. deferred tax assets. Currently, whileHowever, if we cannot guarantee that our expectations of future positive income will occur, we may recognize an income tax benefit derived from total U.S. deferred tax assets upon the release of the valuation allowance. This potential release of the valuation allowance could be affected by anexperience subsequent changes in stock ownership change as defined by Section 382 of the Internal Revenue Code, which might limitwe may have additional limitations on the future useutilization of our U.S. net operating loss carryovers and thus reduce the potential benefit of such losses in the future to offset taxable income and reduce cash outflows for income taxes.losses.
 
For the year ended December 31, 2007, the tax provision included a net benefit of $3.5 million related to the release of the valuation allowance associated with United Kingdom, or U.K., deferred tax assets. The gross amount of U.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 net loss for the year ended December 31, 2007. The reduction in valuation allowance was due to the existence of sufficient positive evidence as of December 31, 2007 to indicate that our net operating losses in the U.K. would more likely than not be realized in the future. The evidence primarily consists of the results of prior performance in the U.K. and the expectation of future performance based on historical results. We will continue to assess the recoverability of U.S. and other deferred tax assets, and whether the valuation allowance should be reduced relative to the U.S. and other deferred tax assets outside the U.K.Stock-Based Compensation
 
Stock-Based Compensation. We measure stock-based compensation cost at the grant date based on the calculated fair value of the award. We recognize the expense over the employee’s requisite service period, generally the vesting period of the award. For performance-based awards, we periodically assess whether the performance conditions are probable of being met and record compensation expense based on this assessment of probability. We estimate the fair value of stock options at the grant date 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.When we elect to pay certain bonuses in shares of stock, the total amount to be paid is determined similarly to cash bonuses and the number of shares to be granted is determined based on the fair value of our stock at the date of grant.

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The expected term represents the weighted average period of time that we expect granted options 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 term 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. A 10% increase in stock-based compensation would result in additional expense of $0.6 million.
 
Recent Accounting Pronouncements
 
Effective January 1, 2008, we adopted SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishesIn June 2009, the Financial Accounting Standards Board, or FASB, issued new accounting guidance which amends the evaluation criteria to identify the primary beneficiary of a frameworkvariable interest entity, or VIE, and requires ongoing reassessment of whether an enterprise is the primary beneficiary of the VIE. The new guidance significantly changes the consolidation rules for measuring fair value under GAAPVIEs including the consolidation of common structures, such as joint ventures, equity method investments and expands disclosures about fair value measurements. SFAS No. 157collaboration arrangements. The guidance is applicable to all new and existing VIEs. This accounting guidance is effective for fiscal yearsus beginning after December 15, 2007. In February 2008,in the FASB issued Staff Position FAS 157-1, Applicationfirst quarter of FASB Statement No. 157 to FASB Statement No. 13 and Its Related Interpretive Accounting Pronouncements That Address Leasing Transactions, which provides supplemental guidance on the application of SFAS No. 157, and Staff Position FAS 157-2, Effective Date of FASB Statement No. 157, which delays the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on at least an annual basis until 2009. In accordance with Staff Position FAS 157-2, we have only adopted the provisions of SFAS No. 157 with respect to our financial assets and liabilities that are measured at fair value within the financial statements as of December 31, 2008. 2010.
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We  have concluded that our joint venture in Internap Japan Co., Ltd. is an equity-method investment under the voting-interest model, not applieda VIE and, accordingly, this new accounting guidance will not impact our consolidated financial statements.
Additional recent accounting pronouncements are summarized in note 2 to the provisions of SFAS No. 157 to nonfinancial assets and nonfinancial liabilities. The major categories of assets and liabilitiesaccompanying consolidated financial statements. Currently, we do not expect any recent accounting pronouncements that are measured at fair value, for which we have not applied the provisions of SFAS No. 157, include reporting units measured at fair value in the first step of a goodwill impairment test under SFAS No. 142, Goodwill and Other Intangible Assets. The adoption of SFAS No. 157 did not have a material impact on our financial position, results of operations and cash flows.
In October 2008, the FASB issued Staff Position FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, which clarifies the application of SFAS No. 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. Some of the key principles illustrated include:
determining fair value in a dislocated market depends on facts and circumstances, and may require the use of significant judgment about whether individual market transactions are forced liquidations or distressed sales and therefore poor indicators of fair value;
when relevant observable market data is not available, the use of assumptions about future cash flows and discount rates may be appropriate in determining fair value; and
the value of broker quotes in determining fair value depends on facts and circumstances, particularly when an active market does not exist.
Staff Position FAS 157-3 was effective immediately, including with respect to prior periods for which financial statements have not been issued. We have consistently used the methodology described in this Staff Position in calculating the fair value of our auction rate securities throughout 2008.
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 was effective for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 159 did not have a material impact on our financial condition, results of operation and cash flows since we elected to apply the fair value option only to our ARS Rights. See note 6 for discussion of the fair value election of our ARS Rights.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations, or SFAS No. 141R. This pronouncement replaces SFAS No. 141, Business Combinations. SFAS No. 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. 141R applies 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 do not expect that adoption of SFAS No. 141R will have an immediate impact 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. SFAS No. 160 amends Accounting Research Bulletin 51, Consolidated Financial Statements, 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. We do not expect adoption of SFAS No. 160yet adopted will have a material impact on our consolidated financial position, results of operations and cash flows.

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statements.
 
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133. SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133 with the intent to provide users of financial statements with an enhanced understanding of: (1) how and why an entity uses derivative instruments; (2) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. This statement is effective for financial statements for fiscal years and interim periods beginning after November 15, 2008. We do not expect adoption of SFAS No. 161 to have a material impact on our financial position, results of operations and cash flows.
In April 2008, the FASB issued Staff Position FAS 142-3, Determination of the Useful Life of Intangible Assets. Staff Position FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142. This Staff Position is effective for financial statements for fiscal years beginning after December 15, 2008. We do not expect adoption of Staff Position FAS 142-3 to have a material impact on our financial position, results of operations and cash flows.
In June 2008, the FASB issued Staff Position No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities. Staff Position No. EITF 03-6-1 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends are participating securities and shall be included in the computation of earnings per share pursuant to the two class method. This Staff Position is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those years. For the quarter ended March 31, 2009, upon adoption, we are required to retrospectively adjust earnings per share data to conform to the provisions in this Staff Position. We do not expect this Staff Position to have a material impact on our calculation of earnings per share.
In November 2008, the FASB issued EITF 08-6, Equity Method Investment Accounting Considerations. The goal of EITF 08-6 is to clarify the accounting for certain transactions and impairment considerations involving equity method investments. This EITF is effective for fiscal years beginning on or after December 15, 2008. Early adoption is not permitted. We do not expect adoption of EITF 08-6 to have a material effect on our financial position, results of operations and cash flows.
Results of Operations
 
Revenues
Revenues. Revenues are generatedWe generate revenues primarily from the sale of IP services and 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 CDN services and premise-based route optimization products and other ancillary services, such as server management and installation services, also referred to as managed hosting, virtual private networking services, managed security services, data back-up, remote storage, restoration services and professional consulting 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 NSPs and competitive local exchange providers;
 
facility and occupancy costs, including power and utilities, for hosting and operating our and our customers’ network equipment;
 
costs of FCP solutionsproducts sold;
 
costs incurred for providing additional third party services to our customers; and
 
royalties and costs of license fees for operating systems software.
 
To the extent a network access point is located at a distance from the respective NSP,Internet service provider, 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. We amortize the cost of the acquired technologies over original lives of three to eight years.

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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, we include facilities costs associated with the network operations center in direct costs of customer support.
 
Product DevelopmentDirect 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. We capitalize costs for software to be sold, leased or otherwise marketed once we establish technological feasibility until the software is available for general release to customers. We capitalize costs associated with internal use software when the software enters the application development stage until the software is ready for its intended use. We expense all other product development costs as incurred.Amortization
 
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. We amortize the cost of the acquired technologies over original lives of three to eight years. The carrying value of acquired technologies at December 31, 2009 was $18.4 million and the weighted average remaining life was approximately five years. These direct costs also include impairment of the acquired CDN advertising technology during both of the years ended December 31, 2009 and 2008, as discussed below in “—Other Operating Costs and Expenses—Impairments and Restructuring.”
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 siteexternal website and other promotional costs.
 
General and Administrative Costs.
General and administrative costs consist primarily of compensation and other expense for executive, finance, product development, human resources and administrative personnel, professional fees and other general corporate costs. General and administrative costs also include 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. We capitalize costs associated with internal use software when the software enters the application development stage until the software is ready for its intended use. We expense all other product development costs as incurred.
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Summary of Results of Operations
 
Following is a summary of our results of operations and financial condition, which is followed by more in-depth discussion and analysis.
 
ForDuring the year ended December 31, 2008,2009, total revenues were $254.0$256.3 million, representing an increase of 8.5%nearly 1% over the year ended December 31, 2007.same period in 2008. Data center services revenue was the primary growth driver forduring the year ended December 31, 2009, increasing 31%14% compared with 2007. We reported a net loss2008. Data center services revenue comprised 51% of total revenues during the year ended December 31, 2009, compared to 45% during the same period in 2008. Total segment profit was $113.2 million for the year ended December 31, 2009, a decrease of $4.9 million, or 4%, from the same period in 2008, primarily as a result of $104.8the increase in data center revenues as a percentage of total revenues. We reported a net loss during the year ended December 31, 2009 of $69.7 million, which included (1) $99.7included: (a) $51.5 million in impairment charges for goodwill, (2) $2.6(b) $4.1 million in impairment charges for other intangible assets (recorded in direct costs of amortization of acquired technologies) and (3) a net adjustment(c) $3.2 million of $1.0 million to increase our restructuring liability, primarily related to anticipated sublease recoveries on restructured real estate.charges.

Cash and short term investments in marketable securities were $54.1 million atAt December 31, 2008, compared with $71.6 million at December 31, 2007. The year-end 2007 balance included $7.22009, we had $73.9 million in auction rate securities which we reclassifiedcash and cash equivalents and $23.2 million in total debt and capital leases. We have continued to long-term investments in the first quarter 2008.improve our net cash position from net cash flows provided by operating activities. The outstanding balance on our credit facility was $20.0 million at December 31, 2008, compared to $19.82009, with $3.6 million of letters of credit issued and $11.4 million of available credit. Quarterly days sales outstanding were 27 days at December 31, 2007.2009.

Cash flow from operations for 2008 was $38.0 million for 2008, representing an increase of 38% over the prior year. Capital expenditures for the year ended December 31, 2008 were $51.2 million, primarily for our data center expansion plan, but also expansion of IP and CDN service points, some of which we implemented earlier than planned to take advantage of economic opportunities.
er
The following table sets forth as a percentage of total revenue, selected statementconsolidated statements of operations data forduring the periods indicated:presented, including comparative information between the periods (dollars in thousands):

  Year Ended December 31,  
Increase (decrease)
from 2008 to 2009
  
Increase (decrease)
from 2007 to 2008
 
  2009  2008  2007  Amount  Percent  Amount  Percent 
Revenues:                     
IP services $125,548  $139,737  $139,072  $(14,189)  (10)% $665   0%
Data center services  130,711   114,252   84,590   16,459   14   29,662   35 
Other        10,428         (10,428)  (100)
Total revenues  256,259   253,989   234,090   2,270   1   19,899   9 
                             
Operating costs and expenses:                            
Direct costs of network, sales and services, exclusive of depreciation and amortization, shown below:                            
IP services  48,055   51,885   50,518   (3,830)  (7)  1,367   3 
Data center services  94,961   83,992   59,440   10,969   13   24,552   41 
Other        8,436         (8,436)  (100)
Direct costs of customer support  18,527   16,217   16,547   2,310   14   (330)  (2)
Direct costs of amortization of acquired technologies  8,349   6,649   4,165   1,700   26   2,484   60 
Sales and marketing  28,131   30,888   31,533   (2,757)  (9)  (645)  (2)
General and administrative  44,152   44,235   39,076   (83)     5,159   13 
Depreciation and amortization  28,282   23,865   22,242   4,417   19   1,623   7 
Loss (gain) on disposals of property and equipment  26   (16)  (5)  42   (263)  (11)  220 
Impairments and restructuring  54,698   101,441   11,349   (46,743)  (46)  90,092   794 
Other        500         (500)  (100)
Total operating costs and expenses  325,181   359,156   243,801   (33,975)  (9)  115,355   47 
Loss from operations  (68,922)  (105,167)  (9,711)  36,245   (34)  (95,456)  983 
                             
Non-operating expense (income):  461   (245)  (937)  706   (288)  692   (74)
                             
Loss before income taxes and equity in (earnings) of equity-method investment  (69,383)  (104,922)  (8,774)  35,539   (34)  (96,148)  1,096 
Provision (benefit) for income taxes  357   174   (3,080)  183   105   3,254   (106)
Equity in (earnings) of equity-method investment, net of taxes  (15)  (283)  (139)  268   (95)  (144)  104 
Net loss $(69,725) $(104,813) $(5,555) $35,088   (33)% $(99,258)  1,787%
                             
          
   Year Ended December 31, 
  2008  2007  2006 
Revenues:         
IP services  48.5%  52.2%  61.9%
Data center services  43.2   35.7   31.2 
CDN services  8.3   7.6    
Other     4.5   6.9 
Total revenues  100.0   100.0   100.0 
             
Operating costs and expenses:            
Direct costs of network, sales and services, exclusive of depreciation and amortization, shown below:            
IP services  18.0   18.8   22.4 
Data center services  32.3   25.4   25.6 
CDN services  3.2   2.8    
Other     3.6   5.6 
Direct costs of amortization of acquired technologies  2.6   1.8   0.3 
Direct costs of customer support  6.4   7.1   6.4 
Product development  3.3   2.8   2.5 
Sales and marketing  12.2   13.4   15.0 
General and administrative  12.1   12.9   11.9 
Provision for doubtful accounts  2.0   1.0   0.3 
Depreciation and amortization  9.3   9.5   8.7 
Goodwill impairment  39.3       
Restructuring and other impairments  0.7   4.9   0.2 
Other operating costs and expenses     0.2   (0.1)
Total operating costs and expenses  141.4   104.2   98.8 
             
(Loss) income from operations  (41.4)%  (4.2)%  1.2%

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Segment Information.
We operate in threetwo business segments: IP services and data center services and CDN services. IP services include managed and premise-based high performance IP and route optimization technologies. Data center services include hostingWe have reclassified the historical comparative financial information below to conform to the current period presentation. Segment results for each 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 overthree years in 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” below. Our reportable segments are strategic business units that offer different products and services. As of December 31, 2008, we had approximately 3,600 customers across more than 20 metropolitan markets.
Revenues
Revenues for the yearsperiod ended December 31, 2008, 2007 and 20062009 are summarized as follows (in thousands):
          
  Year Ended December 31, 
  2009  2008  2007 
Revenues:         
IP services $125,548  $139,737  $139,072 
Data center services  130,711   114,252   84,590 
Other        10,428 
Total revenues:  256,259   253,989   234,090 
             
Direct costs of network, sales and services, exclusive of depreciation and amortization:            
IP services  48,055   51,885   50,518 
Data center services  94,961   83,992   59,440 
Other        8,436 
Total direct costs of network, sales and services, exclusive of depreciation and amortization  143,016   135,877   118,394 
             
Segment profit:            
IP services  77,493   87,852   88,554 
Data center services  35,750   30,260   25,150 
Other        1,992 
Total segment profit  113,243   118,112   115,696 
             
Impairments and restructuring  54,698   101,441   11,349 
Other operating expenses, including direct costs of customer support, depreciation and amortization
  127,467   121,838   114,058 
Loss from operations  (68,922)  (105,167)  (9,711)
Non-operating expense (income)  461   (245)  (937)
Loss before income taxes and equity in (earnings) of equity-method investment $(69,383)  (104,922) $(8,774)
          
    Year Ended December 31, 
  2008  2007  2006 
IP services $123,268  $122,205  $112,250 
Data center services  109,679   83,632   56,548 
CDN services  21,042   17,806    
Other     10,447   12,577 
  $253,989  $234,090  $181,375 

Segment profit is segment revenues less direct costs of network, sales and services, exclusive of depreciation and amortization and does not include direct costs of customer support, direct costs of acquired technologies or any other depreciation or amortization associated with direct costs. Segment profit is a supplemental financial measure that is not prepared in accordance with GAAP. We view direct costs of network, sales and services as generally less-controllable, external costs and we regularly monitor the margin of revenues in excess of these direct costs. Similarly, we view the costs of customer support to also be an important component of costs of revenues but believe that the costs of customer support to be more within our control and to some degree discretionary as we can adjust those costs by hiring and terminating employees. We also have excluded depreciation and amortization from segment profit because they are based on estimated useful lives of tangible and intangible assets. Further, we base depreciation and amortization on historical costs incurred to build out our deployed network and the historical costs of these assets may not be indicative of current or future capital expenditures. Although we believe, for the foregoing reasons, that our presentation of segment profit non-GAAP financial measures provides useful supplemental information to investors regarding our results of operations, our non-GAAP financial measures should only be considered in addition to, and not as a substitute for, or superior to, any measure of financial performance prepared in accordance with GAAP.
 
IP Services. Revenue for IP services increased $1.1decreased $14.2 million, or 1%10%, to $123.3$125.5 million during the year ended December 31, 2009 compared to $139.7 million during the same period in 2008. The decrease in IP services revenues was driven by a decline in IP pricing for new and renewing customers and the loss of older customers who paid higher effective prices, partially offset by an increase in overall traffic. We had a net decrease in IP services customers from December 31, 2008 to December 31, 2009. IP traffic increased on an average annual rate of 27% from the year ended December 31, 2008 compared to $122.2 million for the year ended December 31, 2007. The increase2009, calculated based on a sum of the months in IP revenues is driven by an increase in demandthe respective periods.
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Revenue for our services, partially offset by a decline in IP pricing. We continue to experience increasing demand for our traditional IP services with IP traffic increasing approximately 44% forwas flat during the year ended December 31, 2008, increasing $0.7 million, or less than 1%, to $139.7 million compared to $139.1 million during the same period in 2007. Similar to the discussion above, demand for our services increased but was offset by a continuing decline in IP pricing. IP traffic increased on an annual average rate of 54% from the year ended December 31, 2007 to the year ended December 31, 2007. The increase in IP traffic has resulted from 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. Ongoing industry-wide pricing declines over the last several years, however, have offset a large portion of our gains in IP traffic. The effective price we charge our customers for IP services, measured in megabits per second, or Mbps, decreased approximately 33% for the year ended December 31, 2008 compared to the year ended December 31. 2007.2008. There was a net increase in IP services customers from December 31, 2007 to December 31, 2008, and these new customers added approximately $8.1 million of revenue during 2008. While these new customers are generally using more bandwidth, their additional contribution to revenue was partially offset by the loss of older customers who were paying higher effective prices for IP services. year ended December 31, 2008.
IP services revenuerevenues also includesincluded FCP salesproduct and other hardware sales of $4.8$0.9 million, $2.4 million and $4.6$2.6 million forand FCP-related services and subscription revenue of $0.9 million, $1.0 million and $0.9 million during the years ended December 31, 2009, 2008 and 2007, respectively.

Revenues for IP services increased more than $9.9 million, or 9%, to $122.2 million for the year ended December 31, 2007, compared to $112.3 million for the year ended December 31, 2006. In addition to the increase in demand, as discussed above, we experienced an increase in sales of our premise-based FCP products and other large hardware sales of approximately $1.0 million. IP traffic for the year ended December 31, 2007 increased approximately 35% from the year ended December 31, 2006. In addition to the demand for greater bandwidth, we added high-traffic customers through competitive IP pricing and minimum commitments during the year ended December 31, 2007. However, pricing declines caused the blended rate in Mbps to decrease approximately 26% 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 primarily to disputes over contractual service periods.
Data Center Services. Data center services are a significant source of revenue growth for our business. Revenues for data center services increased approximately $26.0 million, or 31%, to $109.7 million for the year ended December 31, 2008, compared to $83.6 million for the year ended December 31, 2007. This increase is primarily due to our data center growth initiative, as discussed below, which we began executing during 2007 and is on-going. We had a net increase of customers from December 31, 2007 to December 31, 2008 and new data center services customers added approximately $7.8 million of revenue during 2008. Furthermore, customer demand has resulted in a 24% increase in installed cabinets in 2008.
Revenues for data center services increased $27.1 million, or 48%, to $83.6 million for the year ended December 31, 2007, compared to $56.5 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 revenues 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 revenues resulted from both new and existing customers and was largely due to new and existing customers using more space within our facilities, and the design and installation revenues from new customers. We also structured our data center business to accommodate larger, global customers and ensure a platform for robust traffic growth.

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CDN Services. Revenues for our CDN services segment increased $3.2 million, or 18%, to $21.0 million for the year ended December 31, 2008, compared to $17.8 million for the year ended December 31, 2007. Our 2007 results included CDN activity from the acquisition date of VitalStream on February 20, 2007. We expect CDN services to be an area of growth and have upgraded and expanded related infrastructure, including in Europe and Asia, to serve the expected industry-wide demand. Also, we extended our 100% uptime SLA to customers purchasing or renewing CDN services after January 1, 2008. CDN services revenues and operating results for the year ended December 31, 2008 were lower than projected, primarily due to: (1) integration and reliability issues in the acquired network, which we have resolved, (2) a strategic shift to larger, higher credit quality customers and (3) more recently, a highly-competitive market environment for CDN services that is driving our prices lower. As discussed in note 8 to the accompanying financial statements and below, we recorded asset impairment charges of $102.3 million related to our CDN services goodwill and other intangible assets.
Revenues for the year ended December 31, 2007 were lower than originally anticipated as we integrated the VitalStream business with and into our network and infrastructure. 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 was included in “—Other” below. In the second half of 2007, we experienced platform instability in our 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 approximately $1.4 million in sales and billing adjustments related to both service interruptions and disputes over contractual service periods. We recorded these sales and billing adjustments against revenues. As we purchased VitalStream in 2007, we did not have revenue in that segment for the year ended December 31, 2006.
Other. Other revenues consist primarily of third party CDN services. Throughout 2007, the CDN services we began to provide following our acquisition of VitalStream steadily 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 $1.9decreased $3.8 million, or 4%7%, to $45.8$48.1 million forduring the year ended December 31, 2008,2009 compared to $43.9$51.9 million forduring the year ended December 31, 2007.same period in 2008. Direct costs of IP network, sales and services were 38% and 37% of IP services revenues forrevenue during the years ended December 31, 2009 and 2008, respectively. IP services segment profit decreased $10.4 million to $77.5 million during the year ended December 31, 20082009, from $87.9 million during the same period in 2008. The increase in direct costs of IP network, sales and 36% forservices, exclusive of depreciation and amortization, as a percentage of revenues and the year ended December 31, 2007. IP servicesdecrease in segment profit decreased $0.8 millionwere primarily due to $77.5 million for the year ended December 31, 2008,lower revenue from $78.3 million for the year ended December 31, 2007.ongoing pricing pressure as noted above. Connectivity costs vary based upon customer traffic and other demand-based pricing variables. Costs for IP services are subject to ongoing negotiations for pricing and minimum commitments. During the year ended December 31, 2008,2009, we continued to renegotiate our agreements with our major network service providers, which included cancellation and consolidation of certain contracts that, in the aggregate, resulted in higher minimum commitments but lower bandwidth rates. As our IP traffic continues to grow, we expect to have greater bargaining power forrealize lower bandwidth rates and more opportunities to proactively manage network costs, such as utilization and traffic optimization among network service providers.
 
Direct costs of IP network, sales and services exclusive of depreciation and amortization, increased $3.2$1.4 million, or 8%3%, to $43.9$51.9 million forduring the year ended December 31, 2007,2008 compared to $40.7$50.5 million forduring the year ended December 31, 2006. While IP services revenue increased, the directsame period in 2007. Direct costs of IP network, sales and services were approximately37% and 36% of IP services revenue for bothrevenues during the years ended December 31, 2008 and 2007, and 2006. We maintainedrespectively. IP services segment profit decreased $0.7 million to $87.9 million during the year ended December 31, 2008, from $88.6 million during the same period in 2007. The increase in direct costs as a percentage of revenues and the decrease in segment profit were also primarily due to lower revenue from ongoing pricing pressure.
There have been ongoing industry-wide pricing declines over the last several years and this trend continued during the years ended December 31, 2009 and 2008. Technological improvements and excess capacity have been the primary drivers for lower pricing of IP services revenue, even though we hadas well as the more recent entrance of a change in the mix of revenue with alarge number of lower margin highspecialty service providers such as content delivery network vendors. We also continue to experience increasing traffic volume in our traditional IP services. The increase in IP traffic resulted from both new and existing customers using more applications, as well as the nature of applications consuming greater amounts of bandwidth. We believe we remain well-positioned to benefit from an increasing reliance on the Internet as the medium for business applications, media distribution, communication and FCP and other hardware sales.entertainment. 
 
Data Center Services. Data center services have become a significant source of revenue growth for our business. Revenues for data center services increased $16.5 million, or 14%, to $130.7 million during the year ended December 31, 2009 compared to $114.3 million during the same period in 2008. This increase is primarily due to our ongoing data center growth initiative, discussed below. We also believe that the demand for data center space continues to outpace supply in several key geographic markets. During the year ended December 31, 2009, we substantially completed data center expansions and upgrades in New York, Boston and Seattle. In addition, we had a net increase of customers from December 31, 2008 to December 31, 2009 with the new customers adding approximately $11.3 million of revenue during the year ended December 31, 2009.
Revenues for data center services increased $29.7 million, or 35%, to $114.3 million during the year ended December 31, 2008 compared to $84.6 million during the same period in 2007 for the reasons noted above. We had a net increase of customers from December 31, 2007 to December 31, 2008 with new customers adding approximately $7.8 million of revenue during the year ended December 31, 2008.
Direct costs of data center services, exclusive of depreciation and amortization, increased $11.0 million, or 13%, to $95.0 million during the year ended December 31, 2009 compared to $84.0 million during the same period in 2008. Direct costs of data center services as a percentage of corresponding revenues decreased to 73% during the year ended December 31, 2009 from 74% during the same period in 2008. Data center services contributed $35.7 million of segment profit during the year ended December 31, 2009, an increase of $5.5 million from $30.3 million during the same period in 2008. The increase in total direct costs of data center services was also primarily due to our data center growth initiative. The improvement in direct costs as a percentage of revenues and the increase in segment profit were primarily due to an increase in total occupancy at higher rates. Once we sell services in new data center space, each incremental dollar of revenue tends to be more profitable as we offset more fixed costs, improving direct costs of data center services, exclusive of depreciation and amortization, as a percentage of revenue.
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Direct costs of data center services increased $22.6$24.6 million, or 38%41%, to $82.0$84.0 million forduring the year ended December 31, 2008 compared to $59.4 million forduring the year ended December 31,same period in 2007. Data center services contributed $27.7$30.3 million of segment profit forduring the year ended December 31, 2008, an increase of $3.5$5.1 million from $24.2$25.2 million forduring the year ended December 31,same period in 2007. Direct costs of data center services as a percentage of corresponding revenues has increased to 75% for74% during the year ended December 31, 2008 from 71%70% during the same period in 2007 due to pre-operating costs incurred for the year ended December 31, 2007.new and expanded locations ahead of revenues in those locations.

The direct costs of data center services, exclusive of depreciation and amortization, increased approximately $13.0 million, or 28%, to $59.4 million forAs previously noted, the year ended December 31, 2007, compared to $46.5 million for the year ended December 31, 2006. Data center services contributed $24.2 million of segment profit for the year ended December 31, 2007, an increase of $14.1 million from $10.1 million for the year ended December 31, 2006. As data center services revenue increased, direct costs of data center services as a percentage of corresponding revenue decreased to approximately 71% for the year ended December 31, 2007 from 82% for the year ended December 31, 2006. This trend was the result of an increase in total occupancy at higher rates, as discussed with revenues above, while substantial direct costs were subject to previously negotiated rates.

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The growth in data center revenues and direct costs of data center services has largely followsfollowed our ongoing expansion of data center space andthat we believebegan in 2007. Industry data indicates that the demand for data center services continuesis greater than industry-wide supply in several key geographic markets. As a result, we have and expect to outpace industry-wide supply. continue investing in and expanding our data center business. This includes a plan to commit $50.0 million in capital expenditures over the next nine to 18 months to grow our data center business in key markets, in addition to $43.8 million that we have already incurred since 2007.

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. Direct costs of data center services as a percentage of revenues vary with the mix of usage between sitesfacilities operated by us and third parties, referred to as company-controlled facilities and partner sites, respectively, as well as the utilizationoccupancy of total available space. WhileAssuming comparably high levels of utilization, we expect company-controlled facilities to be more profitable than partner sites. However, company-controlled facilities are initially less profitable than partner sites because we recognize some of thesignificant initial operating costs, especially rent, of sites operated by usfor company-controlled facilities in advance of revenues, these sites are more profitable at certain levels of utilization than the use of partner sites.revenues. Conversely, costs in partner sites are more demand-based and, therefore, are more closely associated with thewe generally incur such costs in closer proximity to our recognition of revenues. We seek to optimizeNevertheless, many of the most profitable mix of available data center space operated by us and our partners. The increasecosts in initial operating costs of sites operated by us as well as our increased use of partner sites drove the higher percentage of direct costs for the year ended December 31, 2008were subject to previously negotiated rates.

We will continue to focus on increasing revenues from company-controlled facilities compared to the year ended December 31, 2007.partner sites and to proactively exit less profitable partner sites. We continue to expand the sites operated by us and expect to have more of this space available to be used in the future as part of our data center growth initiative. Wealso expect direct costs of data center services as a percentage of corresponding revenues to decrease as the recently expanded sites operated by usour recently-expanded company-controlled facilities continue to contribute to revenue and become more fully utilized.occupied. This is evidenced by the improvement in direct costs of data center services as a percentage of corresponding revenues of 73% during the year ended December 31, 2009 compared to 74% during the same period in 2008 noted above.

During the year ended December 31, 2008,2009, we added approximately 17,00012,000 net sellable square feet of data center space in sites operated by us and 22,000approximately 4,000 net sellable square feet in partner sites. Our expansion of data center space has contributed to total lower overall utilization of net sellable square feet as of December 31, 2009 compared to the same period in 2008. At December 31, 2008,2009, we had approximately 218,000202,000 net sellable square feet of data center space with a utilization rate of 77% as compared to approximately 179,000186,000 net sellable square feet of data center space with a utilization rate of 75%,79% at December 31, 2007. At December 31, 2006, we had approximately 149,000 square feet of data center space with a utilization rate of 79%.2008. We expect our recent data center expansion and our strategy to provide us lower costs perexit less profitable partner sites will continue to increase our share of occupied square footfootage in future periods, enabling us to increase revenues compared to relatively lower direct costs of data center services.centers operated by us. At December 31, 2008, 121,000 square feet of occupied data center space, or 55%2009, 53% of our total net sellable square feet waswere in data centers operated by us versus partner sites as compared to 104,000 square feet or 58%51% of our total net sellable square feet at December 31, 2007 and 88,000 square feet or 59% of our total square feet at December 31, 2006. Additionally, 76% and 62% of our available square feet as of December 31, 2008 and 2007, respectively, were in data centers operated by us.2008.
CDN Services. Direct costs of network, sales and services, exclusive of depreciation and amortization, for our CDN services segment increased $1.5 million to $8.1 million for the year ended December 31, 2008, compared to $6.6 million for the year ended December 31, 2007. Segment profit for CDN services increased more than $1.7 million to $13.0 million for the year ended December 31, 2008 from $11.2 million for the year ended December 31, 2007. As noted above, costs for the year ended December 31, 2007 only included activity after our acquisition of VitalStream on February 20, 2007. Direct costs of CDN network, sales and services were 38% of CDN services revenues for the year ended December 31, 2008, compared to 37% for the year ended December 31, 2007. The direct costs in 2008 include the benefit of lower rates as we have migrated VitalStream’s former contracts and terms to our own since the acquisition. However, the increase in direct costs as a percentage of revenues is primarily related to increased price competition within the market. Direct costs of CDN network sales and services also include an allocation of direct costs of IP network sales and services based on the average cost of actual usage by the CDN segment. The allocation of direct costs of IP network sales and services was $1.1 million and $0.9 million for the years ended December 31, 2008 and 2007, respectively. The CDN segment will also further benefit from the renegotiated rates with our network service providers discussed above under IP Services. As we purchased VitalStream in 2007, we did not have costs for that segment for the year ended December 31, 2006.

Other. Other revenues and direct costs of network, sales and services consist primarilyconsisted of third party CDN services. Throughout 2007, theThese third party CDN services we began to providewere steadily replaced throughout 2007 by our own internal CDN services following our acquisition of VitalStream steadily replaced the activity of the former third party CDN service provider.in February 2007.
 
Other Operating Costs and Expenses
 
Other than direct costs of network, sales and services, our compensation and facilities-related costs havehas the most pervasive impact on operating costs and expenses. CompensationWe discuss compensation on an aggregate basis below followed by discussion of functional costs and benefits comprise our next largest expense after direct costs of network, sales and services. Cash-basisexpenses.
Compensation. Total compensation and benefits, decreased $2.2including stock-based compensation, was $59.3 million, $57.9 million and $61.3 million during the years ended December 31, 2009, 2008 and 2007, respectively.
Cash-based compensation and benefits increased $3.3 million to $50.4$53.7 million forduring the year ended December 31, 20082009 from $52.6$50.4 million forduring the same period in 2008. The increase during the year ended December 31, 2007. Stock-based compensation decreased $1.22009 compared to the same period in 2008 was primarily due to an increase in severance payments, including $0.9 million to $7.5our former president and chief executive officer, and a $0.3 million forsigning bonus paid to our new president and chief executive officer. However, severance does not include $0.9 million associated with the March 2009 reduction in force noted below. Additionally, we accrued $2.9 million during the year ended December 31, 2009 representing a portion of targeted payments for annual performance bonuses and associated payroll taxes that we did not accrue during the same period in 2008. As noted below, we eliminated the 2008 from $8.7 million for the year ended December 31, 2007. The decrease in cash-basis compensation and benefits is due to the elimination of theannual performance bonus accrual for 2008 compared to an accrual of $2.9 million for 2007,as a $2.0 million reduction in commissions and a larger Georgia Headquarters Tax Credit, or HQC. The elimination of the bonus accrual for 2008 was the result of our compensation committee’s decisiondetermination not to award employee bonuses given that we did not meet established performance goals. These increases were offset by decreases in salary and wages expense of $0.8 million primarily based on lower headcount, as well as a $0.4 million reduction in commissions due primarily to lower sales.
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Additionally, we did not record a Georgia Headquarters Tax Credit, or HQC, in 2009 compared to a $1.3 million credit recorded in 2008, which included credits for two years. The HQC is an incentive to relocate corporate headquarters to and increase associated employment within Georgia. We record the HQC when approved by the Georgia Department of Revenue and we are required to apply credits against our payroll tax liability.

The cash-based compensation and benefits decrease during the year ended December 31, 2008 as compared to the same period in 2007 was primarily due to the elimination of the annual performance bonus accrual, a larger HQC and a reduction in commissions. As discussed above, we eliminated the 2008 annual performance bonus accrual compared to an accrual of $2.9 million during the same period in 2007. The HQC increased to $1.3 million during the year ended December 31, 2008 (which included credits for two years) from $0.3 million (for one year) during the same period in 2007. The availability of any HQC is a function of the timing of approval by the Georgia Department of Revenue. The reduction in commissions was primarily due to higher sales quotas under a new commission plan, adjustments for failing to meet sales quotas, an increase in the number of new sales personnel that were not yet fully productive and open sales positions. These decreases were partially offset by annual pay increases for employees effective April 1, 2008 and having a full 12 months of CDN employee expense during the year ended December 31, 2008 compared to 10 months during the year ended December 31, 2007.

The lower headcount of approximately 390 employees at December 31, 2009 compared to approximately 430 employees at December 31, 2008 reflected our March 2009 reduction in force that reduced headcount by 45 employees, or 10% or our workforce at that time. As discussed in note 9 to the accompanying consolidated financial statements, the reduction was primarily in back-office functions as well as the elimination of certain senior management positions. Total headcount in prior years was relatively consistent increasing to approximately 430 employees at December 31, 2008 compared to approximately 420 employees at December 31, 2007.

Stock-based compensation decreased $1.9 million to $5.6 million during the year ended December 31, 2009 from $7.5 million during the same period in 2008 and decreased $1.2 million during the year ended December 31, 2008 from $8.7 million during the same period in 2007. The decreases were due to an increase in adjustments for actual and estimated forfeitures of unvested stock options and awards through employee turnover, especially at the senior management level, and a lower fair value for new stock options and awards based predominantly on our lower stock price. Stock-based compensation during the year ended December 31, 2009 also included $0.8 million related to the resignation of our former president and chief executive officer, as discussed above, which resulted from the full vesting as of March 16, 2009 of all equity awards previously granted to him. The following table summarizes the amount of stock-based compensation, net of estimated forfeitures, included in the accompanying consolidated statements of operations during the years ended December 31, 2009, 2008 and 2007 (in thousands):
   Year ended December 31, 
   2009   2008   2007 
Direct costs of customer support $1,112  $1,369  $1,892 
Sales and marketing  1,395   1,782   2,135 
General and administrative  3,106   4,348   4,654 
  $5,613  $7,499  $8,681 
Total unrecognized compensation costs related to unvested stock-based compensation as of December 31, 2009 was $8.6 million with a weighted-average remaining recognition period of 3.0 years.
Direct Costs of Customer Support. Direct costs of customer support increased 14% to $18.5 million during the year ended December 31, 2009 from $16.2 million during the same period in 2008. The increase of $2.3 million was primarily due to a $1.9 million increase in cash-based compensation and benefits and a $0.7 million increase in outside professional services offset by a $0.3 million decrease in stock-based compensation. The increase in cash-based compensation and benefits included severance payments for employees terminated separately from the March 2009 restructuring plan.
Direct costs of customer support decreased 2% to $16.2 million during the year ended December 31, 2008 from $16.5 million during the same period in 2007. The decrease of $0.3 million was primarily due to a $0.5 million decrease in stock-based compensation due to forfeitures of unvested stock options and awards through employee turnover, partially offset by a $0.3 million increase in cash-based compensation and benefits due to annual pay increases for employees and having a full 12 months of CDN employee expense as discussed above. The increase in cash-based compensation and benefits was primarily due to annual employee pay increases.

Direct Costs of Amortization of Acquired Technologies. Direct costs of amortization of acquired technologies were $8.3 million, $6.6 million and $4.2 million during the years ended December 31, 2009, 2008 and 2007, respectively. The increases in direct costs of amortization in both 2009 and 2008 were due to impairment charges. In conjunction with consolidating our business segments in 2009, we performed an analysis of the potential impairment and re-assessed the remaining asset lives of other identifiable intangible assets. The analysis and re-assessment of other identifiable intangible assets resulted in an impairment charge of $4.1 million in acquired CDN advertising technology during 2009 due to a strategic change in market focus. We also recorded a similar impairment charge of $1.9 million during 2008. See “—Impairments and Restructuring” below for further discussion of the impairment of goodwill and other intangible assets. Also included in direct costs of amortization of acquired technologies during the year ended December 31, 2008 was additional amortization expense attributable to a full 12 months of amortization of post-acquisition intangible technology assets related to the VitalStream acquisition compared to 10 months during the year ended December 31, 2007.
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Sales and Marketing. Sales and marketing costs during the year ended December 31, 2009 decreased 9% to $28.1 million from $30.9 million during the same period in 2008. The decrease of $2.8 million was primarily due to lower cash-based compensation, as well as commissions and stock-based compensation, during the year ended December 31, 2009. The reduction in cash-based compensation was primarily due to lower headcount. The decrease in commissions was primarily due to lower sales while the reduction in stock-based compensation resulted from adjustments for actual and estimated forfeitures of unvested stock options and awards through employee turnover, especially at the senior management level, and a lower fair value for new stock options and awards based predominantly on our lower stock price.
Sales and marketing costs during the year ended December 31, 2008 decreased 2% to $30.9 million from $31.5 million during the same period in 2007. The decrease of $0.6 million was comprised primarily of a $0.4 million decrease for cash-based compensation and benefits and a $0.4 million decrease in stock-based compensation. The decrease in cash-based compensation included a $2.0 million decrease in commissions. The reduction in commissions and stock-based compensation was primarily due to higher sales quotas under a new commission plan, adjustments for failing to meet sales quotas and an increase in the number of new sales personnel that were not yet fully productive and open sales positions. The HQC increased to $1.3 million in 2008 from $0.3 million in 2007. We record the HQC when approved by the Georgia Department of Revenue. These credits were approved with the stipulation that we apply them against our payroll tax liability. These decreases are partially offset by annual pay increases for employees effective April 1, 2008 and having a full 12 months of CDN employee expense compared to 10 months in 2007. The decrease in stock-basedStock-based compensation is primarilyalso decreased due to fewer grantsan increase in adjustments for actual and estimated forfeitures of stock-basedunvested stock options and awards through employee turnover, especially at the senior management level, and a lower fair value for new awards based on our lower stock price. Total headcount was relatively consistent increasing to approximately 430 at December 31, 2008 compared to approximately 420 at December 31, 2007.

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Cash-basis compensation and benefits increased more than $11.5 million to $52.6 million for the year ended December 31, 2007 from $41.0 million for the year ended December 31, 2006. Stock-based compensation increased approximately $2.7 million to $8.7 million for the year ended December 31, 2007 from $5.9 million for the year ended December 31, 2006. The increases in compensation and benefits were 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, including at the senior management level. Total headcount increased to approximately 420 at December 31, 2007 compared to approximately 330 at December 31, 2006.
Stock-based compensation is summarized by the following financial statement captions (in thousands):
          
    Year ended December 31, 
  2008  2007  2006 
Direct costs of customer support $1,369  $1,892  $1,102 
Product development  688   856   628 
Sales and marketing  1,782   2,135   2,145 
General and administrative  3,660   3,798   2,067 
Total stock-based compensation expense included in net income $7,499  $8,681  $5,942 
Total unrecognized compensation costs related to unvested stock-based compensation as of December 31, 2008 was $16.6 million with a weighted-average remaining recognition period of 2.6 years.
Facilities and related costs, including repairs and maintenance, communications and office supplies but excluding direct costs of network, sales and services, is our next largest recurring expense and increased $0.6 million, or 8%, to $7.6 million for the year ended December 31, 2008 compared to $7.0 million for the year ended December 31, 2007. The increase is primarily due to the relocation and upgrade of one of our sales offices to a new, larger space and having a full 12 months of CDN operating expenses, partly offset by ongoing cost containment efforts.
Facilities 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 was primarily attributable to $0.7 million of VitalStream post-acquisition operating costs.
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 to $6.6 million for the year ended December 31, 2008, from $4.2 million for the year ended December 31, 2007. The increase of approximately $2.4 million included a $1.9 million impairment in developed advertising technology due to a strategic change in market focus. See “—Goodwill Impairment” and “–Restructuring and Other Impairments” below for further discussion of the impairment of goodwill and other intangible assets. Also included in direct costs for 2008 is additional amortization expense attributable to a full 12 months of amortization of post-acquisition intangible technology assets related to CDN services.
Direct costs of amortization of acquired technologies increased approximately $3.6 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 was attributable to the amortization of the post-acquisition intangible technology assets of VitalStream.
Direct Costs of Customer Support. Direct costs of customer support decreased 2% to $16.2 million for the year ended December 31, 2008, from $16.5 million for the year ended December 31, 2007. The decrease of $0.3 million was primarily due to a $0.5 million decrease in stock-based compensation, as previously discussed, partially offset by a $0.3 million increase in cash-basis compensation. The increase in cash-basis compensation is primarily due to annual employee pay increases.
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 approximately $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 $1.7 million and $0.3 million, respectively, whereas facilities-related costs increased $0.6 million.
Product Development. Product development costs for the year ended December 31, 2008 increased 29% to $8.5 million from $6.6 million for the year ended December 31, 2007. The product development cost increase of $1.9 million is attributable to increases in cash-basis compensation and benefits and professional services. The increase in cash-basis compensation was $1.2 million, and included the transfer of certain employees to product development that were formerly in professional services and customer support roles in sales and marketing and direct costs of customer support. The increase in professional services costs of $0.7 million was due to the use of third party vendors for certain engineering services that were previously performed by our employees in 2007, especially with respect to our CDN services.

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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.
Sales and Marketing. Sales and marketing costs for the year ended December 31, 2008 decreased 2% to $30.9 million from $31.5 million for the year ended December 31, 2007. The decrease of $0.6 million was comprised primarily of a net $0.4 million decrease for cash-basis compensation and benefits and a $0.4 million decrease in stock-based compensation. The net decrease in cash-basis compensation included a $2.0 million decrease in commissions. The reduction in commissions was primarily due to higher sales quotas under a new commission plan, adjustments for failing to meet sales quotas and an increase in the number of new sales personnel and open sales positions. Stock-based compensation also decreased due to the reasons previously discussed.
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 approximately $4.3 million was 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.
General and Administrative. General and administrative costs during the year ended December 31, 2009 were $44.2 million, consistent with the same period in 2008. During the year ended December 31, 2009, cash-based compensation increased $3.6 million compared to the same period in 2008, partially offset by a year-over-year reduction in stock-based compensation of $1.2 million. The increase in cash-based compensation and the decrease in stock-based compensation during the year ended December 31, 2009 compared to the same period in 2008 are discussed above in “—Compensation.” The increase in cash-based compensation was also partially offset by decreases in the provision for doubtful accounts and professional services.

The provision for doubtful accounts decreased to $2.7 million during the year ended December 31, 2009 from $5.1 million during the same period in 2008. The higher provision during the year ended December 31, 2008 increased 1% to $30.7 million from $30.3 million for the year ended December 31, 2007. The increase of $0.4 million reflected a $3.4 million increase in professional services costs, a $0.4 million increase in facilities and related costs, partially offset by a $3.2 million decrease in cash-basis compensation. Professional services costs were higher due primarily to contract labor, higher accounting fees, especially associated with bringing current our international statutory audits, use of consultants for process improvements and other outside services. The increase in facilities and related costs is discussed above. Cash-basis compensation and benefits decreased due primarily to a elimination of the bonus accrual of $2.9 million, as discussed above.
General and administrative costs for the year ended December 31, 2007 increased 40% to $30.3 million from $21.6 million for the year ended December 31, 2006. The increase of $8.7 million was 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 $3.5 million, including $1.0 million for the additional VitalStream employees. As discussed earlier, the increase in cash-basis compensation was also due to the hiring of other employees, 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 during 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 $2.2 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. 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.
On January 29, 2009, we announced the resignation of James P. DeBlasio from his positions as President and Chief Executive Officer effective as of March 16, 2009, or the Separation Date. Mr. DeBlasio also has resigned as a director effective March 15, 2009. Pursuant to the terms of a separation agreement, Mr. DeBlasio will receive (1) a cash payment of $0.9 million, (2) full vesting of all equity awards previously granted to him as of the Separation Date and (3) if he so elects, continued health, dental and vision insurance coverage under our group health plan for 18 months from the Separation Date at no cost to him. Mr. DeBlasio has 12 months following the Separation Date in which to exercise any stock options held by him that were vested as of the Separation Date. We will record the associated severance in general and administrative costs during the three months ended March 31, 2009. Also on January 29, 2009, we announced the appointment of J. Eric Cooney as our President and Chief Executive Officer and as a director, effective March 16, 2009.
Provision for Doubtful Accounts. The provision for doubtful accounts increased to $5.1 million for the year ended December 31, 2008, from $2.3 million for the year ended December 31, 2007. The increase during 2008 resulted from our periodic review of the aged accounts receivable balances, taking into consideration current economic conditions and was primarily attributable to our former CDN services and IP services segments. We believe the ability to collect these valid receivables has become uncertain due to changes in customer circumstances. A number of the CDN customers that have beenwe reserved as doubtful accounts were customers in 2007 and early 2008, but have since beenwe disconnected from ourtheir service in 2008 for failing to remitmake payment. In addition, bankruptcies of certain of our customers in the financial services industry negatively impacted IP services. We will continue to strongly focusplace a strong emphasis on the credit worthiness of our customers’customers and their ability to make payment in light of the current economic conditions and put inmeet obligations to us. To mitigate default risk with certain new customers, we place additional upfront requirements such as prepayments or deposits for new customers before commencing delivery ofdelivering our services. These enhancements to our credit and collection procedures have enabled us to mitigate credit and collection risk, which has resulted in reduced bad debt expense.

Professional services given the challenging economic environment expectedcosts decreased $1.1 million to continue in 2009 and beyond.

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The provision for doubtful accounts increased to $2.3$9.4 million forduring the year ended December 31, 2007, from $0.52009 compared to $10.5 million during the same period in 2008. During 2008 and early 2009, professional services costs were substantially higher than at the end of 2009. Professional services included the use of consultants for contract labor, process improvements and other outside services, particularly in finance and information technology, and for personnel recruiting fees. Throughout 2009, we significantly reduced the number of consultants that we utilized.

General and administrative costs during the year ended December 31, 2006.2008 increased 13% to $44.2 million from $39.1 million during same period in 2007. The increase of $5.2 million reflected a $4.1 million increase in professional services costs and $2.8 million increase in the provision for doubtful accounts, was primarily due to our integration of VitalStream with its legacy customers causingpartially offset by a $1.6 million decrease in cash-based compensation. The increases in professional services costs and the provision for doubtful accounts to be greater than our historical expense.
Depreciation and Amortization. Forduring the year ended December 31, 2008 depreciationwere due to an increased use of outside consultants and customers failing to make payment. Cash-based compensation decreased due primarily to the elimination of the bonus accrual of $2.9 million during the year ended December 31, 2008.
Depreciation and Amortization. Depreciation and amortization, including other intangible assets but excluding acquired technologies, increased 7%19% to $23.9$28.3 million compared to $22.2 million forduring the year ended December 31, 2009 compared to $23.9 million during the same period in 2008. The increase of $4.4 million primarily related to the expansion of data center facilities and P-NAP capabilities as well as changes in estimates of remaining lives for certain of our other intangible assets. Capital expenditures were $17.3 million during the year ended December 31, 2009 compared to $51.2 million during the same period in 2008. We plan to commit $50.0 million in capital expenditures over the next nine to 18 months to grow our data center business in key markets.
Depreciation and amortization increased 7% to $23.9 million during the year ended December 31, 2008 compared to $22.2 million during the same period in 2007. The increase of approximately $1.6 million primarily related 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.
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 approximately $6.3 million primarily related 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 accounted for $5.8 million of the expense for the year ended December 31, 2007. The remaining increase in depreciation and amortization related to the expansion of P-NAPs andour on-going expansion of data center facilities.
 
Goodwill ImpairmentImpairments and Restructuring. As a resultDuring the years ended December 31, 2009, 2008 and 2007, we recorded aggregate impairment and restructuring charges of our August 1,$54.7 million, $101.4 million and $11.3 million, respectively. We also recorded impairments of acquired CDN advertising technology of $4.1 million and $1.9 million during the years ended December 31, 2009 and 2008, annual assessmentrespectively. We recorded the impairments of acquired CDN advertising technology in conjunction with the impairments of goodwill, webut recorded athe charges in direct costs of amortization noted above.
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Impairments. The goodwill impairments during the year ended December 31, 2009 included $48.0 million for goodwill related to our former CDN services segment and $3.5 million to adjust goodwill related to our FCP products in the IP services segment, while all of the $99.7 million goodwill impairment chargeplus a $0.8 million impairment of trade names in 2008 related to adjust goodwillour former CDN services segment. Similarly, the impairments of acquired technology included in direct costs of amortization were related to advertising technology of our former CDN services segment. The intangible asset impairments in our former CDN services segment to an implied fair value of $54.7 million.
The goodwill impairment waswere primarily due to declines in our CDN services revenues and operating results as compared to our projections and unfavorable changes in market factors used to estimate fair values. The declines in CDN services revenues and operating results compared to projectionsour expectations and declining multiples of our own and comparable companies. The CDN services goodwill and technology arose from our acquisition of VitalStream in February 2007. We initially recorded goodwill of $154.7 million in the acquisition, which represented 72% of the $214.0 million purchase price. These declines in CDN services revenues and operating results were primarily attributable to integrationcontinued pricing pressures, which were partially offset by increased traffic. This was combined with higher costs of sales related to traffic mix, as well as a weakened economy and reliability issuessteadily increasing levels of customer churn. Given the declines in CDN services revenues and operating results, in 2009 we renewed our emphasis on and dedicated our internal resources within our IP services to strengthen our services offering and leverage our entire IP backbone and cost structure. Similarly, the goodwill impairment related to our FCP products in the acquired network that have now been resolved,IP services segment was due to declines in our FCP products revenues and operating results. The declines in FCP products revenues were primarily attributable to lower sales associated with a strategic shift to larger, higher credit quality customers and more recently, a highly-competitive market environmentreduced marketing effort as we reevaluated our equipment sales strategy for CDN services that is driving lower pricing. Changes in market factors included lower market multiples across the CDN services industry from the time we completed the VitalStream acquisition and our own current lower market capitalization. The culmination of these factors leading to our impairment of goodwill did not occur until the three months ended September 30, 2008. The impairment charge did not have any impact on our current cash balance or future cash expenditures, or result in violation of any covenants of our debt instruments.FCP products.
 
The impairment also caused us to reverse a deferred tax liability and create an income tax benefit of $0.6 million associated withDuring the CDN services goodwill. 
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. We also assessed the likelihood of triggering events and concluded that none had occurred that would cause us to re-assess goodwill for impairment subsequent to August 1, 2008.
Restructuring and Other Impairments. In conjunction with our review of our long-term financial outlook, which includes our annual assessment of goodwill for impairment, as discussed above,ended December 31, 2009, we also performed an analysis of the potential impairment and re-assessed the remaining asset lives of other identifiable intangible assets which resulted in acceleration of amortization expense over shorter estimated remaining useful lives of (a) acquired CDN customer relationships to reflect our historical churn rate for those customers in both 2009 and 2008, and (b) acquired CDN trade names and non-compete agreements to reflect the VitalStream acquisition.decreased value of these assets to our business in 2009. The analysisincreased amortization expense is reflected in depreciation and re-assessment of other identifiable intangible assets recorded in the VitalStream acquisition resulted in:
an impairment charge of $1.9 million in developed advertising technology due to a strategic change in market focus,
an impairment charge of $0.8 million in trade names as a result of discontinuing use of the VitalStream trade name, and
a change in our estimates that resulted in acceleration of amortization expense of our customer relationships intangible asset over a shorter estimated useful life (four remaining years instead of the original estimated nine years) due to customer churn resulting in higher than expected attrition as of the acquisition date.
amortization, noted above.
 
The impairment charge of $1.9Impairments during the year ended December 31, 2007 included $1.4 million for developed advertising technology is included in “Direct costs of amortization of acquired technologies” in the accompanying consolidated statements of operations. The impairment charge of $0.8 million for the trade name is included in “Restructuringleasehold improvements and other impairments”assets related to restructured leases discussed below and $1.1 million in the accompanying consolidated statements of operations. capitalized software for a sales order-through-billing system.
None of the impairment charges or changes in estimated remaining asset lives had any impact on our current cash balancebalances or future cash expenditures, or resultedcovenants in violation of any covenants of our debt instruments. The change in accounting estimate for our customer relationship intangible asset resulted in an increase to our net loss of $0.4 million, or less than $0.01 per basic or diluted share, forcredit agreement.
Restructuring. Total restructuring charges during the year ended December 31, 2008.

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In conjunction with the preparation2009 were $3.2 million, including $2.1 million for adjustments in sublease income assumptions for certain properties included in our previously-disclosed 2007 and 2001 restructuring plans, $0.9 million for a workforce reduction in March 2009 and $0.2 million for cessation of our financial statements asuse of four smaller office and forpartner data center facilities. We also recorded a $1.1 million restructuring charge during the year ended December 31, 2008 for adjustments in sublease income assumptions for certain properties included in our previously-disclosed 2007 and in light2001 restructuring plans offset by non-cash benefit of the recent and significant deterioration in the real estate market, we completed an analysis of$0.1 million to reduce our remaining accrued restructuring liability for leased facilities. After reviewingemployee terminations initially recorded during the analysisyear ended December 31, 2007.
The adjustments in sublease income assumptions for certain properties included in our 2007 and specifically,2001 restructuring plans extended the underlying assumptions related to anticipatedperiod during which we do not anticipate receiving sublease recoveries, we concluded that certain of the facilities remainingincome from those properties. The extensions in the restructuring accrual were taking longer than expected to sublease or were otherwise not generating the expected levels of sublease income. The analysesboth 2009 and 2008 were based on discounted cash flows usingour expectation that it will take longer to find sublease tenants and the same credit-adjusted risk-free rateincreased availability of space in each of these markets where we have unused space.
The workforce reduction of 45 employees in March 2009 represented 10% of our total workforce at that we used to measuretime and was primarily in back-office functions as well as the initial restructuring liability for leases that were partelimination of certain senior management positions. All of the 2007$0.9 million in charges during the year ended December 31, 2009 were cash expenditures. The restructuring plancharge for the four leased facilities was $0.2 million and undiscounted cash flows forall amounts related to these leases that were partdue within 12 months of the 2001 restructuring plan. The cumulative effectdate we ceased use. Due to the short remaining terms of these changes was $1.1 million, whichleases, we recorded as additional restructuring expense and an increasedid not expect to the liability. earn any sublease income in future periods.
We also recorded a non-cash benefit of $0.1 million induring the three monthsyear ended September 30,December 31, 2008 to reduce our restructuring liability for employee separations.terminations. This non-cash adjustment removeseliminated the remaining liability for employee separationsterminations since we had paid all such amounts. Both of these adjustments to the restructuring liability are reported in “Restructuring and other impairments” in the accompanying consolidated statement of operations.
 
During the three monthsyear ended MarchDecember 31, 2007, we incurred a restructuring charge of $10.3 million, which included $1.4 million for the impairment of leasehold improvements and impairment charges totaling $11.3 million. The charges were the result ofother assets. We took this charge following 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 quarteracquisition. In addition to the $1.4 million impairment of 2007. The chargesleasehold improvements and other assets, the charge to expense included $7.8 million for leased facilities representingand $1.1 million of severance payments for the termination of employees. The charge for leased facilities represents both the costs less anticipated sublease recoveries that we will continue to be incurredincur without economic benefit to us and costs to terminate leases before the end of their term. The charges also included severance payments of $1.1 million forimpaired leasehold improvements and other assets were associated with the termination of certain employees and $1.4 million for impairment of assets. After considering the adjustments for anticipated changes in sublease income described above, we estimated net related expenditures for the 2007 restructuring plan to be $12.2 million, of which we paid $4.2 million through December 31, 2008, and the balance continuing through December 2016, the last date of the longestrestructured lease term. We expected these expenditures to be paid out of operating cash flows.facilities. We estimated cost savings from the restructuring to be approximately $0.8 million per year through 2016, primarily for rent.
 
We also incurred a $1.1 million impairment charge during the three months ended March 31, 2007 for the sales order-through-billing system, which was the result of an evaluation of the existing infrastructure relative to our new financial accounting system and the acquisition of VitalStream. This impairment charge was not related to any specific business segment.
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Non-operating Income and Expense (Income). ForInterest expense decreased to $0.7 million during the year ended December 31, 2009 compared to $1.3 million and $1.2 million during the same periods in 2008 and 2007, respectively. Similarly, interest income decreased $1.3to $0.2 million to $1.9 million from $3.2 million forduring the year ended December 31, 2009 compared to $1.9 million and $3.2 million during the same periods in 2008 and 2007, a decreaserespectively. The decreases in interest expense reflected lower levels of 42%. The decrease reflectsaverage outstanding debt and lower overall interest rates. As with interest expense, the decreases in interest income also reflected a reduction in total interest-earning investments along with a move toward lower-risk investments and lower overall interest rates. Non-operating income and expense during the years ended December 31, 2009 and 2008 also included net changes in the fair value of our auction rate securities and the corresponding rights. We describe the corresponding rights below in “Liquidity and Capital Resources—Capital Resources—Short-Term Investments in Marketable Securities and Other non-operating expense forRelated Assets.”
During the year ended December 31, 2008 included a net reduction in fair value of $0.8 million on our auction rate securities offset by the $0.6 million fair value of our ARS Rights, as described in note 6 to our accompanying consolidated financial statements.
During 2007, 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.Corporation.
 
Provision (Benefit) for Income Taxes. The provision for income taxes was $0.2$0.4 million forduring the year ended December 31, 2009, $0.2 million during the same period in 2008 and a net benefit of $3.1 million forduring the year ended December 31,same period in 2007. ForDuring the year ended December 31, 2007, the tax provision included a $4.4 million benefit related to the release of the valuation allowance associated with our U.K. deferred tax assets. The U.K. benefit iswas offset by a reserve of $0.9 million and a U.S. deferred tax liability relating to the VitalStream acquisition.
 
The reduction in valuation allowance was due to the existence of sufficient positive evidence as of December 31, 2007 to indicate that our net operating losses in the U.K. would more likely than not be realized in the future. The evidence primarily consisted of the results of prior performance in the U.K. and theour expectation of future performance based on historical results. We will continue to assess the recoverability of U.S. and other deferred tax assets, and whether the valuation allowance should be reduced relative to the U.S. and other deferred tax assets outside the U.K. We may recognize deferred tax assets in future periods when they are estimated to be realizable, such as establishing expected continuing profitability of us or certain of our foreign subsidiaries.
 
Based on analysis of our projected future U.S. pre-tax income, we maydo not have sufficient positive evidence within the next 12 months to release the valuation allowance currently recorded against our U.S. deferred tax assets. Currently, while we cannot guarantee that our expectations of future positive income will occur, we may recognize an income tax benefit derived from total U.S. deferred tax assets upon the release of the valuation allowance. This potential release of the valuation allowance could be affected by an ownership change as defined by Section 382 of the Internal Revenue Code which might limit the future use of our U.S. net operating loss carryovers and thus reduce the potential benefit of such losses in the future to offset taxable income and reduce cash outflows for income taxes.
 
Liquidity and Capital Resources
 
Cash FlowsLiquidity
We continue to monitor and review our performance and operations in light of global economic conditions. The economic recession in 2008 and 2009 has negatively impacted spending by our customers and potential customers. In addition, the current economic environment may impact the ability of our customers to meet their obligations to us, which could result in delayed collection of accounts receivable and an increase in our provision for doubtful accounts. We monitor all of our investments in marketable securities to ensure, to the extent possible, that instability in liquidity and credit markets does not adversely impact the fair value of these investments. This monitoring resulted in transferring investments in corporate debt securities to money market accounts as the debt securities matured. We do not believe that the instability in the credit markets over the last few years had or will have a material adverse impact on our liquidity or capital resources, although we continue to monitor these markets closely.
We expect to meet our cash requirements in 2010 through a combination of net cash provided by operating activities and existing cash, cash equivalents and short-term investments in marketable securities. This includes a plan to commit $50.0 million in capital expenditures over the next nine to 18 months to grow our data center business in key markets. We may also utilize additional borrowings under our credit agreement, especially for capital expenditures, 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 and the ability to expand and retain our customer base. 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 Years Endedforeseeable future.
We have experienced significant impairments and operational restructurings in recent years, which included substantial changes in our senior management team, streamlining our cost structure, consolidating network access points and terminating non-strategic real estate leases and license arrangements. We have a history of quarterly and annual net losses. During the year ended December 31, 2009, we recorded a net loss of $69.7 million. As of December 31, 2009, our accumulated deficit was $1,036.5 million. Our net loss during the year ended December 31, 2009 included $51.5 million in impairment charges for goodwill and $4.1 million in impairment charges for other acquired intangible assets as well as restructuring charges of $3.2 million and transition costs related to our president and chief executive officer. We also recorded significant similar charges in prior years, including 2008 and 2007. We do not expect to continue to incur any of these charges on a regular basis, but we cannot guarantee that we will not incur other similar charges in the future or that we will be profitable in the future, due in part to the competitive and evolving nature of the industry in which we operate. Also, due to the global economic conditions, we continue to see signs of cautious behavior from our customers. 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. We may not be able to achieve or sustain profitability on a quarterly or annual basis, and our failure to do so would adversely affect our business, including our ability to raise additional funds. 
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Cash Flows
Operating Activities. Net cash provided by operating activities was $37.5 million during the year ended December 31, 2009. Our net loss, after adjustments for non-cash items, generated cash from operations of $28.8 million, while changes in operating assets and liabilities generated cash from operations of $8.7 million. We anticipate continuing to generate cash flows from our results of operations, or net loss adjusted for non-cash items. We also expect to use cash flows from operating activities and cash on hand to fund a significant portion of our capital expenditures and other requirements and to meet our other commitments and obligations, including outstanding debt, as they become due.

The primary non-cash adjustment during the year ended December 31, 2009 was $55.6 million for impairment of goodwill and other intangible assets further discussed above in the section “Critical Accounting Policies and Estimates—Goodwill and Other Intangible Assets” and “Results of Operations—Other Operating Costs and Expenses—Impairments and Restructuring—Impairments.” Non-cash adjustments also included $32.5 million for depreciation and amortization, which included the effects of the expansion of our network and data center facilities, and $5.6 million for stock-based compensation, which we discuss above in “Results of Operations—Other Operating Costs and Expenses—Compensation.” Changes in operating assets and liabilities had a net favorable impact on cash provided by operations, particularly from accounts receivable. Net accounts receivable decreased $7.2 million, primarily as a result of our focus on credit and collections and a continued focus on mitigating default risk in our customer base. Quarterly days sales outstanding at December 31, 2009 decreased to 27 days from 40 days at December 31, 2008. Days sales outstanding are measured as of a point in time and may fluctuate based on a number of factors, including, among other things, changes in revenues, cash collections, allowance for doubtful accounts and the amount of revenues billed in advance. Inventory, prepaid expenses, deposits and other assets decreased $2.2 million from December 31, 2008 2007to December 31, 2009, primarily from amortization of annual prepaid insurance premiums and 2006lower prepaid colocation expenses at our partner sites as we concentrate on selling into company-controlled facilities. Accrued liabilities increased $1.4 million, mainly due to the accrual of $2.9 million representing a portion of targeted payments for annual performance bonuses and associated payroll taxes during the year ended December 31, 2009. We did not accrue any amounts for annual performance bonuses during the year ended December 31, 2008 following our compensation committee’s determination not to award employee bonuses given that we did not meet established performance goals. The increase in the annual performance bonus accrual and associated payroll taxes was partially offset by lower professional fees and commissions. Accounts payable decreased $2.4 million from December 31, 2008 to December 31, 2009, representing a use of cash.

          Net Cash from Operating Activities. Net cash provided by operating activities was $38.0 million forduring the year ended December 31, 2008. Our net loss, adjustedafter adjustments for non-cash items, generated cash from operations of $41.7 million while changes in operating assets and liabilities represented a use of cash from operations of $3.8 million. We anticipate continuing to generate cash flows from our results of operations, or net (loss) income adjusted for non-cash items, and manage changes in operating assets and liabilities towards a net $0 change in subsequent periods. We also expect to use cash flows from operating activities to fund a portion of our capital expenditures and other requirements and to meet our other commitments and obligations, including outstanding debt, as they become due.

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The primary non-cash adjustment induring the year ended December 31, 2008 was $102.3 million for impairment of goodwill and other intangible assets further discussed above in the section “Results of Operations—Other Operating Costs and Expenses—Goodwill Impairment.Impairments and Restructuring—Impairments.” We also had a non-cash adjustment of $28.7 million for depreciation and amortization, which included the amortizable intangible assets acquired through the VitalStream acquisition of VitalStream in 2007 and the expansion of our P-NAP and data center facilities throughout 2007 and 2008. Non-cash adjustments in 2008 also included $7.5 million for stock-based compensation expense and $5.1 million for the provision for doubtful accounts, both of which arewe further discusseddiscuss above in the section “Results of Operations—Other Operating Expenses.Costs and Expenses—Compensation” and “—General and Administrative, respectively. The changes in operating assets and liabilities included increases in inventory, prepaid expenses, deposits and other assets of $2.9 million, mostly due to increases in prepaid colocation setup costs and prepaid rent, as well as two initial deposits required by real estate leases. We had a decrease in accrued liabilities of $1.4 million given that we did not accrue any amounts for bonuses forduring the year ended December 31, 2008, which is discussed above in the section “Results of Operations—Other Operating Expenses.”2008. We also had a net decrease in accrued restructuring of $1.1 million due primarily to scheduled cash payments during the year ended December 31, 2008. These changes were partially offset by a decrease in accounts receivable of $2.4 million. Accounts receivable as of December 31, 2007 reflected some collection delays on certain larger, high credit quality customers that tended to pay over longer terms and an increase from the migration of legacy VitalStream and other customers to our billing and systems platforms. Quarterly days sales outstanding at December 31, 2008 decreased to 40 days from 53 days at December 31, 2007. The 53 days sales outstanding at December 31, 2007 was unusually high and related to an increased accounts receivable, balance, discussed below.
 
Net cash provided by operating activities was $27.5 million forduring the year ended December 31, 2007. Our net loss, adjustedafter adjustments 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 during the year ended December 31, 2007 was $26.4 million for depreciation and amortization, which included the amortizable intangible assets acquired through the VitalStream acquisition of VitalStream in February 2007 and the expansion of our P-NAP and data center facilities throughout 2007. Non-cash adjustments also included $8.7 million for stock-based compensation expense, which is discussed above in “—Results of Operations.”compensation. The change in working capital included an increase in accounts receivable of $15.8 million. The increase in accounts receivable resulted in quarterly days sales outstanding at December 31, 2007 increasing to 53 days from 38 days as of December 31, 2006. This increase in accounts receivable was 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 also experienced collection delays on certain larger, high credit quality customers that tended to pay over longer terms and in conjunction with the migration of some former VitalStream and other customers to our billing and systems platforms. The change in working capital also included 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 was also caused by the implementation near year-end of a new telecommunications expense management system for our direct costs.
 
Net cash provided by operating activities was $29.4 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 $25.2 million offset by changes in working capital items of $0.5 million. The changes in working capital items included 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 was primarily related to the timing of payments with the 2006 balance being consistent with our normal operating expenses and payment terms.- -

 
          Net Cash from Investing Activities. Net cash used in investing activities forduring the year ended December 31, 2009 was $9.9 million, primarily due to capital expenditures of $17.3 million, partially offset by proceeds from the maturities of investments in marketable securities of $7.4 million. Our capital expenditures related to the continued expansion and upgrade of our data center facilities and network infrastructure.
Net cash used in investing activities during the year ended December 31, 2008 was $41.7 million, primarily due to capital expenditures of $51.2 million, partially offset by net proceeds from the maturities and sales of short-term investments in marketable securities of $5.2 million and a decrease in restricted cash of $4.1 million. OurSimilar to 2009, our capital expenditures were principally for the continued expansion of our data center facilities, CDN infrastructure and upgrading our P-NAP facilities. Restricted cash decreased due to the maturity of certificates of deposit that were securinghad secured certain letters of credit, which we replaced. These letters of credit are now secured by our revolving credit facility.
 
Net cash used in investing activities forduring 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 below in “Liquidity—“Capital Resources—Credit Agreement.” Investing activities forduring the year ended December 31, 2007 also included purchases and sales of auction rate securities.

 
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Financing Activities. Net cash used in financing activities during the year ended December 31, 2009 was $0.6 million, primarily due to payments on capital leases of $0.3 million and $0.2 million for the reacquisition of shares of treasury stock as payment of taxes due from employees for stock-based compensation, net of proceeds from employee ESPP purchases and option exercises. We also repaid and re-borrowed a cumulative $78.5 million under our credit facility during the year ended December 31, 2009 to optimize liquidity and net interest income and expense; however, at no one time during the year did we borrow more than $20.0 million. As a result of these activities, we had balances of $20.0 million on our revolving credit facility and $3.2 million in capital lease obligations as of December 31, 2009. We may also borrow additional funds under our credit agreement if we consider it economically favorable to do so. 
 
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 from Financing Activities. Net cash used in financing activities forduring the year ended December 31, 2008 was $0.8 million, primarily for payments on capital leases of $0.8 million. We also repaid and re-borrowed $20.0 million onunder our credit facility to best manageoptimize liquidity and net interest income and expense. We entered into the second amendment to our credit agreement on September 30, 2008. This amendment, among other things, converted our term loan balance into a loan outstanding under the revolving line of credit facility. See the discussion below in “Liquidity—Credit Agreement,” for more details of our credit agreement. As a result of these activities,At December 31, 2008, we had balances of $20.0 million in notes payableoutstanding on our credit facility and $3.5 million in capital lease obligations as of December 31, 2008 with $0.3 million in the capital leases scheduled as due within the next 12 months. We may also utilize additional borrowings under our credit agreement if we consider it economically favorable to do so. 
 
Net cash provided by financing activities forduring 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 stockstock-based 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 athe note payable were a result of entering into theour new credit agreementfacility on September 14, 2007. As a result of these activities, we had balances of $19.8 million
Capital Resources

Short-Term Investments in a note payable (net of discount)Marketable Securities and $1.3 millionOther Related Assets. Short-term investments in capital lease obligations as ofmarketable securities and other related assets at December 31, 2007.
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 exercise2009 consisted 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.
Liquidity
We are continuing to monitor and review our performance and operations in light of the continuing negative global economic conditions. In particular, 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. A prolonged recession, if it were to occur, may have an adverse impact on spending by the businesses we serve, resulting in a decline in demand for our products and services. In addition, deteriorating economic conditions may make it more difficult for these businesses to meet their obligations to us, which could result in delayed collection of accounts receivable and an increase in our provision for doubtful accounts. To date, we have increased our provision for doubtful accounts, in part after taking into consideration current economic conditions, as discussed above. Furthermore, current instability in the market for our auction rate securities has caused us to lower our estimate ofand corresponding rights, described below. The carrying value (which approximates fair value for these securities, which, along with our ARS Rights described below in “—Non-Current Investments,” represented 19% of our total financial assets measured at fair value. Although we do not believe that this reduction has or will have a material adverse effect on our liquidity or capital resources, we are continuing to monitor these markets closely. We are similarly monitoring all of our short-term investments to ensure that instability in liquidity and credit markets do not adversely impact the fair value of these investments. This includes transferring investments in corporate debt securities to money market accounts and U.S. Treasury bills as the debt securities mature.
We expect to meet our cash requirements in 2009 through a combination of net cash provided by operating activities, existing cash, cash equivalents and short-term investments in marketable securities. We may also utilize additional borrowings under our credit agreement, especially for capital expenditures, particularly if we consider it economically favorable to do so. We may incur capital expenditures for the expansion of our P-NAP and data center facilities. 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.
We have experienced significant impairments and operational restructurings in recent years, which include substantial changes in our senior management team, streamlining our cost structure, consolidating network access points and 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, 2008. For the years ended December 31, 2008 and 2007, we recorded net losses of $104.8 million and $5.6 million, respectively. As of December 31, 2008, our accumulated deficit was $966.8 million. Our net loss for the year ended December 31, 2008 included $99.7 million in impairment charges for goodwill and $2.6 million in impairment charges for other intangible assets and approximately $1.0 million for adjustments to our restructuring liability. Our net loss for the year ended December 31, 2007 included $13.0 million in charges for restructuring, asset impairment, write-off of an investment and acquired in-process research and development. We do not expect to incur any of these charges on a regular basis, but we cannot guarantee that we will not incur other similar charges in the future or that we will be profitable in the future, due in part to the competitive and evolving nature of the industry in which we operate. Also, we are currently in a time of severe deteriorating economic conditions and have seen signs of slowdowns and cautious behavior from our customers. 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. We may not be able to sustain or increase profitability on a quarterly or annual basis, and our failure to do so would adversely affect our business, including our ability to raise additional funds. 

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Short-Term Investments. Short-term investments primarily consist of high credit quality corporate debt securities, U.S. Treasury bills and commercial paper. At December 31, 2008, our balance in short-term investments was $7.2 million. All short-term investments have original maturities greater than 90 days but less than one year, are classified as available for sale and are reported at fair value.
          Non-Current Investments. Non-current investments include, in part, auction rate securities whose underlying assets are state-issued student and educational loans that are substantially backed by the federal government. At December 31, 2008, the carrying valuevalue) of our auction rate securities was $6.4 million, all of which carried AAA/Aaa ratings as of December 31, 2008.2009 was $6.5 million compared to a par value of $7.0 million. 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 seven, 28 or 35 days. TheAuction rate securities have historically tradedgenerally trade at par value and are callable at par value 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. 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 or A3 ratings as of December 31, 2009. Although these securities are issued and rated as long-term bonds, they have historically been priced and traded as short-term instrumentsinvestments because of the liquidity provided through the interest rate resets. 
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While we continue to earn and accrue interest on our auction rate securities at contractual rates, these investments arehave not currentlybeen actively trading since early 2008 when auctions failed to attract sufficient buyers and, thereforeas a result, the auction rate securities lost their liquidity. Our auction rate securities do not currently have a readily determinableobservable market value. Accordingly, thevalue and their estimated fair value of auction rate securities no longer approximates par value. Due toAccordingly, we changed the uncertainty as to whenclassification of the auction rate securities markets will improve, we have classified our auction rate securities asto non-current investments as of December 31, 2008, versus short-term investments as of December 31, 2007.investments. In the meantime, we believe we have sufficient liquidity through our cash balances, other short-term investments and available credit.
In OctoberNovember 2008, we receivedaccepted an offer providing us with rights, or ARS Rights, from one of our investment providers to sell at par value auction rate securities originally purchased from the investment provider ($7.2 million)7.0 million as of December 31, 2009) at anytimeany time during a two-year period beginning June 20,30, 2010. On November 14, 2008,The carrying value (which approximates fair value) of our ARS Rights as of December 31, 2009 was $0.5 million. In conjunction with our acceptance of the ARS Rights, we acceptedchanged the offer andinvestment classification of our auction rate securities from available for sale to trading. We intend to exercise the ARS Rights within the next 12 months if wethey are otherwise unablenot redeemed by the issuers or sold to recover par value onthird parties and, therefore, have reclassified both the underlying securities at an earlier date. Atand the ARS Rights from non-current assets to current assets as of December 31, 2008, the2009. The combined carrying value (which approximates fair value) of our auction rate securities and the ARS Rights was $0.6 million.$7.0 million as of December 31, 2009 and represented 21% or our total financial assets measured at fair value. The investment classification of the underlying securities and the ARS Rights continues to be trading. During the year ended December 31, 2009, $0.2 million of our auction rate securities were called by the issuers at par value.
 
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 the administrative agent, or the Credit Agreement. Four of our subsidiaries, VitalStream Holdings, Inc.; VitalStream, Inc.; PlayStream, Inc.; and VitalStream Advertising Services, Inc., are guarantors of the Credit Agreement.agent. We subsequently amended the Credit Agreement on May 14, 2008 and September 30, 2008, as discussed below.
The Credit Agreement replaced our prior credit agreement between us 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.
The Credit Agreement originally provided for a four-year revolving credit facility, or Revolving Credit Facility, in the aggregate amount of up to $5.0 million, which included a $5.0 million sub-limit for letters of credit. With the prior approval of the administrative agent, we could 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 was 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 were 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 originally provided for a term loan in the amount of $30.0 million, or the Term Loan. 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 credit agreement. 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 was a tiered LIBOR-based rate that depended on our 12-month trailing EBITDA. As of December 31, 2007, the interest rate was 7.075%.
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 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.

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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 “Interest expense” within the “Non-operating (income) expense” section of the accompanying 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, as discussed in note 3 of the accompanying consolidated financial statements.
We subsequently amended the Credit Agreement on May 14, 2008 and September 30, 2008, or the Amendment (the(we refer to the Credit Agreement along with the Amendment is referred to as the Amended Credit Agreement). The Amendment modified the originalAmended Credit Amendment as follows:
converted the outstanding Term Loan balance of $20.0 million as of September 30, 2008 into a loan under the Revolving Credit Facility;
terminated the Term Loan under the Credit Agreement;
increased the total Revolving Credit Commitment (as defined in the Amended Credit Agreement) from $5.0 million to $35.0 million;
increased the Letter of Credit Sublimit (as defined in the Amended Credit Agreement) from $5.0 million to $7.0 million;
provided us and Bank of America with an option to enter into a lease financing agreement not to exceed $10.0 million; and
modified certain covenants and definitions.
includes a revolving credit facility of $35.0 million with a letter of credit sublimit of $7.0 million and an option to enter into a lease financing agreement not to exceed $10.0 million. The revolving credit facility is available to finance working capital, capital expenditures and other general corporate purposes.
 
Because the Amendment caused the Revolving Credit Facility to have substantially different terms than the Term Loan, it is considered an extinguishment of debt. We recorded a loss on extinguishment of debt in the amount of $0.2 million during the year ended December 31, 2008. The loss on extinguishment of debt is included in the caption “Interest expense” within the “Non-operating (income) expense” section of the accompanying consolidated statements of operations. We also incurred other costs of less than $0.1 million in connection with the Amendment, which we recorded as debt issue costs and will amortize over the remaining term of the Amended Credit Agreement.
The interest rate on the Amended Credit Agreement asAs of December 31, 2008 was 3.0% and is based on Bank of America’s prime rate less a 0.25% margin. The2009, the revolving credit facility had an outstanding principal amount of $20.0 million is due September 14, 2011. As of December 31, 2008, we had2011, a total of $4.2$3.6 million of letters of credit issued and $10.8$11.4 million in borrowing capacitycapacity. The interest rate on the Revolving Credit Facility.revolving credit facility as of December 31, 2009 was 3.25% and was based on our bank’s prime rate. In January 2009,2010, we repaid $19.8$19.5 million of the outstanding balance.
 
The Amended Credit Agreement includes customary representations, warranties, negative and affirmative covenants (including certain financial covenants relating to a net funded debt to EBITDA ratio, a debt service coverage ratio and a minimum liquidity requirement, as well as a prohibition against paying dividends, limitations on unfunded capital expenditures of $55.0$25.0 million, for 2008 and $25.0 millionplus prior-year carryover, or an amount to be mutually agreed upon for 2009 through 2011),2010 and 2011, customary events of default and certain default provisions that could result in acceleration of all outstanding amounts due under the Amended Credit Agreement.Agreement). As of December 31, 2008,2009, we were in compliance with the various covenants in the Amended Credit Agreement.
 
Our obligations under the Amended 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.
 
Capital Leases. Our future minimum lease payments on remaining capital lease obligations at December 31, 2008 totaled $9.42009 were $3.2 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 therethe agreements are modifications to the terms of those agreements.modified. Service 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 inprovided by 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.

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The following table summarizes our credit obligations and future contractual commitments as of December 31, 20082009 (in thousands):
 
    Payments Due by Period 
   Total  Less than
1 year
  1- 3
Years
  3-5
Years
  More
than 5
years
 
                     
Revolving credit facility(1)
 $21,109  $650  $20,459  $  $ 
Capital lease obligations  8,617   562   1,135   1,180   5,740 
Operating lease commitments  210,811   29,805   59,080   51,420   70,506 
Service commitments  18,474   9,003   9,471       
                     
  $259,011  $40,020  $90,145  $52,600  $76,246 
  
    Payments Due by Period
 
  Total  
Less than
1 year
  
1- 3
Years
  
3-5
Years
  
More
than 5
years
 
                
Revolving line of credit(1)
 $21,623  $600  $21,023  $  $ 
Capital lease obligations  9,441   822   1,130   1,150   6,339 
Operating lease commitments  216,125   25,624   51,898   51,721   86,882 
Service commitments  27,085   20,866   6,219       
                     
  $274,274  $47,912  $80,270  $52,871  $93,221 

____________________
(1)
(1)
As noted above in the section captioned ““—Credit Agreement,” the interest rate on the Revolving Credit Facilityrevolving credit facility is based on our bank’s prime rate less a 0.25% margin.rate. As of December 31, 2008,2009, the interest rate was 3.0%3.25% and the projected interest included in the debt payments above incorporates this rate. We subsequently paid $19.8$19.5 million on the Revolving Credit Facilityrevolving credit facility in January 20092010 which would significantly lower the projected interest included above. We plan to borrow on the Revolving Credit Facilityrevolving credit facility from time-to-time, particularly if we consider it economically favorable to do so.
 
          Common and Preferred Stock. Our Certificate of Incorporation designates 60 million shares of common stock and 20 million shares of preferred stock.
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-10 reverse stock split and amended our Certificate of Incorporation to reduce our authorized shares of common stock 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.
At the time of the reverse stock split, the number of authorized shares of preferred stock was not similarly reduced. We intended the reverse stock split to reduce the authorized number of shares of preferred stock. Accordingly, effective June 19, 2008, we reduced the number of authorized shares of preferred stock from 200 million shares to 20 million shares. Of the resulting 20 million authorized shares of preferred stock, 19.5 million shares are blank check preferred stock, the terms and conditions of which our board of directors may designate. Our board of directors previously designated the remaining 0.5 million shares of preferred stock as series B preferred stock pursuant to a certificate of designation of rights, preferences and privileges on April 11, 2007. As of December 31, 2008, no shares of preferred stock were issued or outstanding.
In June 2006, our stockholders approved a repricing of 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. We implemented the repricing 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 our 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 one-for-two; and
Each new option had a three-year vesting period, vesting in equal monthly installments over three years, so long as the grantee continued to be a full-time employee and a 10-year term.
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.

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Short-Term Investments in Marketable Securities
Short-term investments primarily consist of high credit quality corporate debt securities, U.S. Treasury bills and commercial paper. All of our investments have original maturities greater than 90 days but less than one year. 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 that we have 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 $0.1 million per year.
Auction Rate Securities and ARS Rights
 
Auction rate securities are variable rate bonds tied to short-term interest rates with maturities on the faceAs discussed above under “Management’s Discussion and Analysis of the securitiesFinancial Condition and Results of Operations—Liquidity and Capital Resources—Capital Resources—Short-Term Investments in excess of 90 daysMarketable Securities and have interest rate resets through a modified Dutch auction, at predetermined short-term intervals, usually every seven, 28 or 35 days. They have historically traded at par value and are callable at par value 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 have historically been priced and traded as short-term instruments because of the liquidity provided through the interest rate resets. 
While we continue to earn and accrue interest on our auction rate securities at contractual rates, these investments are not currently trading and therefore do not currently have a readily determinable market value. Accordingly, the estimated fair value of auction rate securities no longer approximates par value. Due to the uncertainty as to when the auction rate securities markets will improve, we have classified our auction rate securities as non-current investments as of December 31, 2008, versus short-term investments as of December 31, 2007. Our accompanying consolidated statement of operations for the year ended December 31, 2008 also includes a net reduction in fair value of $0.8 million related to these investments. In the meantime, we believe we have sufficient liquidity through our cash balances, other short-term investments and available credit.
In October 2008, we received and subsequently accepted an offer providing us with rights, or ARS Rights, from one of our investment providers to sell at par value auction rate securities originally purchased from the investment provider ($7.2 million) at anytime during a two-year period beginning June 30, 2010. As described in note 6, we recorded the ARS Rights as a free standing asset separate from the auction rate securities. In conjunction with our acceptance of the ARS Rights, we elected to measure the ARS Rights at fair value under SFAS No. 159. Also, in conjunction with our acceptance of the ARS Rights, we changed the investment classification of our auction rate securities to trading from available for sale. We expect that future changes in the fair value of the ARS Rights will approximate fair value movements in the related auction rate securities.
As of December 31, 2008,Other Related Assets,” the estimated fair values of our auction rate securities and the ARS Rights were $6.4$6.5 million and $0.6$0.5 million, respectively.respectively, as of December 31, 2009. We estimate that a change in the effective yield of 100 basis points in the auction rate securities and the ARS Rights would change our interest income by $0.1 million per year. During the year ended December 31, 2009, a small portion of our auction rate securities, $0.2 million, were called by the issuer at par value. In addition, we intend to exercise the ARS Rights within the next 12 months if they are not redeemed by the issuers or sold to third parties.
 
Other Investments
 
We have invested $4.1 million in Internap Japan, oura joint venture with NTT-ME Corporation and NTT Holdings. We account for this investment using the equity-method and to date we have recognized $3.1$3.0 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 a 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. As of December 31, 2008,2009, our long-term debt consisted of a Revolving Credit Facilityrevolving credit facility with an outstanding principal balance of $20.0 million withand an interest rate of 3.0% and is3.25%, based on our bank’s prime rate less a 0.25% margin.rate. The outstanding principal amount of $20.0 million is due September 14, 2011. We estimate that a change in the interest rate of 100 basis points would change our interest expense and payments by $0.2 million per year, assuming we maintain a comparable amount of outstanding principal throughout the year. We subsequently paid $19.8$19.5 million on the Revolving Credit Facilityrevolving credit facility in January 20092010 and plan to borrow on the Revolving Credit Facilityrevolving credit facility from time-to-time particularly, if we consider it economically favorable to do so.
 
Foreign Currency Risk
 
Substantially all of our revenue is currently in U.S. dollars and from customers primarily in the U.S. WeAccordingly, we do not believe therefore, that we currently have any significant direct foreign currency exchange rate risk.

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Our accompanying consolidated financial statements, financial statement schedule and the report of our independent registered public accounting firm appear in Part IV of this Form 10-K. Our report on internal controls over financial reporting appearappears in Item 9A of this Form 10-K.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
None.
 
 
Evaluation of Disclosure Controls and Procedures
 
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized and reported withwithin the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily has applied its judgment in assessing the costs and benefits of such controls and procedures, which, by nature, can provide only reasonable assurance regarding management’s control objectives. Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls can prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. There are inherent limitations in all control systems, including the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error, mistake, management override or collusion. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events. While our disclosure controls and procedures are designed to be effective under circumstances where they should reasonably be expected to operate effectively, we can offer no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in any control system, misstatements due to error or fraud may occur and may not be detected.
 
Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act. Based on this evaluation, our chief executive officer and our chief financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2008 to provide reasonable assurance.2009.
- 41 - -

 
Report of Management 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). Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO.
 
Based on our evaluation under the framework in Internal Control — Integrated Framework issued by COSO, our management concluded that our internal control over financial reporting was effective as of December 31, 2008.2009. The effectiveness of our internal control over financial reporting as of December 31, 20082009 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.
 
Changes in Internal Control over Financial Reporting

During the quarter ended December 31, 2008, the only changesThere was no change in our internal control over financial reporting that haveoccurred during the quarter ended December 31, 2009 that has materially affected, or arethat is reasonably likely to materially affect, our internal control over financial reporting are discussed below. These changes include enhancing our existing controls for the analysis of requests for sales adjustments, which include but are not limited to, the following additional processes and controls:reporting.

A single, common logging system, or portal, 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, and
A review by the appropriate designated finance management personnel of the accounting estimates developed from the relevant, sufficient, and reliable data collected above.

The portal provides management with a more complete repository of customer issues for assessing sales credits’ impact on revenues. Since the second quarter of 2008, designated management has met weekly to review and analyze the information collected by the portal, along with other sources of related information, to resolve all customer disputes and requests for credits. The results of these weekly meetings assist finance personnel in determining appropriate accounting estimates by providing more timely and pertinent information. In addition, we continued to develop an automated process to monitor customer usage patterns as a means to better manage customer billing disputes. In the fourth quarter of 2008, we completed our testing of these processes and controls, concluding that we have remediated the material weakness in our analysis of requests for sales adjustments.
 
None.

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PART III
 
 
InformationWe will include information regarding our directors and executive officers will be included in our definitive proxy statement for our 20092010 annual meeting of stockholders, which we will be filedfile within 120 days after the end of the fiscal year covered by this report, andreport. This information is incorporated in this Form 10-K by reference.
 
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.employees. 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.
 
 
The information under the captions, “Executive Officers and Compensation” and “Compensation Committee Report” contained in our definitive proxy statement for our 20092010 annual meeting of stockholders, which we will be filedfile within 120 days after the end of the fiscal year covered by this report, is hereby incorporated in this Form 10-K by reference.
 
 
The information under the caption “Security Ownership of Certain Beneficial Owners and Management” contained in our definitive proxy statement for our 20092010 annual meeting of stockholders, which we will be filedfile within 120 days after the end of the fiscal year covered by this report, is hereby incorporated in this Form 10-K by reference.
 
 
The information under the caption “Certain Relationships and Related Transactions” contained in our definitive proxy statement for our 20092010 annual meeting of stockholders, which we will be filedfile within 120 days after the end of the fiscal year covered by this report, hereby is incorporated in this Form 10-K by reference.
 
 
The information under the caption “Ratification of Appointment of Independent Registered Public Accounting Firm” in our definitive proxy statement for our 20092010 annual meeting of stockholders, which we will be filedfile within 120 days after the end of the fiscal year covered by this report, is hereby incorporated in this Form 10-K by reference.

- 5442 - -

 
 
(a)Documents filed as a part of the report:

(1)Consolidated Financial Statements.
 Item 15(a)(1). Financial Statements.  The following consolidated financial statements of the Company and its subsidiaries are filed herewith:
   
  Page
 Report of Independent Registered Public Accounting FirmF-2
 Consolidated Statements of OperationsF-3
 Consolidated Balance SheetsF-4
 Consolidated StatementStatements of Stockholders’ Equity and Comprehensive LossIncome (Loss)F-5
 Consolidated Statements of Cash FlowsF-6
 Notes to Consolidated Financial StatementsF-8

(2)Financial Statement Schedule.F-7
 
Item 15(a)(2). Financial Statement Schedules. The following financial statement schedule of the Company and its subsidiaries is filed herewith:
   
  Page
Schedule II - Valuation and Qualifying Accounts for the Three Years Ended December 31, 20082009S-1

Item 15(a)(3). Exhibits. The following exhibits are filed as part of this report:
Exhibit
Number
Description
   
3.1*(3)Index to Exhibits.Certificate of Elimination of the Series B Preferred Stock.

   
Exhibit 3.2* 
NumberDescription
2.1Agreement 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).
3.1Restated 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).Company.
 
3.2Certificate 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).
   
3.3Certificate of Amendment of Certificate of Incorporation of the Company dated June 19, 2008 (incorporated by reference herein to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008, filed on August 11, 2008).
3.4 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).
   
3.5Certificate 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).
 
4.14.1* Amendment No. 1 to Preferred Stock Rights Agreement, dated as of April 11, 2007,December 31, 2009, between the Company 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).Agent.
   
10.1 Amended and Restated Internap Network Services Corporation 1998 Stock Option/Stock Issuance Plan.* Plan (incorporated by reference herein to Exhibit 10.1 to the Company’s Annual Report on Form 10-K, filed March 13, 2009).+
   
10.2 Internap Network Services Corporation 1999 Non-Employee Directors’ Stock Option Plan.* Plan (incorporated by reference herein to Exhibit 10.2 to the Company’s Annual Report on Form 10-K, filed March 13, 2009).+
   
10.3 First Amendment to the Internap Network Services Corporation 1999 Non-Employee Directors’ Stock Option Plan.* +
10.4Internap Network Services Corporation 1999 Employee Stock Purchase Plan (incorporated herein by reference herein to Exhibit 10.410.3 to the Company’s Registration StatementAnnual Report on Form S-1, File No. 333-84035 dated July 29, 1999)10-K, filed March 13, 2009).+
   
10.510.4   Amended and Restated Internap Network Services Corporation 1999 Stock Incentive Plan for Non-Officers.* Non-Officers (incorporated by reference herein to Exhibit 10.5 to the Company’s Annual Report on Form 10-K, filed March 13, 2009).+

- 55 - -


   
10.610.5   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).+
   
10.710.6   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 dated July 29, 1999).+
   
10.810.7   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).+
   
10.910.8   Internap Network Services Corporation 2002 Stock Compensation Plan.* Plan (incorporated by reference herein to Exhibit 10.9 to the Company’s Annual Report on Form 10-K, filed March 13, 2009).+
   
10.1010.9   Form of Nonstatutory Stock Option Agreement under the Internap Network Services Corporation 2002 Stock Compensation Plan.* +
10.11Form of Employee Confidentiality, Nonraiding and Noncompetition Agreement used between Company and its Executive OfficersPlan (incorporated herein by reference herein to Exhibit 10.1110.10 to the Company’s Registration StatementAnnual Report on Form S-1, File No. 333-84035 dated July 29, 1999)10-K, filed March 13, 2009).+
   
10.1210.10   Amended and Restated 2005 Incentive Stock Plan, dated March 15, 2006 (incorporated herein by reference to Appendix B to the Company’s Definitive Proxy Statement, filed May 8, 2008).+
- 43 - -

10.1310.11 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).+
   
 10.1410.12 First Amendment to Employment Agreement between James P. DeBlasio and the Company 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).+
   
 10.1510.13 Amended and Restated 2004 Internap Network Services Corporation Employee Stock Purchase Plan, dated January 11, 2006 (incorporated herein 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).+
   
 10.1610.14* 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).Plan.+
   
 10.1710.15* 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’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, filed on August 8, 2006).Plan.+
   
10.1810.16 VitalStream Holdings, Inc. 2001 Stock Incentive Plan (Third Amended and Restated) (incorporated herein 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).+
   
10.1910.17 General Release Agreement dated as of April 9, 2008 between the Company and Vincent Molinaro (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on April 18, 2008).+
   
10.202007 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).+
 
10.21Amendment 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).+
10.2210.18 2008 Executive Bonus Award Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed March 24, 2008).+
   
10.2310.19 2008 Long-Term Incentive Plan (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed March 24, 2008).+
   
10.2410.20Form of Indemnity Agreement for directors and officers of the Company (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed May 29, 2009).+
10.212009 Short Term Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed August 21, 2009).+
10.22 Credit Agreement dated as of September 14, 2007 by and among the Company, 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 herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on September 19, 2007).

- 56 - -


   
10.2510.23 Pledge and Security Agreement dated as of September 14, 2007 among the Company, and certain of its Subsidiaries party thereto from time to time, as Grantors, and Bank of America, N.A., as Administrative Agent (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed on September 19, 2007).
   
10.2610.24 Intellectual Property Security Agreement dated as of September 14, 2007 among the Company, and certain of its Subsidiaries party thereto from time to time, as Grantors, and Bank of America, N.A., as Administrative Agent (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed on September 19, 2007).
   
10.2710.25 Amendment No. 1 to Credit Agreement entered into as of May 14, 2008 by and among Bank of America, N.A. as Administrative Agent, Swing Line Lender, L/C Issuer and sole Lender, the Company and the Subsidiaries of the Company party thereto as Guarantors (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed May 16, 2008).
   
10.2810.26 Amendment No. 2 dated September 30, 2008 to Credit Agreement, dated as of September 14, 2007, by and among the Company, 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 herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed October 6, 2008).
   
10.2910.27 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).+
   
10.30Joinder 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).+
 
10.31Joinder 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).+
10.3210.28 Joinder Agreement to the Employment Security Plan executed by George E. Kilguss (incorporated herein by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K, filed on March 28, 2008).+
   
10.3310.29 Joinder Agreement to the Employment Security Plan executed by Tim Sullivan. Sullivan (incorporated herein by reference to Exhibit 10.28 to the Company’s Annual Report on Form 10-K, filed March 13, 2009). +
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10.30Joinder Agreement to the Employment Security Plan executed by Randal R. Thompson (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q, filed May 7, 2009).+
   
10.3410.31 Offer Letter between the Company and Eric Cooney, dated January 16, 2009 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on February 2, 2009).+
   
10.3510.32 Joinder Agreement to the Employment Security Plan executed by Eric Cooney (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed on February 2, 2009).+
   
10.3610.33 Agreement between the Company and James P. DeBlasio, dated January 29, 2009 (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed on February 2, 2009). +
   
21.110.34 List of SubsidiariesGeneral Release, Separation and Settlement Agreement between the Company and Tim Sullivan, dated August 19, 2009 (incorporated herein by reference to Exhibit 21.110.1 to the Company’s Current Report on Form 10-K,8-K, filed on March 31, 2008)August 28, 2009).+
10.352010 Short Term Incentive Plan.+
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,by J. Eric Cooney, President, Chief Executive Officer and Director the Company.
   
31.2* Rule 13a-14(a)/15d-14(a) Certification, executed by George E. Kilguss, III, Vice President and Chief Financial Officer of the Company.
   
32.1* Section 1350 Certification, executed by James P. DeBlasio,J. Eric Cooney, President, Chief Executive Officer and Director the Company.
   
32.2* Section 1350 Certification, executed by George E. Kilguss, III, Vice President and Chief Financial Officer of the Company.


*Documents filed herewith.
+Management contractscontract and compensatory plansplan and arrangements required to be filed as exhibits pursuant to Item 15(c) of this Report.arrangement.

 
- 5745 - -

 
 
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 CORPORATION 
Date: March 12, 20092, 2010   
 By:/s/ George E. Kilguss, III 
  George E. Kilguss, III 
  Vice President and Chief Financial Officer 
  (Principal Accounting Officer) 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated:
     
Signature Title Date
     
/s/ James P. DeBlasioJ. Eric Cooney    
James P. DeBlasioJ. Eric Cooney President, Chief Executive Officer and Director (Principal
(Principal Executive Officer)
 March 12, 2009
2, 2010
     
/s/ George E. Kilguss, III    
George E. Kilguss, III 
Vice President and Chief Financial Officer (Principal
(Principal Accounting Officer)
 
March 12, 2009
2, 2010
     
/s/ Eugene EidenbergDaniel C. Stanzione    
Eugene EidenbergDaniel C. Stanzione Non-Executive Chairman and Director 
March 12, 2009
2, 2010
     
/s/ Charles B. Coe    
Charles B. Coe Director March 12, 20092, 2010
     
/s/ William J. HardingEugene Eidenberg    
William J. HardingEugene Eidenberg Director 
March 12, 2009
2, 2010
     
/s/ Patricia L. Higgins    
Patricia L. Higgins Director 
March 12, 2009
2, 2010
     
/s/ Kevin L. Ober    
Kevin L. Ober Director 
March 12, 2009
2, 2010
     
/s/ Gary M. Pfeiffer    
Gary M. Pfeiffer Director 
March 12, 2009
2, 2010
     
/s/ Daniel C. StanzioneMichael A. Ruffolo    
Daniel C. StanzioneMichael A. Ruffolo Director 
March 12, 2009
2, 2010
/s/ Debora J. Wilson
Debora J. WilsonDirectorMarch 2, 2010

 
- 5846 - -

 

Internap Network Services Corporation
Index to Consolidated Financial Statements

Internap Network Services Corporation
Index to Consolidated Financial Statements
   
  Page
Report of Independent Registered Public Accounting Firm F-2
Consolidated Statements of Operations F-3
Consolidated Balance Sheets F-4
Consolidated StatementStatements of Stockholders’ Equity and Comprehensive Income (Loss) Income F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-8F-7
Financial 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 accompanying index present fairly, in all material respects, the financial position of Internap Network Services Corporation and its subsidiaries at December 31, 20082009 and 2007,2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20082009 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 accompanying index 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 maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008,2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). 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 on Internal Control Over Financial Reporting appearing under Item 9A. 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 the 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 Notes 2 and 6 to the consolidated financial statements, in 2008 the Company changed the manner in which it measures fair value of financial assets and liabilities in accordance with SFAS No. 157, Fair Value Measurements and SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. Additionally, 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, Georgia
March 12, 2009
/s/ PricewaterhouseCoopers LLP
Atlanta, Georgia
March 2, 2010

 
F-2

 

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
                  
   Year Ended December 31,  Year Ended December 31, 
 2008  2007  2006  2009  2008  2007 
Revenues:                  
Internet protocol (IP) services $123,268  $122,205  $112,250  $125,548  $139,737  $139,072 
Data center services  109,679   83,632   56,548   130,711   114,252   84,590 
Content delivery network (CDN) services  21,042   17,806    
Other     10,447   12,577         10,428 
                        
Total revenues  253,989   234,090   181,375   256,259   253,989   234,090 
Operating costs and expenses:                        
Direct costs of network, sales and services, exclusive of depreciation and amortization, shown below:                        
IP services  45,782   43,925   40,723   48,055   51,885   50,518 
Data center services  82,009   59,439   46,474   94,961   83,992   59,440 
CDN services  8,086   6,594    
Other     8,436   10,141         8,436 
Direct costs of customer support  18,527   16,217   16,547 
Direct costs of amortization of acquired technologies  6,649   4,165   516   8,349   6,649   4,165 
Direct costs of customer support  16,217   16,547   11,566 
Product development  8,477   6,564   4,475 
Sales and marketing  30,888   31,533   27,173   28,131   30,888   31,533 
General and administrative  30,675   30,251   21,556   44,152   44,235   39,076 
Provision for doubtful accounts  5,083   2,261   548 
Depreciation and amortization  23,865   22,242   15,856   28,282   23,865   22,242 
Goodwill impairment  99,700       
Restructuring and other impairments  1,741   11,349   323 
Acquired in-process research and development     450    
Gain on disposals of property and equipment  (16)  (5)  (113)
Loss (gain) on disposals of property and equipment  26   (16)  (5)
Impairments and restructuring  54,698   101,441   11,349 
Other     50            500 
                        
Total operating costs and expenses  359,156   243,801   179,238   325,181   359,156   243,801 
                        
(Loss) income from operations  (105,167)  (9,711)  2,137 
Loss from operations  (68,922)  (105,167)  (9,711)
                        
Non-operating (income) expense:            
Non-operating expense (income):            
Interest expense  720   1,251   1,150 
Interest income  (1,884)  (3,228)  (2,305)  (150)  (1,884)  (3,228)
Interest expense  1,251   1,150   883 
Write-off of investment     1,178            1,178 
Other, net  388   (37)  (129)  (109)  388   (37)
                        
Total non-operating (income) expense  (245)  (937)  (1,551)
Total non-operating expense (income)  461   (245)  (937)
                        
(Loss) income before income taxes and equity in earnings of equity-method investment  (104,922)  (8,774)  3,688 
Loss before income taxes and equity in (earnings) of equity-method investment  (69,383)  (104,922)  (8,774)
Provision (benefit) for income taxes  174   (3,080)  145   357   174   (3,080)
Equity in earnings of equity-method investment, net of taxes  (283)  (139)  (114)
Equity in (earnings) of equity-method investment, net of taxes  (15)  (283)  (139)
                        
Net (loss) income $(104,813) $(5,555) $3,657 
Net loss $(69,725) $(104,813) $(5,555)
                        
Net (loss) income per share:            
Basic $(2.13) $(0.12) $0.11 
Diluted $(2.13) $(0.12) $0.10 
Weighted average shares used in per share calculations:            
Basic  49,238   46,942   34,748 
Diluted  49,238   46,942   35,739 
Basic and diluted net loss per share $(1.41) $(2.13) $(0.12)
            
Weighted average shares outstanding used in computing basic and diluted net loss per share  49,577   49,238   46,942 
 
The accompanying notes are an integral part of these consolidated financial statements.

 
F-3

 


INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(In thousands, except per share amounts)
 

  December 31, 
  2009  2008 
ASSETS      
Current assets:      
Cash and cash equivalents $73,926  $46,870 
Short-term investments in marketable securities and other related assets  7,000   7,199 
Accounts receivable, net of allowance for doubtful accounts of $1,953 and $2,777, respectively  18,685   28,634 
Inventory  375   381 
Prepaid expenses and other assets  8,768   10,867 
         
Total current assets  108,754   93,951 
         
Property and equipment  91,151   97,350 
Investments and other related assets, $0 and $7,027, respectively, measured at fair value  1,804   8,650 
Intangible assets, net  20,782   33,942 
Goodwill  39,464   90,977 
Deposits and other assets  2,637   2,763 
Deferred tax asset, non-current, net  2,910   2,450 
         
Total assets $267,502  $330,083 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
Current liabilities:        
Accounts payable $17,237  $19,642 
Accrued liabilities  10,192   8,756 
Deferred revenues, current portion  3,817   3,710 
Capital lease obligations, current portion  25   274 
Restructuring liability, current portion  2,819   2,800 
Other current liabilities  125   116 
         
Total current liabilities  34,215   35,298 
         
Revolving credit facility, due after one year  20,000   20,000 
Deferred revenues, less current portion  2,492   2,248 
Capital lease obligations, less current portion  3,217   3,244 
Restructuring liability, less current portion  6,123   6,222 
Deferred rent  16,417   14,114 
Other long-term liabilities  636   762 
         
Total liabilities  83,100   81,888 
         
Commitments and contingencies        
         
Stockholders’ equity:        
Preferred stock, $0.001 par value, 20,000 shares authorized; no shares issued or outstanding      
Common stock, $0.001 par value; 60,000 shares authorized; 50,763 and 50,224 shares outstanding, respectively  51   50 
Additional paid-in capital  1,221,456   1,216,267 
Treasury stock, at cost, 42 and 83 shares, respectively  (127)  (370)
Accumulated deficit  (1,036,548)  (966,823)
Accumulated items of other comprehensive income  (430)  (929)
         
Total stockholders’ equity  184,402   248,195 
         
Total liabilities and stockholders’ equity $267,502  $330,083 
       
  December 31, 
  2008  2007 
ASSETS      
Current assets:      
Cash and cash equivalents $46,870  $52,030 
Short-term investments in marketable securities  7,199   19,569 
Accounts receivable, net of allowance for doubtful accounts of $2,777 and $2,351, respectively  28,634   36,429 
Inventory  381   304 
Prepaid expenses and other assets  10,866   8,464 
Deferred tax asset, current portion  1   479 
         
Total current assets  93,951   117,275 
         
Property and equipment, net  97,350   65,491 
Investments and other related assets, $7,027 and $0, respectively measured at fair value  8,650   1,138 
Intangible assets, net  33,942   43,008 
Goodwill  90,977   190,677 
Restricted cash     4,120 
Deposits and other assets  2,763   2,287 
Deferred tax asset, non-current  2,450   3,014 
         
Total assets $330,083  $427,010 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
Current liabilities:        
Note payable, current portion $  $2,413 
Accounts payable  19,642   19,624 
Accrued liabilities  8,756   10,159 
Deferred revenues, current portion  3,710   4,807 
Capital lease obligations, current portion  274   805 
Restructuring liability, current portion  2,800   2,396 
Other current liabilities  116   108 
         
Total current liabilities  35,298   40,312 
         
Note payable, less current portion  20,000   17,354 
Deferred revenues, less current portion  2,248   2,275 
Capital lease obligations, less current portion  3,244   452 
Restructuring liability, less current portion  6,222   7,697 
Deferred rent  14,114   11,011 
Deferred tax liability     398 
Other long-term liabilities  762   878 
         
Total liabilities  81,888   80,377 
         
Commitments and contingencies        
         
Stockholders’ equity:        
Preferred stock, $0.001 par value, 20,000 shares authorized; no shares issued or outstanding      
Common stock, $0.001 par value; 60,000 shares authorized; 50,224 and 49,759 shares outstanding at December 31, 2008 and 2007, respectively  50   50 
Additional paid-in capital  1,216,267   1,208,191 
Treasury stock, at cost, 83 shares at December 31, 2008  (370)   
Accumulated deficit  (966,823)  (862,010)
Accumulated items of other comprehensive income  (929)  402 
         
Total stockholders’ equity  248,195   346,633 
         
Total liabilities and stockholders’ equity $330,083  $427,010 
 
The accompanying notes are an integral part of these consolidated financial statements.

 
F-4

 
 
INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS) INCOME
For the Three Years Ended December 31, 20082009
(In thousands)
 
 Common Stock    Common
Stock
                     
  Shares   Par Value   Additional Paid-In Capital   Treasury Stock   Deferred Stock Compensation   Accumulated Deficit   Accumulated Items of Comprehensive
Income (Loss)
 
  Total Stockholders’ Equity  
Balance, December 31, 2005  34,168 $34 $970,221 $ $(420)$(860,112)$5 $109,728 
Net income            3,657    3,657 
Change in unrealized gains and losses on investments, net of taxes              80  80 
Foreign currency translation adjustment              235  235 
Total comprehensive income                       3,972 
Reclassification of deferred stock compensation resulting from implementation of SFAS No. 123R      (420)   420       
Stock compensation plans activity and stock-based compensation expense  1,154  2  9,015          9,017 
Exercise of warrants  551    3,808          3,808 
                           Shares   Par Value   Additional Paid-In Capital  Treasury Stock  Accumulated Deficit  Accumulated Items of Comprehensive Income
(Loss)
  Total Stockholders’ Equity 
Balance, December 31, 2006  35,873  36  982,624      (856,455) 320  126,525   35,873  $36  $982,624  $  $(856,455) $320  $126,525 
Net loss            (5,555)   (5,555)              (5,555)     (5,555)
Change in unrealized gains and losses on investments, net of taxes              (25) (25)                 (25)  (25)
Foreign currency translation adjustment              107  107                  107   107 
Total comprehensive loss                       (5,473)                          (5,473)
                            
Stock issued in connection with VitalStream acquisition  12,206  12  208,281          208,293   12,206   12   208,281            208,293 
Stock compensation plans activity and stock-based compensation expense  1,680  2  17,286          17,288 
Stock-based compensation plans activity and stock-based compensation  1,680   2   17,286            17,288 
                                                     
Balance, December 31, 2007  49,759  50  1,208,191      (862,010) 402  346,633   49,759   50   1,208,191      (862,010)  402   346,633 
Net loss            (104,813)   (104,813)              (104,813)     (104,813)
Change in unrealized gains and losses on investments, net of taxes              (29) (29)                 (29)  (29)
Foreign currency translation adjustment              (1,302) (1,302)                 (1,302)  (1,302)
Total comprehensive loss                       (106,144                          (106,144)
Stock compensation plans activity and stock-based compensation expense  465    8,076  (370)       7,706 
                            
Stock-based compensation plans activity and stock-based compensation  465      8,076   (370)        7,706 
                                                     
Balance, December 31, 2008  50,224 $50 $1,216,267 $(370)$ $(966,823)$(929)$248,195   50,224   50   1,216,267   (370)  (966,823)  (929)  248,195 
Net loss              (69,725)     (69,725)
Change in unrealized gains and losses on investments, net of taxes                 25   25 
Foreign currency translation adjustment                 474   474 
Total comprehensive loss                          (69,226)
                            
Stock-based compensation plans activity and stock-based compensation  539   1   5,189   243         5,433 
                            
Balance, December 31, 2009  50,763  $51  $1,221,456  $(127) $(1,036,548) $(430) $184,402 
See note 2 for information on effect of one-for-10 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, 
          
  2009  2008  2007 
Cash flows from operating activities:         
Net loss $(69,725) $(104,813) $(5,555)
Adjustments to reconcile net loss to net cash provided by operating activities:            
Depreciation and amortization  32,496   28,663   26,407 
Loss (gain) on disposal of property and equipment, net  26   (16)  (5)
Goodwill and other intangible asset impairments  55,647   102,336   2,454 
Acquired in-process research and development        450 
Stock-based compensation  5,613   7,499   8,681 
Write-off of investment        1,178 
Equity in (earnings) from equity-method investment  (15)  (283)  (139)
Provision for doubtful accounts  2,711   5,083   2,261 
Non-cash changes in deferred rent  2,303   3,102   (421)
Deferred income taxes  (459)  644   (3,095)
Other, net  178   (477)  (150)
Changes in operating assets and liabilities, excluding effects of acquisition:            
Accounts receivable  7,238   2,424   (15,825)
Inventory, prepaid expenses, deposits and other assets  2,205   (2,919)  (2,182)
Accounts payable  (2,405)  18   7,920 
Accrued and other liabilities  1,436   (1,404)  (2,466)
Deferred revenue  351   (836)  2,704 
Accrued restructuring liability  (80)  (1,070)  5,309 
             
Net cash flows provided by operating activities  37,520   37,951   27,526 
             
Cash flows from investing activities:            
Purchases of investments in marketable securities     (21,422)  (38,508)
Maturities of investments in marketable securities  7,374   26,591   32,395 
Purchases of property and equipment  (17,278)  (51,154)  (30,271)
Proceeds from disposal of property and equipment  4   175   5 
Cash received from acquisition, net of costs incurred for the transaction        3,203 
Change in restricted cash, excluding effects of acquisition     4,120   (3,217)
             
Net cash flows used in investing activities  (9,900)  (41,690)  (36,393)
             
Cash flows from financing activities:            
Proceeds from credit facility, due after one year and net of discount  78,500   20,000   19,742 
Principal payments on credit facility, due after one year  (78,500)  (20,000)  (11,318)
Payments on capital lease obligations  (276)  (807)  (1,617)
Stock-based compensation plans  (205)  108   8,582 
Other, net  (117)  (122)  (149)
             
Net cash flows (used in) provided by financing activities  (598)  (821)  15,240 
             
Effect of exchange rates on cash and cash equivalents  34   (600)  66 
             
Net increase (decrease) in cash and cash equivalents  27,056   (5,160)  6,439 
Cash and cash equivalents at beginning of period  46,870   52,030   45,591 
             
Cash and cash equivalents at end of period $73,926  $46,870  $52,030 
          
   Year Ended December 31, 
  2008  2007  2006 
Cash flows from operating activities:         
Net (loss) income $(104,813) $(5,555) $3,657 
Adjustments to reconcile net (loss) income to net cash provided by operating activities:            
Depreciation and amortization  28,663   26,407   16,372 
Gain on disposal of property and equipment, net  (16)  (5)  (113)
Goodwill and other intangible asset impairments  102,336   2,454   319 
Acquired in-process research and development     450    
Stock-based compensation expense  7,499   8,681   5,942 
Write-off of investment     1,178    
Equity in earnings from equity-method investment  (283)  (139)  (114)
Provision for doubtful accounts  5,083   2,261   548 
Non-cash changes in deferred rent  3,102   (421)  2,247 
Deferred income taxes  644   (3,095)   
Other, net  (477)  (150)   
Changes in operating assets and liabilities, excluding effects of acquisition:            
Accounts receivable  2,424   (15,825)  (1,702)
Inventory, prepaid expenses, deposits and other assets  (2,919)  (2,182)  (1,778)
Accounts payable  18   7,920   3,010 
Accrued and other liabilities  (1,404)  (2,466)  1,422 
Deferred revenue  (836)  2,704   1,070 
Accrued restructuring liability  (1,070)  5,309   (1,493)
             
Net cash flows provided by operating activities  37,951   27,526   29,387 
             
Cash flows from investing activities:            
Purchases of investments in marketable securities  (21,422)  (38,508)  (17,427)
Maturities and sales of investments in marketable securities  26,591   32,395   20,277 
Purchases of property and equipment  (51,154)  (30,271)  (13,382)
Proceeds from disposal of property and equipment  175   5   133 
Cash received from acquisition, net of costs incurred for the transaction     3,203    
Change in restricted cash, excluding effects of acquisition  4,120   (3,217)   
             
Net cash flows used in investing activities  (41,690)  (36,393)  (10,399)
The accompanying notes are an integral part of these consolidated financial statements.

 
F-6

 
 
INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
          
    Year Ended December 31, 
  2008  2007  2006 
Cash flows from financing activities:         
Proceeds from notes payable, net of discount  20,000   19,742    
Principal payments on notes payable  (20,000)  (11,318)  (4,375)
Payments on capital lease obligations  (807)  (1,617)  (538)
Debt issuance costs  (14)  (65)   
Stock-based compensation plans  108   8,582   3,031 
Proceeds from exercise of warrants        3,808 
Other, net  (108)  (84)  31 
             
Net cash flows (used in) provided by financing activities  (821)  15,240   1,957 
             
Effect of exchange rates on cash and cash equivalents  (600)  66   212 
             
Net (decrease) increase in cash and cash equivalents  (5,160)  6,439   21,157 
Cash and cash equivalents at beginning of period  52,030   45,591   24,434 
             
Cash and cash equivalents at end of period $46,870  $52,030  $45,591 
             
Supplemental disclosure of cash flow information:            
Common stock issued and stock options assumed in VitalStream acquisition $  $208,293  $ 
Cash paid for interest, net of amounts capitalized  1,403   1,152   793 
Cash paid for income taxes  361   103   149 
Non-cash acquisition of property and equipment  3,069   148   162 
Capitalized stock-based compensation  97   25   44 
The accompanying notes are an integral part of these consolidated financial statements.

F-7

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1.DESCRIPTION OF THE COMPANY AND NATURE OF OPERATIONS
 
Internap Network Services Corporation (“Internap,we,“we,” “us,” “our,”“us” or the “Company”“our”) delivers high performance and reliable Internet solutionsprovides services through a suite of network optimization and delivery products and services. These solutions and our technical support enable companies to 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 entertainment and media, financial services, healthcare, travel, e-commerce, retail and technology. Our product and service offerings are complemented by73 Internet Protocol, or IP, access solutions such as colocation and data center services,service points, which includes 20 content delivery networks,network, or CDN, points of presences, or POPs, and managed security. We deliver services through our 64 service points47 data centers across North America, Europe Asia, India and Australia.the Asia-Pacific region. We also have two additional international standalone CDN POPs and two additional domestic standalone data center locations through which we provide IP services by extension. Our Private Network Access Points, or P-NAPs, feature multiple direct high-speed connections to multiple major Internet backbones, also referred to as network service providers, or NSPs, including AT&T Inc.; Sprint Nextel Corporation;such as Verizon Communications Inc.; Global Crossing Limited; and Level 3 Communications, Inc. We; XO Holdings Inc.; and Cogent Communications Group, Inc. As described in note 4, we operate in threetwo business segments: IP services and data center services. We now operate our IP services and the majority of our CDN services. Prior to February 2007,services on a combined basis while we operatedoperate the managed hosting portion of our CDN services as a single business segment.part of our data center services.
 
The nature of our business subjects us to certain risks and uncertainties frequently encountered by rapidly evolving markets. These risks are described in “Risk Factors” in this Annual Report on Form 10-K.
 
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 and terminating certain non-strategic real estate leases and license arrangements. We have a history of quarterly and annual period net losses throughincluding for each of the yearthree years in the period ended December 31, 2005. For the year ended2009. At December 31, 2006, we recognized net income in each quarter. For2009, our accumulated deficit was $1,036.5 million. However, during the years ended December 31, 2009, 2008 and 2007, we recognized net losses of $104.8 million and $5.6 million, respectively. At December 31, 2008, our accumulated deficit was $966.8 million. However, for the years ended December 31, 2008, 2007 and 2006, we generated net cash flows from operating activities of $37.5 million, $38.0 million $27.5 million and $29.4$27.5 million, respectively.
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Accounting Principles
 
TheWe prepare our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The consolidated financial statements include our accounts and those of our wholly-owned subsidiaries. SignificantWe have eliminated significant inter-company transactions have been eliminated in consolidation.
 
Estimates and Assumptions
 
The preparation of these financial statements requires managementus 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, auction rate securities, goodwill and intangible assets, accruals, stock-based compensation, income taxes, restructuring costs,charges, leases, long-term service contracts, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates.
 
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.

F-8

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Restricted Cash
Restricted cash represented time deposits used to secure letters of credit on certain of our real estate leases and a capital lease for equipment in 2007. The letters of credit for the real estate leases were secured by our former credit agreement with Silicon Valley Bank and were in the process of being secured under the original Credit Agreement executed in 2007. We assumed the letter of credit securing the capital lease for equipment in the VitalStream acquisition. As of December 31, 2008, we had no restricted cash, as these letters of credit were secured by our Amended Credit Agreement, which is defined and described below in note 11.
 
Investments in Marketable Securities and Other Related Assets
 
We determine the appropriate classification of all marketable securities at the time of purchase and re-evaluatereevaluate such classification as of each reporting period. Trading securities are carried at fair value with all changes in fair value reported in “Non-operating expense (income)” in our consolidated statements of operations. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in “Accumulated items of other comprehensive (loss) income, a component of stockholders’equitystockholders’ equity in our accompanying consolidated balance sheets. We also review available-for-sale securities each reporting period for declines in value that we consider to be other-than-temporary and, if appropriate, write down the securities to their estimated fair value. Any declines in value judged to be other-than-temporary on available-for-sale securities are included in “Non-operating expense (income) expense” in the accompanying consolidated statements of operations. Trading securities are carried at fair value with all changes in fair value reported in “Non-operating (income) expense” in the accompanyingour consolidated statements of operations. The cost of securities sold is based on the specific identification method. As of December 31, 2009, our investments in marketable securities and other related assets were comprised of auction rate securities and corresponding rights recorded at fair value equal to $7.0 million and classified as trading securities. We classify the auction rate securities and corresponding rights as current in our consolidated balance sheets because we intend to liquidate our holdings in the auction rate securities at par value within the next 12 months through redemption by the issuers, sales to third parties or exercise of our corresponding rights in the auction rate securities. At December 31, 2008, the fair value of our short-term investments in marketable securities was $7.2 million, comprised of corporate debt securities and U.S. Treasury bills, all designated as available for sale, and thesale. The fair value of our non-current investments in marketable securities wasand other related assets were comprised of auction rate securities and corresponding rights recorded at fair value equal to $6.4 million, all designated as trading. At December 31, 2007, we had $19.6 million of investments in marketable securities, all of which were classified as short-term and designated as available for sale. See note 5 for further discussion of our investments.investments in marketable securities and other related assets.
F-7

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
Other Investments
 
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 we consider other factors, such as minority interest protections, are considered in determining whether the equity method of accounting is appropriate. As of December 31, 2008,2009, Internap Japan Co. Ltd., or Internap Japan, oura  joint venture with NTT-ME Corporation and Nippon Telegraph and Telephone Corporation, or NTT Holdings, qualifiesqualified for equity method accounting. We record our proportional share of the income and losses of Internap Japan one month in arrears on the accompanying consolidated balance sheets as a component of non-current investments and our share of Internap Japan’s income and losses, net of taxes, as a separate caption in our accompanying consolidated statementstatements of operations.
 
We account for investments without readily determinable fair values at historical cost, as determined by our initial investment. We periodically review the recorded value of cost basis investments 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, we reduce the cost basis and record an investment loss. At December 31, 2008, we had no investments accounted for under the cost method.
We incurred a charge during the three monthsyear ended June 30,December 31, 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 5 for further discussion of this investment and the recorded loss.
 
Fair Value of Financial Instruments
 
Effective January 1, 2008, we adopted the provisions of SFAS No. 157, Fair Value Measurements,new accounting guidance which definesdefined fair value and provides guidanceprovided direction for using fair value to measure assets and liabilities. In accordance with SFAS No. 157 and Staff Position FAS 157-2, Effective Date of FASB Statement No. 157,the accounting guidance, we adopted SFAS No. 157the new provisions with regard to all financial assets and liabilities in our financial statements in the first quarter of 2008 and have elected to delay the adoption of SFAS No. 157 forall nonfinancial assets and nonfinancial liabilities untilin the first quarter of 2009. SFAS No. 157The major categories of nonfinancial assets and liabilities that we measure at fair value include reporting units measured at fair value in the first step of a goodwill impairment test. Our adoption for measuring nonfinancial assets and liabilities beginning in 2009 did not have a material impact on our consolidated financial statements. The new guidance is applicable whenever other standards require or permit assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. Accordingly, we continue to value the carrying amounts of certain of our financial instruments, including cash equivalents and marketable securities, continue to be valued at fair value on a recurring basis.
 
SFAS No. 157The new guidance also introduced new disclosures about how we value certain assets. Much of the disclosure focuses on the inputs used to measure fair value, particularly in instances in which the measurement uses significant unobservable inputs. The fair value estimates presented in this report reflect the information available to us as of December 31, 2008.2009. We adopted the optional provisions of an accounting standard to record certain financial assets and financial liabilities at fair value. The accounting standard permitted us to choose to measure, on an instrument-by-instrument basis, many financial instruments and certain other assets and liabilities at fair value that we are not currently required to measure at fair value. We applied the optional provisions of this accounting standard to rights, or the ARS Rights, from one of our investment providers to sell at par value our auction rate securities originally purchased from the investment provider at anytime during a two-year period beginning June 30, 2010. Recording the ARS Rights at fair value enabled us to match changes in the fair value of the ARS Rights to changes in the fair value of the associated auction rate securities. See note 5 for further discussion of the ARS Rights and note 6 for further discussion of the fair value of our financial instruments.

 
F-9

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The carrying amounts of our financial instruments, including cash and cash equivalents, accounts receivable and other current liabilities, approximate fair value due to the short-term nature of these assets and liabilities. TheDue to the nature of our credit facility and variable interest rate, the fair value of our debt approximates the carrying value due to the nature of our credit facility.
We elected to record rights, or ARS Rights, from one of our investment providers at fair value. The ARS Rights are more fully described in note 5. Recording the ARS Rights at fair value enables us to match changes in the fair value of the ARS Rights to changes in the fair value of the associated auction rate securities.
 
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. We also have invested, in accordance with our formal investment policy, in high credit quality corporate debt securities, U.S. Treasury bills and commercial paper. Our investments in marketable securities and other related assets also include auction rate securities whose underlying assets are state-issued student and educational loans which are substantially backed by the federal government. Under our current investment policy, new or additionalAlthough auction rate securities are not eligible investments under our current investment instruments, butpolicy, we will hold our existingintend to exercise the ARS Rights within the next 12 months if they are not redeemed by the issuers or sold to third parties. Accordingly, we now classify the auction rate securities until liquidity returns or we exercise ourand ARS Rights as discussed below.current assets. As of December 31, 2008 and 2007,2009, our investments in auction rate securities having a par value of $7.2$7.0 million had a carrying valuesvalue of $6.4$6.5 million and $7.2 million, respectively. The carrying amount at December 31, 2008 includes a reduction in fair value of $0.8 million. While we continue to earn and accrue interest on our auction rate securities at contractual rates, these investments are not currently trading. During 2008, we classified our auction rate securities as non-current investments on our accompanying consolidated balance sheet versus short-term investments as of December 31, 2007.  This change in classification was initially due to2008, the uncertainty as to wheninvestments had par and carrying values of $7.2 million and $6.4 million, respectively. During 2009, $0.2 million of the auction rate securities markets would improve. As described in note 5, in October 2008, we received and subsequently accepted rights, or ARS Rights, from one of our investment providers to sellwere called by the issuer at par value auction rate securities originally purchased from the investment provider ($7.2 million) at any time during a two-year period beginning June 30, 2010. The fair value and carrying value ofvalue.  We recorded the ARS Rights wasat fair value of $0.5 million and $0.6 million as of December 31, 2008.2009 and 2008, respectively. We further discuss auction rate securities and ARS Rights in note 5.
F-8

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
Inventory
 
We carry inventory 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.products.
 
Property and Equipment
 
We carry property and equipment at original acquisition cost less accumulated depreciation and amortization. We calculate depreciation and amortization on a straight-line basis over the lesser of the estimated useful lives of the assets or the lease term.assets. 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 obligationsterm and commitments range from 24 months for certain networking equipment to 240 months for certain facility leases.none over 20 years. We capitalize additions and improvements that increase the value or extend the life of an asset. We expense maintenance and repairs as incurred. We charge gains or losses from disposals of property and equipment to operations.
 
Leases and Leasehold Improvements
 
We record leases in which we have substantially all of the benefits and risks of ownership as capital leases and all other leases as operating leases. For leases determined to be capital leases, we record the assets held under capital lease and related obligations are recorded at the lesser of the present value of aggregate future minimum lease payments or the fair value of the assets held under capital lease. TheWe amortize the assets are amortized over the shorter ofseven years or over the lease term, ordepending on the estimated useful life.nature of the improvement, but in no event beyond the expected lease term and none over 20 years. The duration of lease obligations and commitments ranges from two years for office equipment to 25 years for facilities. For leases determined to be operating leases, we record lease expense is recorded on a straight-line basis over the lease term. Certain leases include renewal options that, at the inception of the lease, are considered reasonably assured of being renewed. The lease term begins when the Company controlswe control the leased property, which is typically before lease payments begin under the terms of the lease. The difference between the expense recorded in theour consolidated statements of operations and the amount paid is recorded as deferred rent and is included in theour consolidated balance sheets.

F-10

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
Costs of Computer Software Development
 
We capitalize certain direct costs incurred developing internal use software. We capitalized $0.9 million, $1.4 million $1.6 million and $0.9$1.6 million in internal software development costs forduring the years ended December 31, 2009, 2008 2007 and 2006,2007, respectively. During the year ended December 31, 2007, we impaired $1.1 million of software development costs capitalized prior to December 31, 2006 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)(a) the developer of our financial software purchased the developer of our legacy billing system, and (2)(b) 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 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, 20082009 and 2007,2008, the balance of unamortized software costs was $3.8$4.0 million and $2.7$3.8 million, respectively, and forduring the years ended December 31, 20082009 and 2007,2008, amortization expense was $0.7 million and $0.4 million, and $0.2 million, respectively. 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 year ended December 31, 2006.
 
Valuation of Long-Lived Assets
 
We periodically evaluate the carrying value of our long-lived assets, including, but not limited to, property and equipment. TheWe consider the carrying value of a long-lived asset is considered impaired when the undiscounted cash flows from such asset isare separately identifiable and is estimatedwe estimate them to be less than its carrying value. In that event, we would recognize a loss based on the amount by which the carrying value exceeds the fair value of the long-lived asset. FairWe determine fair value is determined primarily using the anticipatedbased on either market quotes, if available, or discounted cash flows discounted atusing a discount rate commensurate with the risk involved. Lossesinherent in our current business model for the specific asset being valued. We would determine losses on long-lived assets to be disposed of would be determined in a similar manner, except that we would reduce fair values would be reduced by the cost of disposal. LossesWe charge losses due to impairment of long-lived assets are charged to operations during the period in which we identify the impairment is identified.impairment.
 
Goodwill and Other Intangible Assets

Goodwill is not amortized. Instead, we assess goodwill for impairment at a reporting unit level on an annual basis. As discussed in note 4, we changed how we view and manage our business beginning June 1, 2009. We performnow operate our IP services and the majority of our CDN services on a combined basis while we operate the managed hosting portion of our CDN services as part of our data center services. Our decision to consolidate segments as of June 1, 2009 required us to assess goodwill for impairment as of that date, which was earlier than the date of our annual assessment (August 1). Our newly-combined IP services operating segment continues to be comprised of two reporting units: services and products. Similarly, our data center services operating segment continues to be a single reporting unit; however, it does not have any recorded goodwill.
F-9

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As a result of this assessment, we recorded an aggregate impairment charge of $55.6 million for goodwill and other intangible assets during the year ended December 31, 2009. This charge included $48.0 million for goodwill related to our former CDN services segment, $3.5 million to adjust goodwill in our IP services segment related to our FCP products and $4.1 million for acquired CDN advertising technology. The impairments in 2009 are in addition to impairments of $99.7 million for goodwill and $2.7 million for other intangible assets in 2008 related to our former CDN services segment. We present the  impairment test ascharges for goodwill and trade names in “Impairments and restructuring” while we present the impairment charges for acquired CDN advertising technologies in “Direct costs of August 1amortization of each calendar year, followingacquired technologies” in our annual strategic planning cycle. consolidated statements of operations.

Our assessment of goodwill for impairment includes comparing the fair value of our reporting units to the net book value of each of our four reporting units. Our IP services operating segment is comprised of two reporting units: services and products. Our data center center services and CDN services operating segments each represent a single reporting unit; however, the data center services segment does not have any recorded goodwill.
carrying value. We estimate fair value using a combination of discounted cash flow models and market approaches. If the fair value of a reporting unit exceeds its net bookcarrying value, goodwill is not impaired and no further testing is necessary. If the net bookcarrying value of a reporting unit exceeds its fair value, we perform a second test to measure the amount of impairment loss,to goodwill, if any. To measure the amount of any impairment, loss, we determine the implied fair value of goodwill in the same manner as if we were acquiring the affected reporting unit were being acquired in a business combination. Specifically, we allocate the fair value of the affected reporting unit to all of the assets and liabilities of that unit, including any unrecognized intangible assets, in a hypothetical calculation that would yield the implied fair value of goodwill. If the implied fair value of goodwill is less than the goodwill recorded on our consolidated balance sheet, we record an impairment charge for the difference.

AsWe base the impairment analysis of goodwill on estimated fair values. 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. These estimates and assumptions primarily include, but are not limited to, discount rates; terminal growth rates; projected revenues and costs; earnings before interest, taxes, depreciation and amortization, or EBITDA, for expected cash flows; market comparables and capital expenditures forecasts. The use of different assumptions, inputs and judgments, or changes in circumstances, could materially affect the results of the valuation. Due to the inherent uncertainty involved in making these estimates, actual results could differ from our estimates.

We perform our annual goodwill impairment test as of August 1 of each calendar year absent any impairment indicators or other changes that may cause more frequent analysis. We did not identify an impairment as a result of our annual August 1, 2008 assessment, we recorded a $99.7 million goodwill2009 impairment charge to adjust goodwill in our CDN services segment to an implied fair value of $54.7 million. The goodwill impairment charge is presented separately in the accompanying statement of operations for the year ended December 31, 2008. The goodwill impairment is primarily due to declines in our CDN services revenues and operating results as compared to our projections and unfavorable changes in market factors used to estimate fair values. The declines in CDN services revenues and operating results compared to projections are attributable to integration and reliability issues in the acquired network and have now been resolved, a strategic shift to larger, higher credit quality customers and more recently, a highly-competitive market environment for CDN services that is driving lower pricing. Changes in market factors include lower market multiples across the CDN services industry from when we completed the acquisition of VitalStream and our own now-lower market capitalization. The culmination of these factors leading to our impairment of goodwill did not occur until the three months ended September 30, 2008. The impairment charge does not have any impact on our current cash balance or result in violation of any covenants of our debt instruments.
test. We also assessedassess on a quarterly basis whether any events have occurred or circumstances have changed that would indicate an impairment could exist. We have considered the likelihood of triggering events that might cause us to re-assess goodwill on an interim basis and concluded that no such triggering events havenone had occurred that would cause us to re-assess goodwill for impairment subsequent to August 1, 2008.

2009.
F-11

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Other intangible assets, including developed technologies and patents, have finite lives and we have recorded these assets at cost less accumulated amortization. We calculate amortization on a straight-line basis over the estimated economic useful life of the assets, which are three to seveneight years for developed technologies and 15 years for patents.
InWe assess other intangible assets for impairment in conjunction with our reviewassessment of our long-term financial outlook, we also performed an analysis ofgoodwill or whenever events or changes in circumstances indicate that the potential impairment and re-assessed the remaining asset lives ofcarrying amounts may not be recoverable. Our assessment for other identifiable intangible assets acquired in the VitalStream acquisition. The analysis and re-assessment of other identifiable intangible assets recorded in the VitalStream acquisition resulted in:
An impairment charge of $1.9 million in developed advertising technology due to a strategic change in market focus,
An impairment charge of $0.8 million in trade names as a result of discontinuing use of the VitalStream trade name, and
a change in our estimates that resulted in acceleration of amortization expense of our customer relationships intangible asset over a shorter estimated useful life (four remaining years instead of the original estimated useful life of nine years) due to customer churn resulting in higher than expected attrition as of the acquisition date.
The impairment analysis of goodwill is based on estimated fair values. The valuation of goodwill requires assumptions and estimates of many critical factors, including revenue and market growth, operatingfuture cash flows market multiplesdirectly associated with the asset or asset group. If we determine that the carrying value is not recoverable, we may record an impairment charge, reduce the estimated remaining useful life, or both.

In addition to impairment of other intangible assets during the years ended December 31, 2009 and discount rates. Adverse2008, we also made changes in estimates that resulted in acceleration of amortization expense related to certain acquired CDN intangible assets. These acquired CDN intangible assets either have a remaining estimated economic useful life of less than one year at December 31, 2009 or were fully amortized during 2009. Additional information is included in note 8. Similar to goodwill as noted above, adverse changes in expected operating results and/or unfavorable changes in other economic factors used to estimate fair values could result in an additional non-cash impairment chargecharges or acceleration of amortization in the future. We believe that our remaining intangible assets are not impaired.

Accruals for Disputed Telecommunication Costs and Other Accrued Liabilities
In delivering our services, we rely on a number of Internet network, telecommunication, utilities and other vendors. We work directly with these vendors to establish, modify or discontinue services for our customers. BecauseNone of the volume of activity, billing disputes inevitably arise, and it is often necessary to estimate certain costs of providing services to our customers given that we may not receive invoices on a timely basisimpairment charges or due to the complexity surrounding such costs. 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 madechanges 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 up to 100% of the disputed amount, dependingestimated remaining asset lives had any impact on our assessment of the likely outcome of the dispute. Conversely, for billing errorscash balances or covenants in our favor, such as the vendor’s failure to invoice us for new service, we record an estimate based on the full amount that we should have been invoiced. If 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.
We research all disputed costs with vendors on an ongoing basis until ultimately resolved. We periodically review and modify estimates in light of new information or developments, if any. We recognize any resolved disputes that will result in a credit over the disputed amounts 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.agreement.
 
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, we 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 our best expectations based on known facts and circumstances at the time of estimation. Should circumstances warrant, we will adjust our previous estimates to reflect what we then believe to be a more accurate representation of expected future costs. Because our estimates and assumptions regarding restructuring costscharges include probabilities of future events, such as our ability to find a sublease tenant within a reasonable period of time or the rate at which a sublease tenant will pay for the available space, such estimates are inherently vulnerable to changes due to unforeseen 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 $9.0 million restructuring liability at December 31, 2008, would result in a $0.9 million expense or benefit in the statement of operations during the period in which the change in estimate occurred. If we do not find a sublease tenant for one of our more significant restructured locations by the end of the second quarter of 2010 or if we do not obtain a certain rate per square foot for the available space, we will need to take an additional charge in our statement of operations that may be material. We monitor market conditions at each period end reporting date and will continue to assess our key assumptions and estimates used in the calculation of our restructuring accrual.
F-10

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
Taxes
 
We account for income taxes under the liability method. We determine deferred tax assets and liabilities based on differences between financial reporting and tax bases of assets and liabilities, and we measure the tax assets and liabilities measured using the enacted tax rates and laws that will be in effect when we expect the differences to reverse. We provide a valuation allowance to reduce our deferred tax assets to their estimated realizable value. We may realize deferred tax assets in future periods if and when they are estimatedwe estimate them to be realizable, such as establishing our expected continuing profitability or that of the Company or certain of our foreign subsidiaries.

F-12

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
We accrueevaluate liabilities for uncertain tax positions and, as of December 31, 2009 and 2008, and 2007, we recognizeddid not recognize any associated liabilities of $0 and $0.9 million, respectively that were netted on the balance sheet with U.K. deferred tax assets.liabilities. We have recorded nominal interest and penalties arising from the underpayment of income taxes in the statement“General and administrative” expenses in our consolidated statements of operations under general and administrative expenses.operations. As of December 31, 20082009 and 2007,2008, we had no accrued interest or penalties related to uncertain tax positions, as a result ofgiven our substantial U.K. net operating loss carryforwards.
 
We account for telecommunication, sales and other similar taxes on a net basis in general“General and administrative expense.expense” in our consolidated statements of operations.
 
Stock-Based Compensation
 
Stock-basedWe measure stock-based compensation cost is measured at the grant date based on the calculated fair value of the award. We recognize the expense over the employees’employee’s requisite service period, generally the vesting period of the award. For performance-based awards, we periodically assess whether the performance conditions are probable of being met and record compensation expense based on this assessment of probability.We estimate the fair value of stock options at the grant date 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.When we elect to pay certain bonuses in shares of stock, the total amount to be paid is determined similarly to cash bonuses and the number of shares to be granted is determined based on the fair value of our stock at the date of grant.
 
We do not recognize a deferred tax asset for unrealized tax benefits associated with the tax deductions in excess of the compensation recorded (excess tax benefit). We apply the “with and without” approach for utilization of tax attributes upon realization of net operating losses in the future. This method allocates stockstock-based compensation benefits last among other tax benefits recognized. In addition, we apply the “direct only” method of calculating the amount of windfalls or shortfalls.
 
Treasury Stock
 
As permitted by our stock-based compensation plans, from time-to-time we acquire from time-to-time, shares of treasury stock as payment of statutory minimum payroll taxes due from employees for stock-based compensation. During 2006,In 2009, we reissued a portion of the shares of treasury stock were acquired as payment of taxesin 2008 and subsequently reissued2009 as part of our stock-based compensation plans. Shares of treasury stock acquired in 2008 willWe also be subsequently reissuedexpect to reissue the remaining shares as part of our stock-based compensation plans. When we reissue the shares, 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. We did not acquire shares of treasury stock during 2007.
 
Reverse Stock Split
On July 10, 2006, we implemented a one-for-10 reverse stock split on our common stock and amended our Certificate of Incorporation to reduce our authorized shares of common stock 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
 
The majority of ourWe generate revenues are derived from high performance IP services, related data center services, CDN services and other ancillary products and services throughout the United States. We derive our IP services revenuesprimarily from the sale of high performance Internet connectivityIP services atand data center services. Our revenues typically consist of monthly recurring revenues from contracts with terms of one year or more. These contracts usually have fixed ratesminimum commitments based on a certain level of usage with additional charges for any usage over a specified limit.
We recognize IP services revenues on a fixed- or usage-based pricing to our customers that desire a DS-3 or faster connection. We provide slower T-1 and fractional DS-3 connections at fixed rates.pricing. Data center revenues include both physical space for hosting customers’ network and other equipment plus associated services such as redundant power and network connectivity, environmental controls and security. DataWe determine data center revenues are based onby occupied square feet and both allocated and variable-based usage. CDN services revenues include three components: (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 services revenues are 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 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 both partieswe have signedentered into an enforceable contract, we have delivered the service to the customer, the fee for the service is fixed or determinable and collection is reasonably assured. If a customer’s usage of our services exceeds 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 asthe 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. Other ancillary products and services include our FCP product, server management and installation, virtual private networking, managed security, data backup, remote storage and restoration.
 
We use contracts and sales or purchase orders as evidence 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 product is more than incidental to the product as a whole, we recognize associated FCP revenue in accordance with generally accepted accounting principles for software. FCP product and other hardware sales were $0.9 million, $2.4 million and $2.6 million and FCP-related services and subscription revenues were $0.9 million, $1.0 million and $0.9 million during the American Institute of Certified Public Accountants’ Statement of Position 97-2, Software Revenue Recognition.

F-13

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
years ended December 31, 2009, 2008 and 2007, respectively.
 
We also enter into multiple-element arrangements or bundled services, such as combining IP services with 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 iswe have 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 we have satisfied other revenue recognition criteria.
 
Deferred revenue consists of revenues for services to be delivered in the future and consists primarily of advance billings, which we amortize over the respective service period. We defer and amortize revenues associated with billings for installation of customer network equipment over the estimated life of the customer relationship, which was, two toon average, approximately three years duringfor each of the three-year period ended December 31, 2008.last three years. We defer and amortize revenues for installation services because the installation service is integral to our primary service offering and does not have value to customers on a stand-alone basis. We also defer and amortize the associated incremental direct costs. We amortize deferred post-contract customer support associated with sales of our FCP product and similar products ratably over the contract period, which is generally one year.
 
We routinely review the collectability of our accounts receivable 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 our 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 we have exhausted all collection efforts, we write the uncollectible balance off against the allowance for doubtful accounts.
F-11

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
We record an amount for service level agreements and other sales adjustments, which reduces net revenues and accounts receivable and revenues. Adjustmentsreceivable. We identify adjustments for service level agreements are identified within the billing period and reduce revenues are reduced accordingly.Theaccordingly. We base 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 deteriorates, or if we become aware of new information impacting a customer’s credit risk, we may make additional adjustments.
 
We routinely review the collectability of our accounts receivable and payment status of our customers. If we determine that collection of revenue is uncertain, we do not recognize revenue until collection is reasonably assured. Additionally, we maintain an allowance 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 general customer information, which primarily includes our historical cash collection experience and the aging of our accounts receivable. We assess the payment status of customers by reference to the terms under which we provide services or goods, with any payments not made on or before their due date considered past-due. Once we have exhausted all collection efforts, we write the uncollectible balance off against the allowance for doubtful accounts. We routinely perform credit checks for new and existing customers and require deposits or prepayments for customers that we perceive as being a credit risk.
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. Research and development costs, which we include in product developmentgeneral and administrative cost and expense as incurred, primarily consist of compensation related to our development and enhancement of IP routing technology, progressive download and streaming technology for our CDN, acceleration and cloud technologies. Research and development costs were $3.8 million, $5.0 million and $3.1 million and $2.4 million forduring the years ended December 31, 2009, 2008 and 2007, respectively. Product development costs, which we also include in general and 2006, respectively.administrative cost and expense as incurred, are primarily related to network engineering costs associated with changes to the functionality of our proprietary services and network architecture. We also expense as incurred those costs that do not qualify for capitalization as software development costs.
 
Advertising Costs
 
We expense all advertising costs as incurred. Advertising costs forduring the years ended December 31, 2009, 2008 2007 and 20062007 were $1.3 million, $1.3 million and $1.2 million, and $1.3 million, respectively.

F-14

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
Net (Loss) IncomeLoss Per Share
 
We compute basic and diluted net (loss) incomeloss per share usingby dividing net loss attributable to our common stockholders by the weighted average number of shares of common stock outstanding during the period. We compute diluted net (loss) income per share using the weighted average number of common and potentially dilutive shareshave excluded all outstanding during the period. Potentially dilutive shares consist of the incremental shares of common stock issuable upon the exercise of outstanding stock options and warrants and unvested restricted stock using the treasury stock method.as such securities are anti-dilutive for all periods presented.
On January 1, 2009, we adopted a recently-issued accounting standard related to whether instruments granted in share-based payment transactions are participating securities for calculating earnings per share. This new accounting standard causes all unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) to be participating securities. 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 fromnew accounting standard further requires participating securities to be included in the computation of net (loss) incomeearnings per share if their effect is anti-dilutive.pursuant to the two-class method. Under the two-class method, earnings (after any dividends) are allocated to common stock and participating securities to the extent that each security may share in earnings. While our unvested restricted stock participate in any dividends equally with common stock, no losses are attributed to the awards. Upon adoption, we adjusted all prior-period earnings per share data presented retrospectively. The adoption of this new accounting standard did not have any impact on our basic or diluted net loss per share for any year in the three year period ended December 31, 2009.
 
Basic and diluted net (loss) incomeloss per share forduring the years ended December 31, 2009, 2008 2007 and 20062007 is calculated as follows (in thousands, except per share amounts):
          
    Year Ended December 31, 
  2008  2007  2006 
Net (loss) income $(104,813) $(5,555) $3,657 
             
Weighted average shares outstanding, basic  49,238   46,942   34,748 
Effect of dilutive securities:            
Stock compensation plans        984 
Warrants        7 
Weighted average shares outstanding, diluted  49,238   46,942   35,739 
             
Net (loss) income per share:            
Basic $(2.13) $(0.12) $0.11 
Diluted $(2.13) $(0.12) $0.10 
             
Anti-dilutive securities not included in diluted net (loss) income per share calculation:            
Stock compensation plans  3,651   3,860   1,408 
Warrants to purchase common stock     34    
             
   3,651   3,894   1,408 
  Year Ended December 31, 
  2009  2008  2007 
Net loss and net loss available to common stockholders $(69,725) $(104,813) $(5,555)
Weighted average shares outstanding, basic and diluted  49,577   49,238   46,942 
Net loss per share, basic and diluted $(1.41) $(2.13) $(0.12)
             
Anti-dilutive securities excluded from diluted net loss per share calculation for stock-based compensation plans  5,356   3,651   3,894 
 
Reclassifications
Beginning in 2008, we classified all revenues and direct costs of network, sales and services previously reported in other, non-segmented results, except for third party CDN services, in the most closely-related business segments to provide a more accurate view of the results of operations of the business segments. Financial information for 2007 and 2006 has also been reclassified to conform to the current period presentation. None of the reclassifications had any effect on previously reported total revenues, total direct costs of network, sales and services, exclusive of depreciation and amortization or net (loss) income.

F-15F-12

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
The effect of these reclassifications on revenues and direct costs of network, sales and services is shown below (in thousands):
                
  
IP
Services
  
Data
Center
Services
  
CDN
Services
  Other  Total 
Year ended December 31, 2007:               
Revenues:               
Previously reported $119,848  $83,058  $17,718  $13,466  $234,090 
Reclassification of termination fees and professional and reseller products and services  2,357   574   88   (3,019)   
Revised $122,205  $83,632  $17,806  $10,447  $234,090 
                     
Direct costs of network, sales and services, exclusive of depreciation and amortization:                    
Previously reported $43,681  $59,439  $6,584  $8,690  $118,394 
Reclassification of professional and reseller products and services  244      10   (254)   
Revised $43,925  $59,439  $6,594  $8,436  $118,394 
                     
Year ended December 31, 2006:                    
Revenues:                    
Previously reported $109,748  $56,152  $  $15,475  $181,375 
Reclassification of termination fees and professional and reseller products and services  2,502   396      (2,898)   
Revised $112,250  $56,548  $  $12,577  $181,375 
                     
Direct costs of network, sales and services, exclusive of depreciation and amortization:                    
Previously reported $39,744  $46,474  $  $11,120  $97,338 
Reclassification of professional and reseller products and services  979         (979)   
Revised $40,723  $46,474  $  $10,141  $97,338 
 
Segment Information
 
We use the management approach for determining which, if any, of our services and products, locations, customers or management structurestructures 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 discusseddescribed in note 3, and the information presented to executive management,4, we classified our operations into three reportableoperate in two business segments: IP services and data center services. These segments reflect a change from our historical segments, which also included CDN services and CDN services.as a separate segment. We have presented the corresponding items of segmentreclassified financial information for prior periods to conform to the year ended December 31, 2006.current period presentation.
Reclassifications

In addition to reclassifications for changes in our segments, discussed in note 4, we also have reclassified other prior period amounts to conform to the current period presentation.
 
Recent Accounting Pronouncements

Effective January 1, 2008, we adopted 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 issued Staff Position 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Its Related InterpretiveRecently Issued Accounting Pronouncements That Address Leasing Transactions, which provides supplementalWe Have Adopted

In June 2009, the Financial Accounting Standards Board, or FASB, issued authoritative guidance oncodifying GAAP. While the application of SFAS No. 157, and Staff Position 157-2, Effective Date of FASB Statement No. 157, which delaysguidance was not intended to change GAAP, it did change the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on at least an annual basis until 2009. In accordance with Staff Position 157-2,way we have only adoptedreference these accounting principles in the provisions of SFAS No. 157 with respectnotes to our consolidated financial assetsstatements. This guidance was effective for interim and liabilities that are measured at fair value within the financial statementsannual reporting periods ending after September 15, 2009. Our adoption of this authoritative guidance as of December 31, 2008. The provisions of SFAS No. 157 have not been applied to nonfinancial assets and nonfinancial liabilities. The major categories of assets and liabilities that are measured at fair value, for whichSeptember 30, 2009 changed how we have not applied the provisions of SFAS No. 157, include reporting units measured at fair valuereference GAAP in the first step of a goodwill impairment test under SFAS No. 142, Goodwill and Other Intangible Assets. The adoption of SFAS No. 157 did not have a material impact on our financial position, results of operations and cash flows.

F-16

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
disclosures.
 
In October 2008,On January 1, 2009, we adopted new accounting guidance for business combinations as issued by the FASB issued Staff Position FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active which clarifies the application of SFAS No. 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. Some of the key principles illustrated include:
determining fair value in a dislocated market depends on facts and circumstances, and may require the use of significant judgment about whether individual market transactions are forced liquidations or distressed sales and therefore poor indicators of fair value;
when relevant observable market data is not available, the use of assumptions about future cash flows and discount rates may be appropriate in determining fair value; and
the value of broker quotes in determining fair value depends on facts and circumstances, particularly when an active market does not exist.
Staff Position FAS 157-3 was effective immediately, including with respect to prior periods for which financial statements have not been issued. We have consistently used the methodology described in this Staff Position in calculating the fair value of our auction rate securities throughout 2008.
In February 2007, the FASB issued SFAS No. 159, FASB. 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 was effective as of the beginning of a fiscal year that begins after November 15, 2007. The adoption of SFAS No. 159 did not have a material impact on our financial condition, results of operations and cash flows since we elected to apply the fair value option only for our ARS Rights. See note 6 for discussion of the fair value election of our ARS Rights.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations, or SFAS No. 141R. This pronouncement replaces SFAS No. 141, Business Combinations. SFAS No. 141Rnew accounting guidance establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interestinterests in the acquiree, andas well as the goodwill acquired or a gain from a bargain purchase. SFAS No. 141R also determines disclosure requirements to enable the evaluationand determination of the natureuseful life of intangible assets. The new guidance also amends provisions related to the initial recognition and financial effects ofmeasurement, subsequent measurement and accounting and disclosures for assets and liabilities arising from contingencies in business combinations. In addition, the business combination. SFAS No. 141R applies 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 do not expect that the adoption of SFAS No. 141R will have an immediate material impact 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. SFAS No. 160 amends Accounting Research Bulletin 51, Consolidated Financial Statements, 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. We do not expect the adoption of SFAS No. 160 will have a material impact on our financial position, results of operations and cash flows.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133. SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133 with the intent to provide users of financial statements with an enhanced understanding of: (1) how and why an entity uses derivative instruments; (2) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We do not expect the adoption of SFAS No. 161 to have a material impact on our financial position, results of operations and cash flows.
In April 2008, the FASB issued Staff Position FAS 142-3, Determination of the Useful Life of Intangible Assets. Staff Position FAS 142-3new guidance amends the factors that an acquirer should be consideredconsider in developing the renewal or extension assumptions used to determine the useful life of a recognized intangible asset. Significant changes from previous guidance resulting from this new guidance include expanded definitions of “business” and “business combination,” expanded disclosure regarding the determination of intangible asset under SFAS No. 142. This Staff Position is effectiveuseful lives and the elimination of the distinction between contractual and non-contractual contingencies, including initial recognition and measurement. For all business combinations (whether partial, full or step acquisitions): (a) the acquirer must record 100% of all assets and liabilities of the acquired business, including goodwill, generally at their fair values; (b) the acquirer must recognize contingent consideration at its fair value on the acquisition date; (c) for certain arrangements, the acquirer must recognize changes in fair value in earnings until settlement; and (d) the acquirer must expense acquisition-related transaction and restructuring charges rather than treat them as part of the cost of the acquisition. The new accounting guidance also establishes disclosure requirements to enable users to evaluate the nature and financial statements issued for fiscal years beginning after December 15, 2008. We do not expecteffects of the business combination. Our adoption of Staff Position FAS 142-3 tothis accounting guidance did not have a material impact on our consolidated financial position, resultsstatements, although it could have a material impact on any business combinations we enter into in future periods.

On January 1, 2009, we adopted new accounting guidance as issued by the FASB for the determination of operationswhether instruments granted in share-based payment transactions are participating securities. As discussed above in “—Net Loss Per Share,” our adoption of this accounting guidance did not have an impact on net loss per share for any periods presented.

On January 1, 2009, we adopted new accounting guidance as issued by the FASB which clarifies the accounting for certain transactions and cash flows.impairment considerations involving equity method investments. Our adoption of this accounting guidance did not have a material impact on our consolidated financial statements.

On January 1, 2009, we adopted new accounting guidance as issued by the FASB which previously delayed the effective date by one year for nonfinancial assets and liabilities that we recognize or disclose at fair value in the financial statements on a non-recurring basis. The major categories of nonfinancial assets and liabilities that we measure at fair value include reporting units in the first step of a goodwill impairment test. Our adoption of this accounting guidance did not have a material impact on our consolidated financial statements. See note 8 for additional information.

On July 1, 2009, we adopted three related sets of accounting guidance as issued by the FASB. The accounting guidance sets forth rules related to determining the fair value of financial assets and financial liabilities when the activity levels have significantly decreased in relation to the normal market, guidance related to the determination of other-than-temporary impairments to include the intent and ability of the holder as an indicator in the determination of whether an other-than-temporary impairment exists and interim disclosure requirements for the fair value of financial instruments. Our adoption of the three sets of accounting guidance did not have a material impact on our consolidated financial statements.
F-17F-13

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
Recently Issued Accounting Pronouncements That We Have Not Yet Adopted

In June 2008,2009, the FASB issued Staff Position No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities. Staff Position No. EITF 03-6-1 provides that unvested share-based payment awards that contain nonforfeitable rightsnew accounting guidance which amends the evaluation criteria to dividends are participating securitiesidentify the primary beneficiary of a variable interest entity, or VIE, and shall be included inrequires ongoing reassessment of whether an enterprise is the computationprimary beneficiary of earnings per share pursuantthe VIE. The new guidance significantly changes the consolidation rules for VIEs including the consolidation of common structures, such as joint ventures, equity method investments and collaboration arrangements. The guidance is applicable to the two class method.all new and existing VIEs. This  Staff Positionaccounting guidance is effective for us beginning in the first quarter of 2010. We have concluded that our joint venture in Internap Japan Co., Ltd. is an equity-method investment under the voting-interest model, not a VIE and, accordingly, this new accounting guidance will not impact our consolidated financial statements.

In September 2009, the FASB issued new accounting guidance related to revenue recognition of multiple element arrangements. The new guidance states that if vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, companies will be required to develop a best estimate of the selling price to separate deliverables and allocate arrangement consideration using the relative selling price method. The accounting guidance will be applied prospectively and will become effective during the first quarter of 2011. Early adoption is allowed. We are currently evaluating the impact of this accounting guidance on our consolidated financial statements, but do not expect adoption will materially impact our consolidated financial statements.

In September 2009, the FASB issued new accounting guidance related to certain revenue arrangements that include software elements. Previously, companies that sold tangible products with “more than incidental” software were required to apply software revenue recognition guidance. This guidance often delayed revenue recognition for the delivery of the tangible product. Under the new guidance, tangible products that have software components that are “essential to the functionality” of the tangible product will be excluded from the software revenue recognition guidance. The new guidance includes factors to help companies determine what is “essential to the functionality.” Software-enabled products will not be subject to other revenue recognition guidance and will likely follow the guidance for multiple deliverable arrangements issued by the FASB in September 2009, noted above. The new guidance is to be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after DecemberJune 15, 20082010, with early application permitted. If a company elects earlier application and interim periods withinthe first reporting period of adoption is not the first reporting period in the company’s fiscal year, the guidance must be applied through retrospective application from the beginning of the company’s fiscal year and the company must disclose the impact of the change to those years. Forpreviously reported periods. We are currently evaluating the quarter ended March 31, 2009, upon adoption, we are required to retrospectively adjust earnings per share data to conform to the provisions inimpact of this Staff Position. Weaccounting guidance on our consolidated financial statements, but do not expect this Staff Positionadoption will materially impact our consolidated financial statements.
In addition to the accounting pronouncements described above, we have adopted and considered other recent accounting pronouncements that either did not have a material impact on our calculation of earnings per share.
In November 2008, the FASB issued EITF 08-6, Equity Method Investment Accounting Considerations. The goal of EITF 08-6 isconsolidated financial statements or are not relevant to clarify the accounting for certain transactions and impairment considerations involving equity method investments. This issue is effective for fiscal years beginning on or after December 15, 2008. Early adoption is not permitted.our business. We do not expect the adoption of EITF 08-6 toother recently issued accounting pronouncements that are not yet effective will have a material impact on our consolidated financial position, results of operations and cash flows.
3.BUSINESS COMBINATION
statements.
 
3.           BUSINESS COMBINATION
On February 20, 2007, we completed the acquisition of VitalStream Holdings, Inc., or VitalStream, for approximately $214.0 million, whereby VitalStream became our wholly-owned subsidiary. The acquisition allowsenabled us to provide productsservices and servicesproducts for storing and delivering digital media to large audiences over the Internet. The acquisition also enhances our position as a leading provider of high performance route control productsInternet and services by addingprovide complementary service offerings in the rapidly growing content delivery markets.market. We accounted for the transaction using the purchase method of accounting in accordance with SFAS No. 141, Business Combinations.accounting. Our results of operations include the activities of VitalStream from February 21, 2007.
 
Purchase Price
 
We recorded assets acquired and liabilities assumed 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 $197,272  $197,272 
Fair value of stock options assumed  11,021   11,021 
Direct transaction costs  5,729   5,729 
Total purchase price $214,022 
 $214,022 
 
As a result of the acquisition, we issued approximately 12.2 million shares of our common stock based on an exchange ratio of 0.5132 shares of our 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-10 reverse stock split we implemented on July 11, 2006 and the one-for-four reverse stock split VitalStream implemented on April 4, 2006. The average market price per share of our 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 our common stock and we assumed thatthose stock optionoptions in accordance with the terms of the applicable VitalStream stock optionstock-based compensation 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 our common stock.
 
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):
        
  Amount 
Estimated
Useful Life
 
Net tangible assets $12,286   
Identifiable intangible assets:       
Developed technologies  36,000  8 years 
Customer relationships  9,000  9 years 
Trade name and other  1,500  3-6 years 
Acquired 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.

F - 18F-14

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
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 products acquired in the VitalStream acquisition that have reached technological feasibility and include processes and trade secrets acquired or developed through design and development of 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. See note 8 for discussion of the impairment charge recorded during the year ended December 31, 2008 for developed technologies and trade names, as well as a change in estimated life of customer relationships.
 
In-Process Research and Development
 
As of the closing date, one project was in development that had not reached technological feasibility and therefore qualified as in-process research and development. TheWe charged the amount allocated to in-process research and development was chargedof $0.5 million to the statementconsolidated statements 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. Pursuant to the guidance in SFAS No. 141, an assembled workforce is not recognized apart from goodwill and therefore is embedded in goodwill. We acquired an assembled workforce in the VitalStream acquisition that we included as a component of goodwill. Another component of goodwill is the estimated fair value of the expected synergies and other benefits from combining the net assets and business of us and VitalStream. We expected significant synergies 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. See note 8 for discussion of the goodwill impairment charge recorded during the year ended December 31, 2008. A total of $17.1 million of goodwill will be deductible for tax purposes.
Pro Forma Results (Unaudited)
VitalStream provided 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. The acquisition enhanced 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 market. 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, 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 eachthe period. Prior to the acquisition, VitalStream was a customer of ours, and forduring the yearsyear ended December 31, 2007, and 2006 we recognized revenues of $0.4 million and $0.2 million, respectively, from VitalStream which were excludedwe exclude 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 eachthe period (in thousands, except per share amounts):

F - 19

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  
Year Ended
December 31, 2007
 
Pro forma revenues $236,418 
Pro forma net loss  (14,269)
Pro forma net loss per share, basic and diluted  (0.25)
 
  
 Year Ended December 31, 
 
  2007  2006 
Pro forma revenues $236,418  $205,052 
Pro forma net loss  (14,269)  (16,153)
Pro forma net loss per share, basic and diluted  (0.25)  (0.34)

4.OPERATING SEGMENTS
 
We operate in threetwo business segments: IP services and data center services and CDN services. IP services primarilyrepresent our IP transit activities and include our high performance Internet connectivity, as well as sales of ourCDN services and 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.
During the year ended December 31, 2009, we changed how we view and manage our business. We now operate our IP services and the majority of our CDN services primarily include data storage, streaming/delivery andon a user interface/reporting tool. Other revenues and direct costs represent third partycombined basis while we operate the managed hosting portion of our CDN services prioras part of our data center services. The change from our historical segments reflects our view of the business and aligns our segments with our operational and organizational structure. We have integrated the primary components of our CDN services with our IP services in the IP services segment. This includes integration of our CDN POPs into our P-NAPs, along with combining engineering and operations teams and internal financial reporting.  In addition, a single manager reports directly to our chief executive officer for the integrated IP services. Historically, CDN services also included managed hosting, or maintaining network equipment on behalf of customers. Since these CDN services are a hosting activity, they are more similar to our data center services and therefore we have included these services in our data center services segment. We have reclassified financial information during the years ended December 31, 2008 and 2007 to conform to the acquisition of VitalStream. current period presentation.
The following tables show operating results for our reportable segments, along with reconciliations from segment gross profit to (loss) incomeloss before income taxes and equity in earnings of equity-method investment (in thousands):
                
  Year Ended December 31, 2008 
  IP Services  
Data
Center
Services
  
CDN
Services
  Other  Total 
Revenues $123,268  $109,679  $21,042  $  $253,989 
Direct costs of network, sales and services, exclusive of depreciation and amortization  45,782   82,009   8,086      135,877 
Segment profit $77,486  $27,670  $12,956  $    118,112 
Other operating expenses                  223,279 
Loss from operations                  (105,167)
Non-operating income                  245 
Loss before income taxes and equity in earnings of equity-method investment                 $(104,922)
          
  Year Ended December 31, 
  2009  2008  2007 
Revenues:         
IP services $125,548  $139,737  $139,072 
Data center services  130,711   114,252   84,590 
Other        10,428 
Total revenues:  256,259   253,989   234,090 
             
Direct costs of network, sales and services, exclusive of depreciation and amortization:            
IP services  48,055   51,885   50,518 
Data center services  94,961   83,992   59,440 
Other        8,436 
Total direct costs of network, sales and services, exclusive of depreciation and amortization  143,016   135,877   118,394 
             
Segment profit:            
IP services  77,493   87,852   88,554 
Data center services  35,750   30,260   25,150 
Other        1,992 
Total segment profit  113,243   118,112   115,696 
             
Impairments and restructuring  54,698   101,441   11,349 
Other operating expenses, including direct costs of customer support, depreciation and amortization
  127,467   121,838   114,058 
Loss from operations  (68,922)  (105,167)  (9,711)
Non-operating expense (income)  461   (245)  (937)
Loss before income taxes and equity in (earnings) of equity-method investment $(69,383)  (104,922) $(8,774)
 
Direct costs of network, sales and services, exclusive of depreciation and amortization, includes an allocation of $1.1 million from the IP services segment to the CDN services segment based on the average cost of actual usage by the CDN segment for 2008.
                
  Year Ended December 31, 2007 
  IP Services  
Data
Center
Services
  
CDN
Services
  Other  Total 
Revenues $122,205  $83,632  $17,806  $10,447  $234,090 
Direct costs of network, sales and services, exclusive of depreciation and amortization  43,925   59,439   6,594   8,436   118,394 
Segment profit $78,280  $24,193  $11,212  $2,011   115,696 
Other operating expenses                  125,407 
Loss from operations                  (9,711)
Non-operating income                  937 
Loss before income taxes and equity in earnings of equity-method investment                 $(8,774)
Direct costs of network, sales and services, exclusive of depreciation and amortization, included an allocation of $0.9 million from the IP services segment to the CDN services segment based on the average cost of actual usage by the CDN segment for 2007.

F - 20F-15

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
  Year Ended December 31, 2006 
  IP Services  
Data
Center
Services
  
CDN
Services
  Other  Total 
Revenues $112,250  $56,548  $  $12,577  $181,375 
Direct costs of network, sales and services, exclusive of depreciation and amortization  40,723   46,474      10,141   97,338 
Segment profit $71,527  $10,074  $  $2,436   84,037 
Other operating expenses                  81,900 
Income from operations                  2,137 
Non-operating income                  1,551 
Income before income taxes and equity in earnings of equity-method investment                 $3,688 
The following table includes selected segment financial information as of December 31, 2008 and 2007, related to goodwill and total assets (in thousands):
                
  IP Services  
Data
Center
Services
  
CDN
Services
  Other  Total 
December 31, 2008:               
Goodwill $36,314  $  $54,663  $  $90,977 
Total assets  151,839   69,317   108,927      330,083 
                     
December 31, 2007:                    
Goodwill $36,314  $  $154,363  $  $190,677 
Total assets  148,697   64,498   211,469   2,346   427,010 
 
As discussed in note 8, we recorded the following impairment charges by segment during the years ended December 31, 2009 and 2008 (in thousands):
           
   
IP
Services
  
Data
Center
Services
  Total 
           
 Year Ended December 31, 2009:         
 Goodwill $37,848  $13,665  $51,513 
 Other intangible assets  4,134      4,134 
   $41,982  $13,665  $55,647 
              
 Year Ended December 31, 2008:            
 Goodwill $74,775  $24,925  $99,700 
 Other intangible assets  2,440   196   2,636 
   $77,215  $25,121  $102,336 
              
We present goodwill by segment in note 8. We present total assets by segment as of December 31, 2009 and 2008 in the CDN services segment of $99.7 million for goodwill and $2.6 million for other intangible assets.following table (in thousands):
    December 31, 
    2009  2008 
 Total assets:       
 IP services  $191,743  $233,268 
 Data center services   75,759   96,815 
    $267,502  $330,083 
 
Through December 31, 2008,2009, neither revenues generated nor long-lived assets located outside the United States were significant (all less than 10%).
5.INVESTMENTS
 
InvestmentInvestments in Marketable Securities and Other Related Assets
 
PursuantWe invest excess funds are invested pursuant to oura formal investment policy,policy. At December 31, 2009, investments in marketable securities primarily consistand other related assets were comprised of $7.0 million of auction rate securities and the ARS Rights, described below, all designated as trading securities. We invested other excess funds in money market funds classified with cash and cash equivalents at December 31, 2009. In addition to money market funds, auction rate securities and the ARS Rights, investments in marketable securities and other related assets at December 31, 2008 also included high credit quality corporate debt securities and U.S. Treasury bills and commercial paper. All short-term investments in marketable securities havehaving original maturities greater than 90 days but less than one year, areyear. At December 31, 2008, we designated all of the investments as available for sale, and are recorded at fair value with changes in fair value reflected in other comprehensive (loss) income, a component of stockholders’ equity in our accompanying consolidated balance sheets, unless the change in fair value is determined to be an other-than-temporary impairment. Our investments in marketable securities also includeexcept for auction rate securities whose underlying assets are state-issued student and educational loans which are substantially backed by the federal government. Under our current investment policy, new or additional auction rate securities are not eligible instruments, but we will hold the existing auction rate securities until liquidity returns or we exercise our ARS Rights, which we designated as discussed below.trading securities.
 
Auction Rate 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 seven, 28 or 35 days. Auction rate securities generally trade at par value and are callable at par value 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. 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 or A3 ratings as of December 31, 2009 and AAA/Aaa as of December 31, 2008. Although these securities are issued and rated as long-term bonds, they have historically been priced and traded as short-term instrumentsinvestments because of the liquidity provided through the interest rate resets.
F-16

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
While we continue to earn and accrue interest on our auction rate securities at contractual rates, these investments arehave not currently trading.been actively trading since early 2008 when auctions failed to attract sufficient buyers. During 2008, we classifiedreclassified our auction rate securities asfrom current to non-current investments onas presented in our accompanying consolidated balance sheet versus short-term investments as of December 31, 2007.2008. This change in classification was initially due to the uncertainty as to when the auction rate securities markets would improve. In November 2008, as further described below, we accepted an offer for the ARS Rights on our auction rate securities. In conjunction with our acceptance of the ARS Rights, we changed the designation of our auction rate securities from available for sale to trading securities.
We intend to exercise the ARS Rights within the next 12 months if they are not redeemed by the issuers or sold to third parties. Accordingly, we have reclassified both the underlying securities and the ARS Rights from non-current assets to current assets as of December 31, 2009. During the years ended December 31, 2009 and 2008, we recorded unrealized gains (losses) on the auction rate securities to trading from available for saleof $0.3 million and continue to classify$(0.8) million, respectively, included in “Non-operating (income) expense” in the securities as non-current investments asconsolidated statements of December 31, 2008.

F - 21

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Summariesoperations. The unrealized loss of our investments in short-term available for sale securities are as follows (in thousands):
  
 December 31, 2008 
 
  
 Cost Basis 
 
 
Unrealized
Gain (Loss)
  Carrying Value 
Corporate debt securities $5,706  $(7) $5,699 
U.S. Treasury bills  1,500      1,500 
Total short-term investments in marketable securities $7,206  $(7) $7,199 

  December 31, 2007 
  Cost Basis  
Unrealized
Gain (Loss)
  
Carrying
Value
 
Corporate debt securities $7,607  $3  $7,610 
Auction rate securities  7,150      7,150 
Commercial paper  4,787   2   4,789 
Other  24   (4)  20 
Total short-term investments in marketable securities $19,568  $1  $19,569 
Proceeds from the sale of short-term available-for-sale securities, primarily commercial paper, were $3.2$0.8 million during the year ended December 31, 2008.2008 represented the immediate recognition in earnings of the other-than-temporary impairment on our auction rate securities in connection with our acceptance of the ARS Rights and transferring our auction rate securities from available for sale to trading securities. We previously recorded the other-than-temporary impairment on our auction rate securities in “Accumulated items of other comprehensive income” in our consolidated balance sheets. The fair values of our auction rate securities were $6.5 million and $6.4 million, recorded in “Short-term investments in marketable securities and other related gross realized gainsassets” and losses were less than $0.1 million. For“Investments and other related assets” in the consolidated balance sheets as of December 31, 2009 and 2008, respectively. During the year ended December 31, 2007, all proceeds on short-term marketable securities were from the maturity2009, $0.2 million of the securities or sales ofour auction rate securities were called by the issuer at par value. Accordingly, we didNew or additional auction rate securities are not recognize any realized gains or losses on short-term marketable securities.eligible investments under our current investment policy.
 
ARS Rights. In OctoberNovember 2008, we receivedaccepted an offer providing us with rights, or the ARS Rights, from one of our investment providers providing us with the ARS Rights, which gave us the right to sell at par value auction rate securities originally purchased from the investment provider ($7.2 million) at anytimeany time during a two-year period beginning June 30, 2010. On November 14, 2008, we accepted the offer. By accepting the offer, we are able to sell our auction rate securities back to our investment provider at par value, which is defined as the price equal to the liquidation preference of the auction rate securities plus accrued but unpaid dividends or interest, during the period of June 30, 2010 to July 2, 2012. In consideration for the ARS Rights, we granted the investment provider the right to sell or otherwise dispose of, and/or enter orders in the auction process for, our auction rate securities until July 2, 2012 without prior notification, so long as we receive payment of par value upon any sale or disposition.
 
The ARS Rights represent a firm agreement, in accordance with SFAS No. 133, which defines a firm agreement asthat is, an agreement with an unrelated party, binding on both parties and usually legally enforceable, with the following characteristics: (1)(a) the agreement specifies all significant terms, including the quantity to be exchanged, the fixed price and the timing of the transaction, and (2)(b) the agreement includes a disincentive for nonperformance that is sufficiently large to make performance probable. The enforceability of the rightsARS Rights results in a put option and should be recognized as a free standing asset separate from the auction rate securities. The ARS Rights cannot be net settled, so they doit does not meet the definition of a derivative instrument under SFAS No. 133.instrument. Therefore, we have elected to measure the ARS Rights at fair value under SFAS No. 159, which permitsin accordance with applicable accounting standards that permit an entity to elect the fair value option for selected recognized financial assets, in orderassets. Measuring the ARS Rights at fair values enables us to match the changes in the fair value of the auction rate securities. As a result, changes in fair value are and will continue to be included in earnings in future periods. ForDuring the yearyears ended December 31, 2009 and 2008, we have recorded an unrealized gain(losses) gains of $(0.1) million and $0.6 million, respectively, on the ARS Rights, representing the fair value as of December 31, 2008.Rights. The unrealized gain is(losses) gains are included in “Non-operating (income) expense” in the accompanying consolidated statements of operations and we include the fair value is includedvalues of $0.5 million and $0.6 million in “Short-term investments in marketable securities and other related assets” and “Investments and other related assets” in the accompanying consolidated balance sheets.sheets at December 2009 and 2008, respectively.
 
In connection withOther Investments in Marketable Securities. Summaries of our acceptanceother investments in short-term available for sale securities as of December 31, 2008 are as follows (in thousands):
  Cost Basis  
Unrealized
Gain (Loss)
  
Carrying
Value
 
Corporate debt securities $5,706  $(7) $5,699 
U.S. Treasury bills  1,500      1,500 
  $7,206  $(7) $7,199 
During the ARS Rights in November 2008,year ended December 31, 2009, we transferred ourhad investment proceeds of $7.4 million, representing $7.2 million from the maturity of available for sale securities at par value and $0.2 million from issuer calls of auction rate securities at par value. Accordingly, we did not recognize any realized gains or losses on the disposals of these securities. Proceeds from investments available for sale to tradingthe maturity of short-term available-for-sale securities, in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. The transfer to trading securities reflects our intent to exercise the ARS Rightsprimarily commercial paper, were $3.2 million during the period June 30, 2010 to July 2, 2012. As a result of the transfer, we immediately recognized in earnings the other-than-temporary impairment on our auction rate securities previously recorded in other comprehensive income (loss). For the year ended December 31, 2008 we recorded a cumulative other-than-temporary impairment and net changethe related gross realized gains and losses were less than $0.1 million. As noted above, our investments in fair valuemarketable securities and other related assets at December 31, 2009 were comprised of $0.8 million on the auction rate securities included in “Non-operating (income) expense” in the accompanying consolidated statements of operations.and ARS Rights, designated as trading securities.

F - 22F-17

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
Investment in Internap Japan
 
We maintaininvested $4.1 million for 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.
 
OurWe include our investment activity in the joint venture is included in the IP services operating segment, andwhich is summarized as follows (in thousands):
 
  
 Year Ended December 31, 
 
  2008  2007  2006 
Investment Balance, January 1, $1,138  $958  $823 
Proportional share of net income  283   139   114 
Unrealized foreign currency translation gain, net  201   41   21 
Investment Balance, December 31, $1,622  $1,138  $958 
         
  Year Ended
December 31,
 
  2009  2008 
Investment balance, January 1 $1,623  $1,138 
Proportional share of net income  15   283 
Unrealized foreign currency translation gain, net  166   202 
Balance, December 31, 2009 $1,804  $1,623 
 
Investment in Aventail
 
We account for investments without readily determinable fair values at cost. We include realized gains and losses and declines in value of securities judged to be other-than-temporary in other expense. We incurred a charge during the three monthsyear ended June 30,December 31, 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.
6.FAIR VALUE MEASUREMENTS

Effective January 1, 2008, we adopted SFAS No. 157. We alsothe provisions of new accounting guidance which defined fair value and provided director for using fair value to measure assets and liabilities. In accordance with the accounting guidance, we adopted SFAS No. 159the new provisions with regard to all financial assets and liabilities in our financial statements in the first quarter of 2008 and all nonfinancial assets and nonfinancial liabilities in the first quarter of 2009. The major categories of nonfinancial assets and liabilities that we measure at fair value include reporting units measured at fair value in the first step of a goodwill impairment test. Our adoption for measuring nonfinancial assets and liabilities beginning in 2009 did not have a material impact on our ARS Rights, as described in note 5. SFAS No. 157consolidated financial statements.
The new accounting standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value. See note 2 for a further description of this standard. The fair value hierarchy is summarized as follows:
 Level 1: Quoted prices in active markets for identical assets or liabilities;
 Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
 Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

We also adopted optional provisions of an accounting standard to record certain financial assets and financial liabilities at fair value. The accounting standard permitted us to choose to measure, on an instrument-by-instrument basis, many financial instruments and certain other assets and liabilities at fair value that we are not currently required to measure at fair value. We applied the optional provisions of this accounting standard to the ARS Rights as discussed in note 5.
F-18

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
The following table represents the fair value hierarchy for our financial assets (cash equivalents, and investments in marketable securities)securities and other related assets) measured at fair value on a recurring basis as of December 31, 2009 and 2008 (in thousands):
             
  Level 1  Level 2  Level 3  Total 
Money market funds and other $21,877  $  $  $21,877 
Corporate debt securities     5,699      5,699 
U.S. Treasury bills     1,500      1,500 
Auction rate securities        6,378   6,378 
ARS Rights        649   649 
Total $21,877  $7,199  $7,027  $36,103 

F - 23

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
             
  Level 1  Level 2  Level 3  Total 
December 31, 2009:            
Available for sale securities:
            
Money market funds(1)
 $26,019  $  $  $26,019 
Trading securities:
                
Auction rate securities(2)
        6,503   6,503 
ARS Rights(2)
        497   497 
  $26,019  $  $7,000  $33,019 
                 
December 31, 2008:                
Available for sale securities:
                
Money market funds and other(1)
 $21,877  $  $  $21,877 
Corporate debt securities(2)
     5,699      5,699 
U.S. Treasury bills(2)
     1,500      1,500 
Trading securities:
                
Auction rate securities(3)
        6,378   6,378 
ARS Rights(3)
        649   649 
  $21,877  $7,199  $7,027  $36,103 
 
Level 3 assets consist of auction rate securities whose underlying assets are state-issued student and educational loans that are substantially backed by the federal government and the ARS Rights.
(1)Included in “Cash and cash equivalents” in the consolidated balance sheets as of December 31, 2009 and 2008 in addition to $47.9 million and $25.0 million, respectively, of cash. Unrealized gains and losses on money market funds were nominal due to the short-term nature of the investments.
(2)Included in “Short-term investments in marketable securities and other related assets” in the consolidated balance sheets as of December 31, 2009 and 2008, respectively.
(3)Included in “Investments and other related assets” in the consolidated balance sheets as of December 31, 2008 in addition to $1.6 million of equity-method investment in Internap Japan (note 5).
While we continue to earn and accrue interest on our auction rate securities at contractual rates, these investments arehave not currentlybeen actively trading since early 2008 when auctions failed to attract sufficient buyers, and, thereforeas a result, the auction rate securities lost their liquidity. Our auction rate securities do not currently have a readily determinableobservable market value. Accordingly, thevalue and their estimated fair value of auction rate securities no longer approximates par value. Given that observable auction rate securities market information was not sufficiently available to determine the fair value of our auction rate securities, we estimated the fair value of the auction rate securities based on a wide array of market evidence related to each security’s collateral, ratings and insurance to assess default risk, credit spread risk and downgrade risk that we believe market participants would use in pricing the securities in a current transaction. These assumptions could change significantly over time based on market conditions. We then used a trinomial discount model where the future cash flows of the auction rate securities were priced by summing the present value of the future principal and forecasted interest payments. We also considered probabilities of default, auction failure, a successful auction at par value or repurchase at par value and recovery rates in default for each of the securities. We then discounted the weighted average cash flow for each period back to present value at the determined discount rate for each auction rate security.
 
Similar to the auction rate securities, observable market information was not available to determine the fair value of the ARS Rights. We estimated the fair value of the ARS Rights based on a valuation approach commonly used for forward contracts in which one party agrees to sell a financial instrument (generating cash flows) to another party at a particular time for a predetermined price. In this approach, we subtracted the present value of all expected future cash flows from the current fair value of the security, and calculated the resulting value as a future value at an interest rate reflective of counterparty risk.
 
The following table provides a summary of changes in fair value of our Level 3 financial assets, auction rate securities and ARS Rights, for each of the two years in the period ended December 31, 2009 (in thousands):
       
  
Auction
Rate
Securities
  
ARS
Rights
 
Balance, December 31, 2007 $7,150  $ 
Total losses (realized and unrealized) included in earnings  (772)   
Issuance of ARS Rights     649 
Balance, December 31, 2008  6,378   649 
Total gains (losses) (realized and unrealized) included in earnings  275   (152)
Settlements  (150)   
Balance, December 31, 2009 $6,503  $497 
The total amount of gains or losses included in earnings attributable to the change in unrealized gains or losses relating to assets still held as of December 31, 2009 and 2008 were $0.1 million and $0.8 million, respectively.
F-19

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes our nonfinancial assets measured at fair value on a nonrecurring basis as of December 31, 2009 and 2008 (in thousands):
             
  Level 1  Level 2  Level 3  Total 
December 31, 2009:            
Goodwill $  $  $39,464  $39,464 
Other intangible assets        20,782   20,782 
  $  $  $60,246  $60,246 
                 
December 31, 2008:                
Goodwill $  $  $90,977  $90,977 
Other intangible assets        33,942   33,942 
  $  $  $124,919  $124,919 

We further discuss goodwill and other intangibles assets, along with the associated impairments, in note 8.
Market risk associated with our variable rate revolving credit facility and fixed rate other liabilities relates to the potential negative impact to future earnings and reduction in fair value, respectively, from an increase in interest rates. The following table presents information about our revolving credit facility and other liabilities at December 31, 2009 and 2008 (in thousands):
  December 31, 
  2009  2008 
  Carrying
Amount
  Fair
Value
  Carrying
Amount
  Fair
Value
 
Revolving credit facility $20,000  $20,000  $20,000  $20,000 
Other liabilities  761   789   878   897 
  $20,761  $20,789  $20,878  $20,897 
       
  
Auction
Rate
Securities
  
ARS
Rights
 
Balance, December 31, 2007 $7,150  $ 
Net realized loss included in earnings  (772)   
Issuance of ARS Rights     649 
Balance, December 31, 2008 $6,378  $649 
         

We estimate the fair values of our revolving credit facility and other liabilities based on current market rates of interest.
7.PROPERTY AND EQUIPMENT
 
Property and equipment consistsconsisted of the following (in thousands):
            
 December 31,  December 31, 
 2008  2007  2009  2008 
Network equipment $96,958  $86,496  $101,705  $96,958 
Network equipment under capital lease  1,596   1,596   1,581   1,596 
Furniture, equipment and software  33,853   31,726   31,637   33,853 
Leasehold improvements  147,835   111,216   156,252   147,835 
Buildings under capital lease  3,003      3,003   3,003 
Property and equipment, gross  283,245   231,034   294,178   283,245 
Less: Accumulated depreciation and amortization ($1,721 and $1,596 related to capital leases at December 31, 2008 and 2007, respectively)  (185,895)  (165,543)
Less: Accumulated depreciation and amortization ($1,914 and $1,721 related to capital leases at December 31, 2009 and 2008, respectively)  (203,027)  (185,895)
 $97,350  $65,491  $91,151  $97,350 
 
During 2008, weWe retired $6.4 million of assets with accumulated depreciation of $6.3 million during the year ended December 31, 2009, $2.0 million of assets with accumulated depreciation of $1.9 million. During 2007, we retired $2.7 million of fully depreciated assets. We capitalized $0.3 million of interest during the year ended December 31, 2008. For2008 and $2.7 million of fully depreciated assets during the yearsyear ended December 31, 2007 and 2006,2007. The amount of interest we capitalized less than $0.1 millionwas immaterial for each year.

F - 24

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
of the three years in the period ended December 31, 2009.
 
DepreciationWe summarize 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):
 
  Year ended December 31, 
  2009  2008  2007 
Direct costs of network, sales and services $22,134  $20,650  $18,313 
Other depreciation and amortization  6,148   3,215   3,929 
Subtotal  28,282   23,865   22,242 
Amortization of acquired technologies(1)
  8,349   6,649   4,165 
Total depreciation and amortization $36,631  $30,514  $26,407 

(1)
Amortization of acquired technologies during the years ended December 31, 2009 and 2008 included impairment charges of $4.1 million and $1.9 million, respectively, for acquired CDN advertising technology. See note 8 for further details.
F-20

  
 Year ended December 31, 
 
  2008  2007  2006 
Direct costs of network, sales and services $20,650  $18,313  $13,250 
Other depreciation and amortization  3,215   3,929   2,606 
Subtotal  23,865   22,242   15,856 
Amortization of acquired technologies(1)
  6,649   4,165   516 
Total depreciation and amortization $30,514  $26,407  $16,372 
                __________________
INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
            (1) Amortization of acquired technologies for 2008 included an impairment charge of $1,850 for developed advertising technology. See note 8 for further details.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8.GOODWILL AND OTHER INTANGIBLE ASSETS
 
Goodwill
 
Goodwill represents the premium paid over the fair value of the net tangible and intangible assets we have acquired in business combinations. We recorded $154.7an aggregate goodwill impairment charge of $51.5 million ofduring the year ended December 31, 2009. This charge included $48.0 million for goodwill in connection with the acquisition of VitalStream in February 2007 described in note 3 and we recorded $36.3 million of goodwill from acquisitions in previous years. All of the VitalStream goodwill has been allocatedrelated to theour former CDN services segment and all remaining goodwill from previous acquisitions is included in our IP services segment. A total of $17.1$3.5 million of goodwill is deductible for tax purposes.
We test goodwill for impairment at least annually. We perform our annual goodwill impairment test as of August 1 of each calendar year, following our annual strategic planning cycle. Our assessment of goodwill for impairment includes comparing the fair value to the net book value of our reporting units. We estimate fair value using a combination of discounted cash flow models and market approaches. If the fair value of a reporting unit exceeds its net book value, goodwill is not impaired and no further testing is necessary. If the net book value of a reporting unit exceeds its fair value, we perform a second test to measure the amount of impairment loss, if any. To measure the amount of any impairment loss, we determine the implied fair value of goodwill in the same manner as if the affected reporting unit were being acquired in a business combination. Specifically, we allocate the fair value of the affected reporting unit to all of the assets and liabilities of that unit, including any unrecognized intangible assets, in a hypothetical calculation that would yield the implied fair value of goodwill. If the implied fair value of goodwill is less than the goodwill recorded on our balance sheet, we record an impairment charge for the difference.
As a result of our August 1, 2008 assessment, we recorded a $99.7 million goodwill impairment charge to adjust goodwill in our IP services segment related to our FCP products. The goodwill impairments in 2009 are in addition to a goodwill impairment of $99.7 million in 2008 related to our former CDN services segment to an implied fair value of $54.7 million.segment. We present the goodwill impairment charge separatelycharges in “Impairments and restructuring” in the accompanying statementconsolidated statements of operations foroperations. We reclassified the year ended December 31, 2008. original goodwill in the former CDN services segment and the 2008 impairment charge from the former CDN services segment to IP services and data center services based on the respective estimated relative fair value of those segments.
The goodwill impairment isin our former CDN services segment was primarily due to declines in our CDN services revenues and operating results as compared to our projections and unfavorable changes in market factors used to estimate fair values. The declines in CDN services revenues and operating results compared to projections are attributable to integrationour expectations and reliability issues in the acquired networkdeclining multiples of our own and have now been resolved, a strategic shift to larger, higher credit quality customers and more recently, a highly-competitive market environment forcomparable companies. The CDN services that is driving lower pricing. Changes in market factors include lower market multiples across the CDN services industrygoodwill arose from when we completed theour acquisition of VitalStream in February 2007. We initially recorded goodwill of $154.7 million in the acquisition, which represented 72% of the $214.0 million purchase price. These declines in CDN services revenues and operating results were primarily attributable to continued pricing pressures, which were partially offset by increased traffic. This was combined with higher costs of sales related to traffic mix, as well as a weakened economy and steadily increasing levels of customer churn. Given the declines in CDN services revenues and operating results, in 2009 we renewed our own now-lower market capitalization. The culmination of these factors leadingemphasis on and dedicated our internal resources within our IP services to strengthen our services offering and leverage our entire IP backbone and cost structure. Similarly, the goodwill impairment related to our FCP products in our IP services segment was due to declines in our FCP products revenues and operating results. The declines in FCP products revenues were primarily attributable to lower sales associated with a reduced marketing effort as we reevaluated our equipment sales strategy for FCP products. The impairment of goodwillcharges did not occur until the three months ended September 30, 2008. The impairment charge does not have any impact on our current cash balance or result in violation of any covenants ofin our debt instruments.

F - 25

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
credit agreement.
 
The changes in the carrying amount of goodwill for each of the two years in the period ended December 31, 2008 and 20072009 are as follows (in thousands):
             
     Data       
  IP  Center  CDN    
  Services  Services  Services  Total 
Balance, January 1, 2007 $36,314  $  $  $36,314 
Goodwill acquired        154,653   154,653 
Adjustments to pre-acquisition assets and liabilities        133   133 
Utilization of a portion of net operating losses        (423)  (423)
Balance, December 31, 2007  36,314      154,363   190,677 
                 
Balance, January 1, 2008  36,314      154,363   190,677 
Impairment        (99,700)  (99,700)
Balance, December 31, 2008 $36,314  $  $54,663  $90,977 
          
  
IP
Services
  
Data
Center
Services
  Total 
Balance, December 31, 2007:         
Goodwill $152,087  $38,590  $190,677 
             
Impairment  (74,775)  (24,925)  (99,700)
             
Balance, December 31, 2008:            
Goodwill  152,087   38,590   190,677 
Accumulated impairment losses  (74,775)  (24,925)  (99,700)
Subtotal  77,312   13,665   90,977 
             
Impairment  (37,848)  (13,665)  (51,513)
             
Balance, December 31, 2009:            
Goodwill  152,087   38,590   190,677 
Accumulated impairment losses  (112,623)  (38,590)  (151,213)
  $39,464  $  $39,464 
 
We base impairment analysis of goodwill on estimated fair values. 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. These estimates and assumptions primarily include, but are not limited to, the discount rate,rates; terminal growth rate,rates; projected revenues and costs; earnings before interest, taxes, depreciation and amortization, or EBITDA, for expected cash flows; market comparables and capital expenditures forecasts. The use of different assumptions, inputs and judgments, or changes in circumstances, could materially affect the results of the valuation. Due to the inherent uncertainty involved in making these estimates, actual results could differ from our estimates and could result in an additional non-cash impairment charge in the future. The followingFollowing is a description of the valuation methodologies we used to derive the fair value the former CDN services segment:and the FCP products reporting units as of our assessment date of June 1, 2009:
F-21

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
Income Approach: To determine fair value, we discounted the expected cash flows of the CDN services and the FCP products reporting unit.units. We calculated expected cash flows using a compounded annual revenue growth rate of approximately 20%, for CDN services and 3% for FCP products, forecasting existing cost structures and considering capital reinvestment requirements. We used a discount rate of 20%,16% for CDN services and 18% for FCP products, representing the estimated weighted average cost of capital, which reflects the overall level of inherent risk involved in our CDN servicesthe respective operations and the rate of return an outside investor wouldcould expect to earn. To estimate cash flows beyond the final year of our model,models, we used a terminal valuevalues and incorporated the present valuevalues of the resulting terminal valuevalues into our estimateestimates of fair value.
 
Market-Based Approach: To corroborate the results of the income approach described above, we estimated the fair value of our CDN services segment and FCP products reporting unit using several market-based approaches, including the enterprise value that we derive based on our stock price. We also used the guideline company method, which focuses on comparing our risk profile and growth prospects, to select reasonably similar/guideline publicly traded companies. Using the guideline company method, we selected revenue and EBITDA multiples below the median for our comparable companies.
 
We used similar valuation methodologies to derive the fair valuesvalue of our two IPother reporting units. The portion of goodwill from the former CDN services reporting units: services and products. Ourunit allocated to data center services was immediately impaired so that data center services continues to not have any recorded goodwill. Adverse changes in expected operating segment does not include any goodwill, but was valued usingresults and/or unfavorable changes in other economic factors used to estimate fair values could result in an income approach as part of our determination of enterprise value. additional non-cash impairment charge in the future.
We will continue to perform our annual goodwill impairment testingtest as of August 1 each calendar year absent any impairment indicators or other changes that may cause more frequent analysis. We assesseddid not identify an impairment as a result of our annual August 1, 2009 impairment test. We also assess on a quarterly basis whether any events have occurred or circumstances have changed that would indicate an impairment could exist. We have considered the likelihood of triggering events and concluded that no such triggering events have occurred that wouldmight cause us to re-assess goodwill for impairmenton an interim basis and concluded that none had occurred subsequent to August 1, 2008.2009.
 
The goodwill impairment during the year ended December 31, 2008 also caused us to reverse a deferred tax liability and create an income tax benefit of $0.6 million associated with the former CDN services goodwill. The goodwill impairment during the year ended December 31, 2009 similarly resulted in a deferred tax asset of $0.5 million associated with the former CDN services goodwill that we fully offset by a valuation allowance.
 
Other Intangible Assets
 
In conjunction with the change in our business segments and the associated review of our long-term financial outlook during the year-ended December 31, 2009, we also performed an analysis of the potential impairment and re-assessed the remaining asset lives of other identifiable intangible assets acquired in the VitalStream acquisition.assets. The analysis and re-assessment of other identifiable intangible assets recorded in the VitalStream acquisition resulted in:
 an impairment charge of $4.1 million in acquired CDN advertising technology due to a strategic change in market focus,
 a change in estimates that resulted in an acceleration of amortization expense of our acquired CDN customer relationships over a shorter estimated remaining useful life (from 38 months remaining as of June 1, 2009 to 11 months) to reflect our historical churn rate for acquired CDN customers,
a change in estimates that resulted in an acceleration of amortization expense of our acquired CDN trade names over a shorter estimated remaining useful life (from 32 months remaining as of June 1, 2009 to 17 months) to reflect the decreased value of our acquired CDN trade names to our business, and
a change in estimates that resulted in acceleration of amortization expense of our CDN non-compete agreements over a shorter estimated remaining useful life (from nine months remaining as of June 1, 2009 to one month) to reflect the decreased value of the non-compete agreements to our business.
Similarly, the review of our long-term financial outlook during the year-ended December 31, 2008 resulted in:
 an impairment charge of $1.9 million in developedacquired CDN advertising technology, due to a strategic change in market focus,
 an impairment charge of $0.8 million in trade names as a result of discontinuing use of the VitalStream trade name, and
 
F - 26

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 a change in our estimates that resulted in an acceleration of amortization expense of our acquired CDN customer relationships intangible asset over a shorter estimated useful life (four(from nine years remaining years insteadas of an original estimated nineAugust 1, 2008 to four years) due to customer churn resulting in higher than expected attrition as of the acquisition date.
F-22

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
The impairment chargecharges and changes in estimated remaining useful lives of CDN intangible assets did not impact our cash balances or result in violation of any covenants in our credit agreement. We continue to believe that our remaining intangible assets are not impaired.
We included the impairment charges for acquired CDN advertising technology of $4.1 million and $1.9 million for developed advertising technology is includedduring the years ended December 31, 2009 and 2008, respectively, in the caption “Direct costs of amortization of acquired technologies” in the accompanyingconsolidated statements of operations. We include the impairment charge for the VitalStream trade name of $0.8 million during the year ended December 31, 2008 in “Impairments and restructuring” in the consolidated statements of operations. The impairment chargechange in estimates of $0.8 millionremaining useful lives for the trade name is includedintangible assets as of June 1, 2009 noted above resulted in the caption “Restructuring and other impairments” in the accompanying consolidated statements of operations. The impairment charge for trade name is presented in the accompanying statement of operations net of a non-cashan increase of approximately $1.0 million to our restructuring liability, as discussed in note 9. Nonenet loss of $2.8 million, or $0.06  per basic and diluted share, during the impairment charges have any impact on our current cash balance or result in violation of any covenants of our debt instruments.year ended December 31, 2009. The change in accounting estimate for our customer relationship intangible asset as of August 1, 2008 noted above resulted in an increase to our net loss of $0.4 million, or less than $0.01 per basic and diluted share, forduring the year ended December 31, 2008.
 
The components of our amortizing intangible assets are as follows (in thousands):
             
 December 31, 2008 December 31, 2007 
 Gross   Gross   
 Carrying Accumulated Carrying Accumulated  December 31, 2009  December 31, 2008 
 Amount Amortization Amount Amortization   Gross Carrying Amount   Accumulated Amortization   Gross Carrying Amount   Accumulated Amortization 
Technology based $40,061 $(13,317)$41,911 $(8,518) $35,927  $(17,532) $40,061  $(13,317)
Contract based  24,232  (17,034) 25,018  (15,403)  24,232   (21,845)  24,232   (17,034)
 $64,293 $(30,351)$66,929 $(23,921) $60,159  $(39,377) $64,293  $(30,351)
 
Amortization expense for identifiable intangible assets during the years ended December 31, 2009, 2008 and 2007 and 2006 was $9.0 million, $6.4 million $5.3 million and $0.5$5.3 million, respectively. This amortization expense does not include impairment charges of $4.1 million and $2.7 million in 2008.during the years ended December 31, 2009 and 2008, respectively. As of December 31, 2008, estimated2009, remaining amortization expense for the next fivesix years is as follows (in thousands):
     
2010 $6,083 
2011  3,528 
2012  3,528 
2013  3,528 
2014  3,528 
2015  587 
  $20,782 
      
 2009 $6,696 
 2010  6,509 
 2011  6,181 
 2012  5,356 
 2013  4,246 
 Thereafter  4,954 
   $33,942 

9.RESTRUCTURING AND OTHER IMPAIRMENTS
 
In conjunction with the preparation of our financial statements as of and forDuring the year ended December 31, 20082009, we made adjustments in sublease income assumptions for certain properties included in our previously-disclosed 2007 and 2001 restructuring plans, implemented a restructuring plan to reduce our workforce by 45 employees and ceased use of four smaller facilities which were office and partner data center facilities.
The adjustments in lightsublease income assumptions for certain properties included in our 2007 and 2001 restructuring plans extended the period during which we do not anticipate receiving sublease income from those properties given our expectation that it will take longer to find sublease tenants and the increased availability of the recent and significant deteriorationspace in the real estate market,each of these markets where we completed an analysis of our remaining accrued restructuring liability for leased facilities. After reviewing the analysis, and specifically the underlying assumptionshave unused space. The related to anticipated sublease recoveries, we concluded that certain of the facilities remaining in the restructuring accrual were taking longer than expected to sublease or were otherwise not generating the expected levels of sublease income. The analyses were based on discounted cash flows using the same credit-adjusted risk-free rate that we used to measure the initial restructuring liability for leases that were part of the 2007 restructuring plan and undiscounted cash flows for leases that were part of the 2001 restructuring plan.plan, in accordance with accounting standards in effect at the time we initiated the restructuring plans. The cumulative effectnew assumptions resulted in an increase to our restructuring accrual of these changes was $1.1$2.0 million, which we recorded as additionala restructuring expensecharge and an increase to the related liability. We made similar adjustments during 2008 resulting in a $1.1 million increase in the restructuring liability and additional restructuring expense as of and during the year ended December 31, 2008.
The workforce reduction of 45 employees in March 2009 represented 10% of our total workforce at that time and was primarily in back-office functions as well as the elimination of certain senior management positions. All of the $0.9 million of associated non-recurring severance charges during the year ended December 31, 2009 were cash expenditures. The restructuring charge for the four leased facilities was $0.2 million and all amounts related to these leases were due within 12 months of the date we cased use. Due to the short remaining terms of these leases, we did not expect to earn any sublease income in future periods.
We also recorded a non-cash benefit of $0.1 million induring the three monthsyear ended September 30,December 31, 2008 to reduce our restructuring liability for employee separations.terminations. This non-cash adjustment removeseliminated the remaining liability for employee separationsterminations since we havehad paid all amounts.
F-23

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
During the year ended December 31, 2007, we incurred a restructuring and impairment charge of $10.3 million. Themillion, which included $1.4 million for the impairment of leasehold improvements and other assets. We took this charge was the result offollowing a review of our business, particularly in light of our acquisition of VitalStream acquisition and our plan to finalize the overall integration and implementation of the acquisition. TheIn addition to the $1.4 million impairment of leasehold improvements and other assets, 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$1.1 million 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.employees. After considering the adjustments for anticipated changes in sublease income described above, we estimated net related expenditures for the 2007 restructuring plan to be $12.2$14.0 million, of which we paid $4.2$5.9 million through December 31, 2008,2009, and the balance continuing through December 2016, the last date of the longest lease term. We expect to pay these expenditures from operating cash flows. The $1.4 million impairment charge during 2007 consisted of $1.3 million for restructured leases and less than $0.1 million for other assets. We estimated cost savings from the restructuring to be approximately $0.8 million per year through 2016, primarily for rent.

F - 27

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
In 2001, we implemented significant restructuring plans that resulted in substantial charges for real estate and network infrastructure obligations, personnel and other charges. AdditionalWe subsequently incurred additional related charges have subsequently been incurred as we continued to evaluate our restructuring reserve.
 
All of these adjustments to the restructuring liability are reported in “Restructuring and other impairments” in the accompanying consolidated statement of operations. The following table displays the activity and balances for the restructuring and asset impairment activity forduring the years ended December 31, 20082009 and 20072008 (in thousands):
                            
  December 31,  Restructuring           December 31,        December 31, 
  2006  and     Non-Cash  Non-Cash  2007     Non-Cash  2008 
  Restructuring  Impairment  Cash  Write-  Plan  Restructuring  Cash  Plan  Restructuring 
  Liability  Charges  Payments  Downs  Adjustments  Liability  Payments  Adjustments  Liability 
Activity for 2007 restructuring charge:                           
                            
Real estate obligations $  $7,755  $(2,248) $  $805  $6,312  $(1,120) $1,084  $6.276 
Employee separations     1,140   (615)     (119)  406   (260)  (146)   
                                     
Total restructuring costs     8,895   (2,863)     686   6,718   (1,380)  938   6,276 
                                     
Activity 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)  3,374   (647)  19   2,746 
                                     
Total $4,784  $10,263  $(4,062) $(1,368) $475  $10,092  $(2,027) $957  $9,022 
                         
  
December 31,
2007
Restructuring
Liability
  
Cash
Payments
  
Non-Cash
Plan
Adjustments
  
December 31,
2008
Restructuring
Liability
  Initial
Restructuring
Charges
  
Subsequent
Plan
Adjustments(1)
  
Cash
Payments
  
December 31,
2009
Restructuring
Liability
 
                         
Activity for 2009
restructuring charge:
                        
Employee terminations $  $  $  $  $877  $31  $(872) $36 
Real estate obligations              239   5   (66)  178 
               1,116   36   (938)  214 
                                 
                                 
                                 
Activity for 2007
restructuring charge:
                                
Real estate obligations  6,312   (1,120)  1,084   6,276      1,694   (1,722)  6,248 
Employee terminations  406   (260)  (146)               
   6,718   (1,380)  938   6,276      1,694   (1,722)  6,248 
                                 
Activity for 2001
restructuring charge:
                                
Real estate obligations  3,374   (647)  19   2,746      309   (575)  2,480 
                                 
  $10,092  $(2,027) $957  $9,022  $1,116  $2,039  $(3,235) $8,942 
 
The impairment charges referenced in the table above were primarily associated with our data center segment.

(1)
Includes $0.1 million of reclassifications of accrued liabilities and deferred rent related to prior restructuring activities.
 
We also recorded a $1.1 million impairment during year ended December 31, 2007 for the sales order-through-billing system. 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. 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.
10.ACCRUED LIABILITIES
 
Accrued liabilities consist of the following (in thousands):
 
  
 December 31, 
 
  2008 2007 
Compensation and benefits payable $2,918 $5,390 
Telecommunications, sales, use and other taxes  1,902  2,317 
Other  3,936  2,452 
  $8,756 $10,159 
   December 31, 
   2009   2008 
Compensation and benefits payable $5,818  $2,918 
Telecommunications, sales, use and other taxes  1,743   1,902 
Other  2,631   3,936 
  $10,192  $8,756 

11.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 the administrative agent, and other lenders who may become a party to the credit agreement from time-to-time, or the Credit Agreement. Four of our subsidiaries, VitalStream Holdings, Inc., VitalStream, Inc., PlayStream, Inc., and VitalStream Advertising Services, Inc., were guarantors of the Credit Agreement.
The Credit Agreement replaced our prior credit agreement between us and Silicon Valley Bank that was last amended on December 27, 2006.agent. We paid off and terminated this prior credit facility concurrently with the execution of the Credit Agreement.
F - 28

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Credit Agreement originally provided for a four-year Revolving Credit Facility in the aggregate amount of up to $5.0 million, which included a $5.0 million sub-limit for letters of credit. With the prior approval of the administrative agent, we had the option to 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 was 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. We had no amounts outstanding on the Revolving Credit Facility as of December 31, 2007.
The Credit Agreement also originally provided for a term loan, in the amount of $30.0 million, or the Term Loan. 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 credit agreement. 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 was a tiered LIBOR-based rate that depended on our 12-month trailing EBITDA. As of December 31, 2007, the interest rate was 7.075%.
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 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.
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 “Interest expense” within the Non-operating (income) expense section of the accompanying 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, as discussed in note 3.
We subsequently amended the Credit Agreement on May 14, 2008 and September 30, 2008, or the Amendment (the(we refer to the Credit Agreement along with the Amendment are referred to as the Amended Credit Agreement). The Amendment modified the originalAmended Credit Amendment as follows:
converted the Term Loan balance of $20.0 million as of September 30, 2008 into a loan under the Revolving Credit Facility under the Credit Agreement;
terminated the Term Loan under the Credit Agreement;
increased the total Revolving Credit Commitment (as defined in the Amended Credit Agreement) from $5.0 million to $35.0 million;
increased the Letter of Credit Sublimit (as defined in the Amended Credit Agreement) from $5.0 million to $7.0 million;
provided us and Bank of America with an option to enter into a lease financing agreement not to exceed $10.0 million; and
modified certain covenants and definitions.
Agreement includes a revolving credit facility of $35.0 million with a letter of credit sublimit of $7.0 million and an option to enter into a lease financing agreement not to exceed $10.0 million. The revolving credit facility is available to finance working capital, capital expenditures and other general corporate purposes.
 
Because the Amendment caused the Revolving Credit Facility to have substantially different terms than the Term Loan, it is considered an extinguishment of debt. We recorded a loss on extinguishment of debt in the amount of $0.2 million during the year ended December 31, 2008. The loss on extinguishment of debt is included in the caption “Interest expense” within the non-operating (income) expense section
F-24

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of the accompanying consolidated statements of operations. We also incurred other costs of less than $0.1 million in connection with the Amendment, which we recorded as debt issue costs and will amortize over the remaining term of the Amended Credit Agreement.
The interest rate on the Revolving Credit Facilityrevolving credit facility as of December 31, 2009 and 2008 was 3.0% and is based on Bank of America’s prime rate less a 0.25% margin. The principal amount of $20.0 million is due September 14, 2011. As of December 31, 2008, we had a total of $4.2 million of letters of credit issued and $10.8 millionfollows (dollars in borrowing capacity on the Revolving Credit Facility.thousands):
  December 31, 
  2009  2008 
Credit limit $35,000  $35,000 
Outstanding principal balance, due September 14, 2011  20,000   20,000 
Letters of credit issued  3,610   4,200 
Borrowing capacity  11,390   10,800 
Interest rate, based on our bank’s prime rate  3.25%  3.00%
 
The Amended Credit Agreement includes customary representations, warranties, negative and affirmative covenants (including certain financial covenants relating to a net funded debt to EBITDA ratio, a debt service coverage ratio and a minimum liquidity requirement, as well as a prohibition against paying dividends, limitations on unfunded capital expenditures of $55.0$25.0 million, for 2008 and $25.0 millionplus prior-year carryover, or an amount to be mutually agreed upon for 2009 through 2011),2010 and 2011, customary events of default and certain default provisions that could result in acceleration of all outstanding amounts due under the Amended Credit Agreement.Agreement).
 
Our obligations under the Amended 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.

F - 29

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
The fair value of our debt approximates the carrying value due to the nature of our credit facility.
12.CAPITAL LEASES
 
We record capital lease obligations and the leased property and equipment at the time of acquisition at the lesser of the present value of future lease payments based upon the terms of the related lease agreement or the fair value of the assets held under capital leases. As of December 31, 2008,2009, our capital leases havehad expiration dates ranging from May 20092010 to April 2023.
 
Historically, our capital leases relaterelated to equipment; however, in May 2008 we entered into a capital lease agreement for one of our data center locations whichthat expires in April 2023.
 
Future minimum capital lease payments together with the present value of the minimum lease payments as of December 31, 2008,2009, are as follows (in thousands):
     
2010 $562 
2011  566 
2012  569 
2013  581 
2014  599 
Thereafter  5,740 
Remaining capital lease payments  8,617 
Less: amounts representing imputed interest  (5,375)
Present value of minimum lease payments  3,242 
Less: current portion  (25)
  $3,217 
     
2009 $822 
2010  564 
2011  566 
2012  569 
2013  581 
Thereafter  6,339 
Remaining capital lease payments  9,441 
Less: amounts representing imputed interest  (5,923)
Present value of minimum lease payments  3,518 
Less: current portion  (274)
  $3,244 

13.INCOME TAXES
 
The current and deferred income tax provision (benefit) forduring the years ended December 31, 2009, 2008 2007 and 20062007 was as follows (in thousands):
            
   Year Ended December 31, 
   2008 2007 2006 
 Current:          
 Federal $254 $15 $145 
 State  181     
 Foreign (including change in unrecognized tax benefits)  (668) 921   
 Total current provision  (233) 936  145 
 Deferred:          
 Federal  (398) 356   
 State  (16) 42   
 Foreign  821  (4,414)  
 Total deferred benefit  407  (4,016)  
 Net income tax provision (benefit) $174 $(3,080)$145 
          
  Year Ended December 31, 
  2009  2008  2007 
Current:         
Federal $153  $254  $15 
State  356   181    
Foreign (including change in unrecognized tax benefits)     (668)  921 
   509   (233)  936 
Deferred:            
Federal��    (398)  356 
State  4   (16)  42 
Foreign  (156)  821   (4,414)
   (152)  407   (4,016)
Net income tax provision (benefit) $357  $174  $(3,080)
 
We account for income taxes under the liability method. We determine deferred tax assets and liabilities based on differences between financial reporting and tax bases of assets and liabilities, and we measure suchthe tax assets and liabilities using the enacted tax rates and laws that will be in effect when we expect the differences to reverse. We provide a valuation allowance to reduce our deferred tax assets to their estimated realizable value.

F - 30F-25

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
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, 
 Year Ending December 31,  2009  2008  2007 
 2008 2007 2006 
Federal income tax (benefit) expense at statutory rates  (34)% (34)% 34%
Federal income tax (benefit) at statutory rates  (34)%  (34)%  (34)%
Goodwill impairment  29       24   29    
Foreign and state income tax (benefit) expense    (4) 4 
Stock-based compensation expense  1  6  8 
Foreign and state income tax (benefit)        (4)
Stock-based compensation  1   1   6 
Tax reserves    11           11 
Other      1 
Change in valuation allowance  4  (14) (43)  8   4   (14)
Effective tax rate  % (35)% 4%  (1)%  %  (35)%
 
Temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities that give rise to significant portions of deferred taxes relaterelated to the following (in thousands):
            
 December 31,  December 31, 
 2008  2007  2009  2008 
Current deferred income tax assets:            
Provision for doubtful accounts $1,378  $593  $2,192  $1,378 
Accrued compensation  205   233   84   205 
Other accrued expenses  213   196   304   213 
Deferred revenue  1,298   1,648   1,347   1,298 
Restructuring costs  973   910 
Foreign net operating loss carryforwards – current portion     479 
Restructuring liability  1,071   973 
Other  63   77   66   63 
Current deferred income tax assets  4,130   4,136   5,064   4,130 
Less: valuation allowance  (4,129)  (3,625)  (5,064)  (4,129)
  1   511 
Net current deferred income tax assets     1 
                
Non-current deferred income tax assets:                
Property and equipment  23,719   21,488   27,577   23,719 
Goodwill  3,897      5,724   3,897 
Intangible assets  2,574      4,508   2,574 
Deferred revenue, less current portion  767   717   933   767 
Restructuring costs, less current portion  2,455   2,925 
Restructuring liability, less current portion  2,327   2,455 
Deferred rent  5,689   4,184   6,513   5,689 
Stock compensation  3,378   2,620 
U. S. net operating loss carryforwards  71,616   81,766 
Stock-based compensation  1,647   3,378 
U.S. net operating loss carryforwards  68,221   71,616 
Foreign net operating loss carryforwards, less current portion  5,481   13,717   5,514   5,481 
Capital loss carryforwards  2,271   2,271   2,271   2,271 
Tax credit carryforwards  690   180   712   690 
Other  539   502   877   539 
Non-current deferred income tax assets  123,076   130,370   126,824   123,076 
Less: valuation allowance  (120,626)  (124,936)  (123,914)  (120,626)
  2,450   5,434 
Non-current deferred income tax liabilities:        
Purchased intangibles     (1,531)
FIN 48 liability related to net operating loss carryforwards     (921)
Goodwill     (398)
Non-current deferred income tax assets (liabilities), net  2,450   2,584 
Non-current deferred income tax assets , net  2,910   2,450 
Net deferred tax assets $2,451  $3,095  $2,910  $2,451 
 
Based upon a study conducted in 2008, we reduced our net operating loss carryforwards due to limitations under Section 382 of the Internal Revenue Code with regard to an ownership change in 2001. As of December 31, 2008,2009, we had U.S. net operating loss carryforwards for federal tax purposes of approximately $188.5$179.5 million that will expire beginning 2020 through 2026. AllWe have revised all periods presented have been revised to reflect these limitations. Of the total U.S. net operating loss carryforwards, $16.8 million of net operating losses related to the deduction of stockstock-based compensation that will be tax-effected and the benefit credited to additional paid inpaid-in capital when realized. In addition, we have alternative minimum tax and stateresearch and development tax credit carryforwards of approximately $0.7 million, whichmillion. Alternative minimum tax credits have an indefinite carryforward period while our research and development credits will begin to expire in 2026. Finally, we have foreign net operating loss carryforwards of approximately $18.4$18.7 million that will begin to expire in 2009.
F - 31

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
We determined that through December 31, 2008,2009, no further ownership shiftschanges have occurred since 2001. Therefore, as of December 31, 2009, no additional material limitations exist on the U.S. net operating losses related to Section 382 of the Internal Revenue Code as of December 31, 2008.Code. However, if we experience subsequent changes in stock ownership as defined by Section 382 of the Internal Revenue Code, we may have additional limitations on the future utilization of our U.S. net operating losses.
 
F-26

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A deferred tax asset is also created by accelerated depreciable lives of fixed assets for income tax purposes. Network equipment and leasehold improvements comprise the majority of the income tax basis differences. These assets are deductible over a shorter life for financial reporting than for income tax purposes. As we retire assets in the future, the income tax basis differences will reverse and become deductible for income taxes.
We periodically evaluate the recoverability of the deferred tax assets and the appropriateness of the valuation allowance. For U.S. income tax purposes, we established a valuation allowance of approximately $121.4$125.4 million 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 we determine that it is more likely than not that the deferred tax assets will be realized, we will reduce the valuation allowance accordingly.
 
Based on analysis of our projected future U.S. pre-tax income, we may have sufficient positive evidence within the next 12 months to release the valuation allowance currently recorded against our U.S. deferred tax assets. Currently, while we cannot guarantee that our expectations of future positive income will occur, we may recognize an income tax benefit derived from total U.S. deferred tax assets upon the release of the valuation allowance. This potential release of the valuation allowance could be affected by an ownership change as defined by Section 382 of the Internal Revenue Code which might limit the future use of our U.S. net operating loss carryovers and thus reduce the potential benefit of such losses in the future to offset taxable income and reduce cash outflows for income taxes.
During the fourth quarter ofyear ended December 31, 2007, we concluded that it was more likely than not that we will realize our U.K. deferred tax assets generated in the United Kingdom, or U.K., in future years. The U.K. deferred tax assets primarily consist of net operating loss carryforwards. The total deferred tax asset wascarryforwards and were $11.6 million as of December 31, 2007. We released $4.4 million of the valuation allowance associated with U.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, for a net recognized tax benefit of $3.5 million.million during the year ended December 31, 2007.
 
Changes in our deferred tax asset valuation allowance are summarized as follows (in thousands):
   Year Ended December 31, 
   2009   2008   2007 
Balance, January 1, $124,755  $128,561  $117,747 
Decrease (increase) in deferred tax assets  4,223   (3,806)  15,228 
Recognition of deferred tax assets        (4,414)
Balance, December 31, $128,978  $124,755  $128,561 
            
   Year Ended December 31, 
   2008 2007 2006 
 
Balance, January 1,
 $128,561 $117,747 $130,316 
 Decrease (increase) in deferred tax assets  (3,806) 15,228  (12,569)
 Recognition of deferred tax assets  
  (4,414)  
 
Balance, December 31,
 $124,775 $128,561 $117,747 
The impairment of goodwill and other intangible assets induring the third quarter of 2008year ended December 31, 2009 had a material effectimpact on the income tax provision. While we may deduct a component of the former CDN services goodwill is deductible for tax purposes, the majority of the goodwill associated with both the former CDN services and FCP products as well as other intangible assets had no basis for tax purposes. Accordingly, when the “non tax basis”impairments of goodwill and other intangible assets of $90.0$55.6 million was impaired for financial reporting purposes, itduring the year ended December 31, 2009 resulted in a $30.5$49.6 million permanent difference that impacted our effective income tax rate. The portion of goodwill where there was corresponding tax basis at the timeremainder of the acquisition only impacted ourgoodwill impairment resulted in a termporary tax difference. Our effective income tax rate to the extent that the tax amortization reducedwas not impacted as the tax basis ofover the goodwill below the corresponding book basis while we havein goodwill created a deferred tax asset for financial reporting basis which was offset by a valuation allowance. In past years, this resulted in a permanent difference of an aggregate $0.4 million relating to the tax amortization difference. With the additional impairment of the “tax basis” goodwill in 2008, we recorded a tax benefit for the reversal of the previous income tax expense recognized related to the tax amortization of the CDN services goodwill.
 
We intend to reinvest future earnings indefinitely within each country; however, it is not practicable to determine the amount of the unrecognized deferred income tax liability related to future foreign earnings. Accordingly, we have not recorded deferred taxes for the difference between our financial and tax basis investment in foreign entities. Based on limited cumulative earnings from foreign operations, we expect the unrecognized deferred assets or liabilities to be an immaterial component of our consolidated financial statements.
 
Effective January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, or FIN 48. FIN 48 clarifies theOur accounting for uncertainty in income taxes recognized in our financial statements in accordance with SFAS No. 109. FIN 48 requires us 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, we must measure the tax position to determine the amount to recognize in the financial statements.

F - 32

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
Upon the adoption of FIN 48 on January 1, 2007, we recognized no increaseChanges in our liability for unrecognized tax benefits. A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ending December 31, 2008 and 2007 isare summarized as follows (in thousands):
       
  Year Ending December 31, 
  2008  2007 
Unrecognized tax benefits balance at January 1, $921  $ 
Additions for tax positions of prior years      
Reductions for tax positions of prior years settlements      
Additions for tax positions of current year     921 
Foreign exchange (loss)  (253)   
Lapse of statute of limitations  (668)   
Unrecognized tax benefits balance at December 31, $  $921 
   Year Ended December 31, 
   2009   2008   2007 
Unrecognized tax benefits balance, January 1, $  $921  $ 
Additions for tax positions of current year        921 
Foreign exchange (loss)     (253)   
Lapse of statute of limitations     (668)   
Unrecognized tax benefits balance, December 31, $  $  $921 
 
The changes in the FIN 48 liability for unrecognized tax benefits had no impact on our effective income tax rate in the respective periods of change due to the offsetting changes in our U.K. deferred tax asset.asset for the corresponding periods.
 
We classify interest and penalties arising from the underpayment of income taxes in the accompanying consolidated statementstatements of operations as a component of general“General and administrative expenses. As of December 31, 20082009 and 2007,2008, we had no accrued interest or penalties related to uncertain tax positions. Our federal income tax returns remain open to examination for the tax years 20052006 through 2007,2008; however, tax authorities have the right to adjust the net operating loss carryovers for years prior to 2005.2006. Returns filed in other jurisdictions are subject to examination for years prior to 2005.2006.
F-27

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14.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 $0.7 million, $0.9 million and $0.8 million and $0.7 million forduring the years ended December 31, 2009, 2008 2007 and 2006,2007, respectively.
15.COMMITMENTS, CONTINGENCIES, CONCENTRATIONS OF RISK AND LITIGATION, INCLUDING SUBSEQUENT EVENT
 
Operating Leases
 
We, as a lessee, have entered into leasing arrangements relating to officedata center, P-NAP and service point rentaloffice space and office equipment that are classified as operating leases. Initial lease terms range from two to 2025 years and contain various periods of free rent and any renewal options. However, we record rent expense on a straight-line basis over the initial lease term and any 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 arehaving terms in excess of one year were as follows at December 31, 20082009 (in thousands):
      
 2009 $24,808 
 2010  25,789 
 2011  26,109 
 2012  26,875 
 2013  24,846 
 Thereafter  86,882 
   $215,309 
      
 2010 $29,430 
 2011  29,515 
 2012  29,565 
 2013  26,773 
 2014  24,647 
 Thereafter  70,506 
   $210,436 
 
Rent expense was $26.6 million, $21.5 million and $15.1 million and $18.8 million forduring the years ended December 31, 2009, 2008 2007 and 2006,2007, respectively. Sublease income, recorded as a reduction of rent expense, was $0.2 million, $0.3 million $0.5 million and $0.6$0.5 million during the years ended December 31, 2009, 2008 2007 and 2006,2007, respectively.

F - 33

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 arewere as follows at December 31, 20082009 (in thousands):
      
 2009 $7,163 
 2010  4,941 
 2011  1,278 
   $13,382 
Subsequent Event
On January 29, 2009, we announced the resignation of James P. DeBlasio from his positions as President and Chief Executive Officer effective as of March 16, 2009, or the Separation Date. Mr. DeBlasio also has resigned as our director effective March 15, 2009. Pursuant to the terms of a separation agreement, Mr. DeBlasio will receive (1) a cash payment of $0.9 million, (2) full vesting of all equity awards previously granted to him as of the Separation Date and (3) if he so elects, continued health, dental and vision insurance coverage under our group health plan for 18 months from the Separation Date at no cost to him. Mr. DeBlasio has 12 months following the Separation Date in which to exercise any stock options held by him that were vested as of the Separation Date. We will record the associated severance and stock-based compensation expense in general and administrative costs during the three months ended March 31, 2009. Also on January 29, 2009, we announced the appointment of J. Eric Cooney as our President and Chief Executive Officer and director, effective March 16, 2009.
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. We research disputed costs, both in the vendors’ favor and our favor, and discuss our analysis 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. We periodically review these estimates and modify the estimates 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.
      
 2010 $6,772 
 2011  3,356 
 2012  6,116 
   $16,244 
 
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 shouldif we are 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, a limited number of vendors currently supply the routers and switches used in our network infrastructure are currently supplied by a limited number of vendors.network. 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-outmaintenance or expansion of our infrastructure and increase our costs. If our limited sourcenumber of suppliers failsfail 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
 
Securities Class Action Litigation. On November 12, 2008, a putative securities fraud class action lawsuit was filed against us and our Chief Executive Officer,former chief executive officer, James P. DeBlasio, in the United States District Court for the Northern District of Georgia, captioned Catherine Anastasio and Stephen Anastasio v. Internap Network Services Corp. and James P. DeBlasio, Civil Action No. 1:08-CV-3462-JOF. The complaint alleges that we and the individual defendant violated Section 10(b) of the Securities Exchange Act of 1934, or the Exchange Act and that the individual defendant also violated Section 20(a) of the Exchange Act as a “control person” of Internap. Plaintiffs purport to bring these claims on behalf of a class of our investors who purchased our stock between March 28, 2007 and March 18, 2008.

F - 34F-28

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Plaintiffs allege generally that, during the putative class period, we made misleading statements and omitted material information regarding (1)(a) integration of VitalStream, (2)(b) customer issues and related credits due to services outages, and (3)(c) our previously reported 2007 revenue that we subsequently reduced in 2008 as announced on March 18, 2008. Plaintiffs assert that we and the individual defendant made these misstatements and omissions in order to keep our stock price high. Plaintiffs seek unspecified damages and other relief.
 
On August 12, 2009, the Court granted plaintiffs leave to file an Amended Class Action Complaint (“Amended Complaint”). The Amended Complaint added a claim for violation of Section 14(a) of the Exchange Act based on alleged misrepresentations in our proxy statement in connection with our acquisition of VitalStream. The Amended Complaint also added our former Chief Financial Officer, David A. Buckel, as a defendant and lengthened the putative class period.
On September 11, 2009, we and the individual defendants filed motions to dismiss. Those motions are currently pending before the Court. On November 6, 2009, plaintiffs filed a Corrected Amended Class Action Complaint. On December 7, 2009, plaintiffs filed a motion for leave to file a Second Amended Class Action Complaint to add allegations regarding, inter alia, an alleged failure to conduct due diligence in connection with the VitalStream acquisition and additional statements from purported confidential witnesses. We opposed plaintiffs’ motion for leave to file the Second Amended Class Action Complaint and that motion is also currently pending before the Court.
Derivative Action Litigation. On November 12, 2009, stockholder Walter M. Unick filed a putative derivative action purportedly on behalf of Internap against certain of our directors and officers in the Superior Court of Fulton County, Georgia, captioned Unick v. Eidenberg, et al., Case No. 2009cv177627. This action is based upon substantially the same facts alleged in the securities class action litigation described above. The complaint seeks to recover damages in an unspecified amount. On January 28, 2010, the Court entered the parties’ agreed order staying the matter until the motions to dismiss are resolved in the securities class action litigation.
While we intend to vigorously contest this lawsuit,these lawsuits, we cannot determine the final resolution of this lawsuitthe lawsuits or when itthey might be resolved. In addition to the expenses incurred in defending this litigation and any damages that may be awarded in the event of an adverse ruling, our management’s efforts and attention may be diverted from the ordinary business operations to address these claims. Regardless of the outcome, this litigation may have a material adverse impact on our results because of defense costs, including costs related to our indemnification obligations, diversion of resources and other factors.
 
We are subject to other 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 effectimpact on our financial condition, results of operations or cash flows.
16.PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
 
Preferred Stock
 
Effective July 11, 2006, we implemented a one-for-10 reverse stock split for our common stock. At the time, the authorized number of shares of preferred stock was not accordingly reduced and remained at 200 million shares. Wealthough we intended the reverse stock split to reduce the authorized number of shares of preferred stock. Accordingly,stock, we did not amend our certificate of incorporation to make this change and, therefore, the authorized number of shares of preferred stock remained at 200.0 million shares. To implement this change, effective June 19, 2008, we reduced the number of authorized shares of preferred stock from 200200.0 million shares to 2020.0 million shares. Of the resulting 20 million authorized shares of preferred stock, 19.5 million shares are blank check preferred stock, the terms and conditions of which our board of directors may designate. Our board of directors previously designated the remaining 0.5 million shares of preferred stock as series B preferred stock pursuant to a certificate of designation of rights, preferences and privileges on April 11, 2007. We have no shares of preferred stock outstanding.
Rights Agreement
 
On March 15, 2007, our board of directors declared a dividend of one preferred share purchase right, or a Right, for each outstanding share of our common stock, par value $0.001 per share. The dividend was payable on March 23, 2007 to the stockholders of record on that date. Each Right entitlesentitled the registered holder to purchase from us 1/1000 of a share of our Seriesseries B Preferred Stock,preferred stock, 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 arewere set forth in athe Preferred Stock Rights Agreement between us and American Stock Transfer & Trust Company, as Rights Agent, dated April 11, 2007. 
Common Stock
On September 18, 2006, our common stock began trading on2007, or 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-10 reverse stock split of our common stock. Stockholders approved the stock split on June 21, 2006. 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 StockRights Agreement.
 
During 2006 and 2008, we acquired2009, of the 20.0 million authorized shares of treasurypreferred stock, 19.5 million shares were designated as paymentblank check preferred stock, the terms and conditions of taxes on stock-based compensation from employees. These shares will be subsequently reissued as partwhich our board of our stock-based compensation plans.
Warrants to Purchase Common Stock
On October 20, 2003, we issued warrants to purchase less than 0.1directors could designate, with the remaining 0.5 million shares of commonpreferred stock at an exercise pricedesignated as series B preferred stock.

On November 23, 2009, we approved the termination of $9.50 inthe Rights Agreement. Originally scheduled to expire on March 23, 2017, we amended the Rights Agreement to accelerate its expiration which occurred on the close of business on December 31, 2009. In connection with the expiration of the Rights Agreement, we filed a private placementCertificate of Elimination with the Secretary of State of the State of Delaware on February 26, 2010, to eliminate our series B preferred stock. The Certificate of Elimination removed the previous designation of 0.5 million shares of series B preferred stock and caused such shares of series B preferred stock to resume their status as undesignated shares of our commonpreferred stock. These warrants expired on August 22, 2008.Accordingly, all 20.0 million authorized shares of preferred stock are now designated as blank check preferred stock.

We have no shares of preferred stock outstanding.
F - 35F-29

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Treasury Stock
From time to time, we acquire shares of treasury stock as payment of statutory minimum payroll taxes on stock-based compensation from employees. We expect to reissue shares of treasury stock as part of our stock-based compensation plans.
17.STOCK-BASED COMPENSATION PLANS
 
We have granted employees options to purchase shares of stock and issued unvested stock awards, commonly referred to as stock options and restricted stock, respectively. We measure stock-based compensation cost at the grant date based on the calculated fair value of the option or award. We recognize the expense over the employees’ requisite service period, generally the vesting period of the option or award.For performance-based awards, we periodically assess whether the performance conditions are probable of being met and record compensation expense based on this assessment of probability. We estimate the fair value of stock options at the grant date using the Black-Scholes option pricing model with weighted average assumptions for the activity under our stock plans. Optionmodel. Stock 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.When we elect to pay certain bonuses in shares of stock, the total amount to be paid is determined similarly to cash bonuses and the number of shares to be granted is determined based on the fair value of our stock at the date of grant.
 
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 forduring the years ended December 31, 2009, 2008 2007 and 20062007 (in thousands):
 
   Year ended December 31, 
    2009   2008   2007 
Direct costs of customer support $1,112  $1,369  $1,892 
Sales and marketing  1,395   1,782   2,135 
General and administrative  3,106   4,348   4,654 
  $5,613  $7,499  $8,681 
       Year ended December 31, 
  2008  2007  2006 
Direct costs of customer support $1,369  $1,892  $1,102 
Product development  688   856   628 
Sales and marketing  1,782   2,135   2,145 
General and administrative  3,660   3,798   2,067 
Total stock-based compensation expense included in net income $7,499  $8,681  $5,942 
 
We have not recognized any tax benefits associated with stock-based compensation due to our tax net operating losses. We capitalized less than $0.1 million of stock-based compensation during each of the three years in the period ended December 31, 2008, 2007 and 2006.2009.
 
We estimated the fair values of stock options 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 activityoption grants under our stock optionstock-based compensation plans forduring the years ended December 31, 2009, 2008 2007 and 2006,2007, were expected terms of 4.3, 4.0 6.2 and 5.7,6.2, respectively; historical volatilities of 72%82%, 114%72% and 123%114% respectively; risk free interest rates of 2.61%1.8%, 4.44%2.6% and 4.63%4.4%, respectively and no dividend yield. The weighted average estimated fair value per share of our employee stock options at grant date was $1.65, $3.79 and $13.71 and $7.75 forduring the years ended December 31, 2009, 2008 2007 and 2006,2007, respectively. The expected term represents the weighted average period of time that grantedthe stock options are expected to be outstanding, giving consideration to the vesting schedules and our historical exercise patterns. Because our stock 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 term of the options. We have also used historical data to estimate stock option exercises, employee terminationterminations and forfeiture rates.
 
In June 2006, our stockholders approved the repricing of 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. We implemented the repricing 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 one-for-two; and
Each new option has a 10-year term and 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.

F - 36

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. 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.
StockStock-Based Compensation and Option Plans
 
On June 23, 2005, we adoptedUnder the Internap Network Services Corporation 2005 Incentive Stock Plan, or the 2005 Plan, which we amended and restated on March 15, 2006. Under the 2005 Plan, we may issue stock options, stock appreciation rights, stock grants and stock unit grants to eligible employees and directors. Our historical practice has been to grant only stock options and stock grants (i.e., restricted stock).
The 2005 Plan is administered by the compensation committee of our board of directors. On October 1, 2008, we filed a registration statement on Form S-8 to register 4.0 million additional shares of our common stock for issuance underdirectors administers the 2005 Plan. We have reserved a total of 10.8 million shares of stock for issuance under the 2005 Plan, comprised of 6.0 million shares designated in the 2005 Plan plus 1.0 million shares that remain available for issuance of stock options and awards and 3.8 million shares of unexercised stock options under certain pre-existing plans. We will not make any future grants under the specified preexistingthese pre-existing 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, 2008, 2.62009, 3.2 million stock options were outstanding, 0.81.1 million shares of non-vestedunvested restricted stock awards were outstanding and 6.63.3 million shares of stock were available for issuance under the 2005 Plan.
 
Under the 2005 Plan, we may not grant in any calendar year ana stock option to any employee or director 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.stock in any calendar year. Similarly, we may not make in any calendar year a stock grant or stock unit grant to any employee or director where the fair market value of the stock subject to such grant on the grant date exceeds $3.0 million.million in any calendar year. Furthermore, we may not issue more than 0.7 million non-forfeitable shares of stock pursuant to stock grants.
 
F-30

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As a result of theour 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 correspondingoutstanding stock options to purchase stock. Under the terms of the merger agreement, eachgranted under such plan. 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 optionstock-based compensation plan and terms of the stock option agreement. Based on VitalStream’sWe converted 3.0 million stock options outstanding at February 20, 2007, we converted options to purchase approximately 3.0 million shares of VitalStream common stock into 1.5 million stock options to purchase approximately 1.5 million shares of our 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 planVitalStream 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 grant date of grant and had contractual terms of five 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.
 
In July 1999, we adoptedUnder the 1999 Non-Employee Directors’ Stock Option Plan, or the Director Plan. The Director Plan, provides for the grant ofwe granted non-qualified stock options to non-employee directors. A total of 0.4 million shares of our common stock have beenwere reserved for issuance under the Director Plan. Under the Director Plan, non-employee directors receive fully-vested and exercisable initial option forreceived 8,000 shares of our common stock options on the date such person is first elected or appointed as a non-employee director. The Director Plan provides that onOn the day after each of our annual stockholder meetings, each non-employee director receives a fully vested and exercisable option forreceived 5,000 shares,stock options, provided such person has beenwas a non-employee director for at least the prior six months. The stock options havehad an exercise price equal to 100% of the fair market value of our common stock on the grant date and arewere fully vested and exercisable as of the grant date. Each director also receivesreceived an annual grant of 2,500 restricted stock, awards, which vestvested ratably over three years, subject to the terms of the 2005 Plan, under which these shares of restricted stock awards arewere granted. Beginning in 2009, the actual number of stock options and shares of restricted stock to be granted was the lesser of dividing $55,000 by either (a) our closing stock price on the grant date, or (b) $3.00 per share. In addition, new non-employee directors were to receive a grant of 12,500 shares of restricted stock awards, whichto vest ratably over three years, subject to the terms of the 2005 Plan and the stock grant agreement under which the restricted stock awards are granted.years. As of December 31, 2008, 0.22009, 0.3 million stock options were outstanding and 0.2 million shares were available for grant pursuant to the Director Plan.

F - 37

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Director Plan expired by its terms in July 2009.  We will make future grants of stock options and/or restricted stock to non-employee directors from the 2005 Plan.
 
The optionFor all stock-based compensation plans, the exercise price for each share of stock subject to an option generally may not be less than the fair market value of a share of our common stock on the grant date. Stock options generally have a maximum term of 10 years from the grant date. 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 stock options. Upon exercise of a stock appreciation right, the compensation committee of our board of directors determines 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.
 
OptionsStock options and stock appreciation rights, if any, become exercisable in whole or in part from time-to-time as determined at the grant date by our board of directors or the compensation committee of our board of directors, as applicable. Stock options generally vest 25% after one year and monthly or quarterly over the following three years, except for non-employee directors who usually receive immediately exercisable options. 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 grant date 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 grant date. We have reserved common stock under each of the stockstock-based compensation plans to satisfy stock option exercises with newly issued stock. However, we may also use treasury stock to satisfy stock option exercisesexercises.
 
On March 20, 2008, we granted 0.2 million shares of restricted common stock with performance-based vesting. The awards will vest in increments of one-third beginning on the first anniversary of the grant date if we achieve revenue and adjusted earnings levels established by our board of directors. ”Adjusted earnings” is defined in the 2005 Plan. We 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 vestStock option activity during any of the three years, 50% of such shares will vest on the fourth anniversary of the date of grant. For the performance-based restricted stock awards, we recognize compensation expense based on our assessment of the probability that the performance conditions will be achieved. We must use our judgment to make the probability assessment and, as of December 31, 2008, we believed the performance conditions would not be met.
Option activity for the year ended December 31, 20082009 under all of our stock optionstock-based compensation plans is as follows (shares in thousands):
       
  Shares  
Weighted
Average
Exercise Price
 
Balance, December 31, 2008  2,781  $11.91 
Granted  2,224   2.66 
Exercised  (5)  2.14 
Forfeitures and post-vesting cancellations  (747)  10.53 
Balance, December 31, 2009  4,253  $7.16 
Exercisable, December 31, 2009  2,084  $10.59 
F-31

        
   Shares  
Weighted
Average
Exercise Price
 
 Balance, January 1, 2008  3,173  $13.29 
 Granted  660   6.90 
 Exercised  (78)  4.08 
 Forfeitures and post-vesting cancellations  (974)  13.62 
 Balance, December 31, 2008  2,781  $11.91 
 Exercisable, December 31, 2008  1,738  $13.37 
INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
Fully vested and exercisable stock options and stock options expected to vest as of December 31, 20082009 are further summarized as follows (shares in thousands):
        
   
Fully
Vested and
Exercisable
  
Expected
to Vest
 
 Total shares  1,738   2,616 
 Weighted-average exercise price $13.37  $12.07 
 Aggregate intrinsic value $2,925  $2,925 
 Weighted-average remaining contractual term, in years  5.8   6.6 
       
  
Fully
Vested and
Exercisable
  
Expected
to Vest
 
Total shares  2,084   3,815 
Weighted-average exercise price $10.59  $7.58 
Aggregate intrinsic value $170,194  $3,181,769 
Weighted-average remaining contractual term, in years  3.8   6.1 
 
The total intrinsic value of stock options exercised was less than $0.1 million, $0.2 million and $11.8 million and $2.6 million forduring the years ended December 31, 2009, 2008 2007 and 2006,2007, respectively. None of our stock options or the underlying shares is subject to any right to repurchase by us.

F - 38

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
Restricted stock activity forduring the year ended December 31, 20082009 is as follows (shares in thousands):
        
   Shares  
Weighted-Average
Grant Date Fair
Value
 
 Non-vested balance, January 1, 2008  679  $13.19 
 Granted  724   4.07 
 Vested  (256)  10.84 
 Forfeited  (302)  9.22 
 Non-vested balance, December 31, 2008  845  $7.76 
       
  Shares  
Weighted-Average
Grant Date Fair
Value
 
Unvested balance, December 31, 2008  845  $7.76 
Granted  944   2.61 
Vested  (384)  7.95 
Forfeited  (317)  5.87 
Unvested balance, December 31, 2009  1,088  $3.61 
 
The total fair value of restricted stock awards vested during the years ended December 31, 2009, 2008 2007 and 20062007 was $1.1 million, $1.1 million and $2.3 million, and $2.1 million, respectively. The cumulative effect of the change in the forfeiture rate for non-vested restricted stock upon our adoption of SFAS No. 123R on January 1, 2006 was immaterial and recorded as part of operating expense. The total intrinsic value at December 31, 20082009 of all non-vestedunvested restricted stock awards was $2.1$5.1 million.
 
Total unrecognized compensation costs related to non-vestedunvested stock-based compensation as of December 31, 20082009 is summarized as follows (dollars in thousands):
            
   December 31, 2008 
   
Stock
Options
 
Restricted
Stock
 Total 
 Unrecognized compensation $8,367 $8,253 $16,620 
 Weighted-average remaining recognition period (in years)  2.5  2.6  2.6 
             
  Stock Options  Restricted Stock   Total 
Unrecognized compensation $5,218  $3,384  $8,602 
Weighted-average remaining recognition period (in years)  3.1   2.9   3.0 
 
Employee Stock Purchase Plan
 
Effective June 15, 2004, we adopted theOur 2004 Internap Network Services Corporation Employee Stock Purchase Plan, or the Purchase Plan. The purpose of the Purchase Plan is to encourageencourages 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 Purchase Plan 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, theThe price for shares of common stock purchased under the Purchase Plan was the lesser of 85%is 95% of the closing sale price per share of common our stock on the first day of the purchase period or 85% of such closing price on the last day of the purchase period. The Purchase Plan wasis 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, we amended the Purchase Plan 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, we did not recognize additional compensation expense for the Purchase Plan after June 30, 2006. We granted less than 0.1 million shares under the Purchase Plan during each of the years during the three year period ended December 31, 2008 and 2007, and we granted approximately 0.1 million shares under the Purchase Plan during the year ended December 31, 2006.2009. Cash received from participation in the Purchase Plan was $0.1 million during the year ended December 31, 2009 and $0.2 million for each of the years ended December 31, 2008 and 2007 and $0.5 million for the year ended December 31, 2006.2007. At December 31, 2008,2009, 0.2 million shares were reserved for future issuance under the Purchase Plan.
 
At December 31, 2008,2009, we had reserved 9.88.9 million total shares for future awards under all stock-based compensation plans. Cash received from all stock-based compensation arrangements was $0.1 million, $0.5 million and $8.6 million and $3.0 million forduring the years ended December 31, 2009, 2008 2007 and 2006,2007, respectively.
18.RELATED PARTY TRANSACTIONS
 
As discussed in note 5, we have a 51% ownership interest in Internap Japan, a joint venture that we account for using the equity method. Transactions with Internap Japan are summarized as follows (in thousands):
   Year Ended December 31, 
   2009   2008   2007 
Revenues $390  $366  $357 
Direct costs of network sales and services  168   181   139 
             
F-32

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
   December 31, 
   2009   2008 
Accounts receivable $95  $89 
Accounts payable  51   26 
Also as discussed in note 5, 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 2006.2007. As of December 31, 2007, our outstanding receivable balance with Aventail was less than $0.1 million. We incurred a charge during the periodyear ended June 30,December 31, 2007, totaling $1.2 million, representing the write-off of the remaining carrying value of our investment in series D preferred stock of Aventail.

F - 39

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19.           SUPPLEMENTAL CASH FLOW INFORMATION
 
One of our former executive officers had a material equity ownership interest in andSupplemental cash flow information is a member of the board of directors of a customer of ours, Surfline/Wavetrak, Inc., or Surfline. We invoiced Surfline $0.2 million and $0.1 million during 2008 and 2007, respectively, of which less than $0.1 million was outstanding as of both December 31, 2008 and 2007. Surfline was not a customer prior to 2007. This executive officer resigned from the Company in June 2008.follows (in thousands):
          
  Year Ended December 31, 
  2009  2008  2007 
Supplemental disclosure of cash flow information:         
Common stock issued and stock options assumed in VitalStream acquisition $  $  $208,293 
Cash paid for interest, net of amounts capitalized  795   1,403   1,152 
Cash paid for income taxes  681   361   103 
Non-cash acquisition of property and equipment under capital leases     3,069   148 
Capitalized stock-based compensation  24   97   25 
19.
20.           UNAUDITED QUARTERLY RESULTS
 
The following table sets forth selected unaudited quarterly data forduring the years ended December 31, 20082009 and 2007.2008. The quarterly operating results below are not necessarily indicative of those in future periods (in thousands, except for share data).
                        
 Quarter Ended  Quarter Ended 
2008 March 31  June 30  September 30  December 31 
2009 March 31  June 30  September 30  December 31 
                            
Revenues $62,053  $62,325  $65,399  $64,212  $63,924  $64,372  $64,414  $63,549 
Direct costs of network, sales and services, exclusive of depreciation and amortization  31,363   33,484   35,404   35,626   35,665   36,579   36,497   34,275 
Direct costs of customer support  4,403   4,438   4,767   4,919 
Direct costs of amortization of acquired technologies  1,229   1,229   3,049   1,142   1,158   5,233   979   979 
Direct costs of customer support  4,365   4,203   3,950   3,699 
Impairments and restructuring        100,415   1,026   870   53,735      93 
Net income (loss)  739   (3,237)  (101,405)  (910)
Basic net income (loss) per share  0.02   (0.07)  (2.06)  (0.02)
Diluted net income (loss) per share  0.01   (0.07)  (2.06)  (0.02)
Net loss  (6,608)  (60,645)  (1,975)  (497)
Basic and diluted net loss per share  (0.13)  (1.22)  (0.04)  (0.01)
 

             
  Quarter Ended 
2008 March 31  June 30  September 30  December 31 
             
Revenues $62,053  $62,325  $65,399  $64,212 
Direct costs of network, sales and services, exclusive of depreciation and amortization  31,363   33,484   35,404   35,626 
Direct costs of customer support  4,365   4,203   3,950   3,699 
Direct costs of amortization of acquired technologies  1,229   1,229   3,049   1,142 
Impairments and restructuring        100,415   1,026 
Net income (loss)  739   (3,237)  (101,405)  (910)
Basic net income (loss) per share  0.02   (0.07)  (2.06)  (0.02)
Diluted net income (loss) per share  0.01   (0.07)  (2.06)  (0.02)
             
  Quarter Ended 
2007 March 31  June 30  September 30  December 31 
                 
Revenues $53,534  $58,494  $60,426  $61,636 
Direct costs of network, sales and services, exclusive of depreciation and amortization  28, 629   29,617   29,272   30,876 
Direct costs of amortization of acquired technologies  654   1,054   1,228   1,229 
Direct costs of customer support  3,388   4,330   4,495   4,334 
Impairments and restructuring  11,349          
Acquired in-process research and development  450          
Write-off of investment     1,178       
Net (loss) income  (10,695)  (1,683)  1,383   5,440 
Basic and diluted net (loss) income per share  (0.26)  (0.03)  0.03   0.11 
                 

 
F - 40F-33

 
 
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
Period
 
Year ended December 31, 2006:                
Allowance for doubtful accounts $963 $548 $ $(1,130
)(1)
$381 
                 
Balance at
Beginning
of Fiscal
Period
  
Charges to
Costs and
Expense
  
Charges to
Other
Accounts
  Deductions   
Balance at
End of
Fiscal
Period
 
Year ended December 31, 2007:                                
Allowance for doubtful accounts  381  2,261  928(2) (1,219
)(1)
 2,351  $381  $2,261  $928(1) $(1,219) (2)  $2,351 
                                     
Year ended December 31, 2008:                                     
Allowance for doubtful accounts  2,351  5,322    (4,896
)(1)
 2,777   2,351   5,083      (4,657) (2)   2,777 
                     
Year ended December 31, 2009:                     
Allowance for doubtful accounts  2,777   2,711      (3,535) (2)   1,953 
 


(1)__________________Purchase price adjustment associated with our acquisition of VitalStream Holdings, Inc.
(1)(2)Deductions in the allowance for doubtful accounts represent write-offs of uncollectible accounts net of recoveries.
(2)Purchase price adjustment associated with our acquisition of VitalStream Holdings, Inc.
 
 
S - 1S-1