UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,WASHINGTON, DC 20549
 
 
FORM 10-Q

 
(Mark One)
 
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  For the quarterly period ended March 31,June 30, 2008

OR

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

For the transition period from             to             

Commission File Number: 000-27265
 
 
INTERNAP NETWORK SERVICES CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
 

DELAWARE91-2145721
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification Number)No.)


250 Williams Street
Atlanta, Georgia 30303
(Address of Principal Executive Offices, Including Zip Code)

(404) 302-9700
(Registrant’s Telephone Number, Including Area Code)
 
 

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o
Non-accelerated filer o
Accelerated filer x
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 Exchange Act). Yes   o     No  x  
 
As of April 21,July 31, 2008, 50,419,89550,225,433 shares of the registrant’s outstanding common stock, $0.001 par value per share, were outstanding.
 


INTERNAP NETWORK SERVICES CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31,JUNE 30, 2008
TABLE OF CONTENTS
  
  Pages
 PART I. FINANCIAL INFORMATION 
   
 
Special Note Regarding Forward-Looking Statements
3
   
ITEM 1.
FINANCIAL STATEMENTS
4
   
 
Unaudited Condensed Consolidated Statements of Operations
4
   
 
Unaudited Condensed Consolidated Balance Sheets
5
   
 
Unaudited Condensed Consolidated Statements of Cash Flows
6
   
 
Unaudited Condensed Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)Loss
7
   
 
Unaudited Condensed Notes to Consolidated Financial Statements
8
   
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1317
   
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
2128
   
ITEM 4.
CONTROLS AND PROCEDURES
2228
   
 PART II. OTHER INFORMATION 
   
ITEM 1.
LEGAL PROCEEDINGS
2430
   
ITEM 1A.
RISK FACTORS
2430
   
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
2430
   
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
31
ITEM 6.
EXHIBITS
2431
   
 SIGNATURES 
 
- 2 - -
 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements regarding industry trends, our future financial position and performance, business strategy, revenues and expenses in future periods, projected levels of growth, and other matters that do not relate strictly to historical facts. These statements are often identified by the use of words such as “may,” “will,” “seeks,” “anticipates,” “believes,” “estimates,” “expects,” “projects,” “forecasts,” “plans,” “intends,” “continue,” “could,” “should,” or similar expressions or variations. These statements are based on the beliefs and expectations of our management team based on information currently available. Such forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated by forward-looking statements. Important factors currently known to our management that could cause or contribute to such differences include, but are not limited to, those set forth in this quarterly report under “Item 1A .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,” or the “Company” refer to Internap Network Services Corporation.
 


- 3 - -




 
PART I. FINANCIAL STATEMENTS

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts) 
  
Three Months Ended
March 31,
 
  2008  2007 
Revenues:      
Internet protocol (IP) services $31,124  $29,316 
Data center services  25,185   18,098 
Content delivery network (CDN) services  5,744   2,052 
Other  —   4,068 
Total revenues  62,053   53,534 
         
Operating costs and expenses:        
Direct costs of network, sales and services, exclusive of depreciation
and amortization shown below:
        
IP services  11,290   10,340 
Data center services  18,124   14,305 
CDN services  1,949   663 
Other  —   3,321 
Direct costs of amortization of acquired technology  1,229   653 
Direct costs of customer support  4,365   3,388 
Product development  2,291   1,255 
Sales and marketing  8,829   6,189 
General and administrative  8,003   7,832 
Restructuring and asset impairment  —   11,349 
Acquired in-process research and development  —   450 
Depreciation and amortization  5,381   4,912 
Gain on disposals of property and equipment  (16)  (4)
Total operating costs and expenses  61,445   64,653 
Income (loss) from operations  608   (11,119)
         
Non-operating (income) expense:        
Interest income  (701)  (693)
Interest expense  310   223 
Other, net  81   2 
Total non-operating (income) expense  (310)  (468)
         
Income (loss) before income taxes and equity in earnings of equity method investment  918   (10,651)
Provision for income taxes  251   50 
Equity in earnings of equity-method investment, net of taxes  (72)  (6)
Net Income (loss)  $739  $(10,695)
         
Net income (loss) per share:        
Basic $0.02  $(0.26)
Diluted $0.01  $(0.26)
         
Weighted average shares used in per share calculations:        
Basic  49,110   40,997 
Diluted  49,330   40,997 
         
The accompanying notes are an integral part of these condensed consolidated financial statements.
4


  INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
  
March 31,
2008
  
December 31,
 2007
 
ASSETS      
Current assets:      
Cash and cash equivalents $49,850  $52,030 
Short-term investments in marketable securities  12,429   19,569 
Accounts receivable, net of allowance of $5,124 and $5,470, respectively  32,956   36,429 
Inventory  502   304 
Prepaid expenses and other assets  10,445   8,464 
Deferred tax asset, current portion  749   479 
Total current assets  106,931   117,275 
         
Property and equipment, net of accumulated depreciation of $170,421 and $165,543, respectively  70,596   65,491 
Investments  8,085   1,138 
Intangible assets, net of accumulated amortization of $25,482 and $23,921, respectively  41,448   43,008 
Goodwill  190,677   190,677 
Restricted cash  2,127   4,120 
Deferred tax asset, non-current  2,610   3,014 
Deposits and other assets  3,497   2,287 
Total assets $425,971  $427,010 
         
LIABILITIES AND STOCKHOLDERS' EQUITY        
Current liabilities:        
Notes payable, current portion $3,667  $2,413 
Accounts payable  18,150   19,624 
Accrued liabilities  8,589   10,159 
Deferred revenue, current portion  3,765   4,807 
Capital lease obligations, current portion  833   805 
Restructuring liability, current portion  2,051   2,396 
Other current liabilities  110   108 
Total current liabilities  37,165   40,312 
         
Notes payable, less current portion  16,121   17,354 
Deferred revenue, less current portion  2,842   2,275 
Capital lease obligations, less current portion  233   452 
Restructuring liability, less current portion  7,389   7,697 
Deferred rent  11,567   11,011 
Deferred tax liability  515   398 
Other long-term liabilities  849   878 
Total liabilities  76,681   80,377 
         
Commitments and Contingencies        
         
Stockholders' equity:        
Preferred stock, $0.001 par value, 200,000 shares authorized, none issued or outstanding  —   — 
Common stock, $0.001 par value; 60,000 shares authorized; 50,234 and 49,759 shares
outstanding at March 31, 2008 and December 31, 2007, respectively
  50   50 
Additional paid-in capital  1,210,532   1,208,191 
Accumulated deficit  (861,271)  (862,010)
Accumulated other comprehensive income  114   402 
Treasury stock, at cost, 23 shares at March 31, 2008  (135)  — 
Total stockholders' equity  349,290   346,633 
Total liabilities and stockholders' equity $425,971  $427,010 

The accompanying notes are an integral part of these condensed consolidated financial statements.
5


INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
  
Three months ended
March 31,
 
  2008  2007 
CASH FLOWS FROM OPERATING ACTIVITIES      
Net income (loss) $739  $(10,695)
Adjustments to reconcile net income (loss) to net cash used in operating activities:        
Asset impairment  —   2,454 
Acquired in-process research and development  —   450 
Depreciation and amortization  6,610   5,565 
Gain on disposal of assets  (16)  (4)
Provision for doubtful accounts and billing adjustments  655   189 
Income from equity method investment  (72)  (6)
Non-cash changes in deferred rent  556   (1,133)
Stock-based compensation expense  2,375   1,625 
Deferred income taxes  251   — 
Other, net  (62)   14 
Changes in operating assets and liabilities, excluding effects of acquisition:        
Accounts receivable  2,818   (2,281)
Inventory  (198)  (41)
Prepaid expenses, deposits and other assets  (3,195)  (2,343)
Accounts payable  (1,474)   4,884 
Accrued and other liabilities  (1,833)  (2,580)
Deferred revenue  (475)   456 
Accrued restructuring charge  (653)   9,584 
Net cash provided by operating activities  6,026   6,138 
         
CASH FLOWS FROM INVESTING ACTIVITIES        
Purchases of property and equipment  (10,123)  (3,786)
Purchases of investments in marketable securities  (9,321)  (6,367)
Maturities of investments in marketable securities  9,379   5,536 
Proceeds from disposal of property and equipment  16   — 
Cash received from acquisition, net of costs incurred for the transaction  —   3,203 
Change in restricted cash  1,993   — 
Net cash used in investing activities  (8,056)  (1,414)
         
CASH FLOWS FROM FINANCING ACTIVITIES        
Principal payments on notes payable  —   (1,260)
Payments on capital lease obligations  (191)  (594)
Proceeds from stock compensation plans  64   3,723 
Other, net  (23)  (12)
Net cash (used in) provided by financing activities  (150)   1,857 
         
Net (decrease) increase in cash and cash equivalents  (2,180)   6,581 
Cash and cash equivalents at beginning of period  52,030   45,591 
Cash and cash equivalents at end of period $49,850  $52,172 
SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION:        
Common stock issued and stock options assumed for acquisition of VitalStream $—  $208,293 
             
  Three Months Ended June 30,  Six Months Ended June 30, 
  
2008
  
2007
  2008  
2007
 
Revenues:            
Internet protocol (IP) services $30,395  $29,740  $61,519  $59,056 
Data center services  26,511   19,856   51,696   37,954 
Content delivery network (CDN) services  5,419   5,222   11,163   7,274 
Other  —   3,676   —   7,744 
Total revenues  62,325   58,494   124,378   112,028 
Operating costs and expenses:                
Direct costs of network, sales and services, exclusive of depreciation and amortization shown below:                
IP services  11,401   10,573   22,691   20,912 
Data center services  20,028   14,095   38,152   28,400 
CDN services  2,055   1,958   4,004   2,621 
Other  —   2,991   —   6,312 
Direct costs of amortization of acquired technologies  1,229   1,054   2,458   1,708 
Direct costs of customer support  4,203   4,330   8,568   7,718 
Product development  2,052   1,747   4,343   3,002 
Sales and marketing  7,711   8,341   16,540   14,531 
General and administrative  8,478   7,896   15,826   15,539 
Provision for doubtful accounts  3,042   437   3,697   626 
Restructuring and asset impairment  —   —   —   11,349 
Acquired in-process research and development  —   —   —   450 
Depreciation and amortization  5,699   5,912   11,080   10,824 
Gain on disposals of property and equipment  —   —   (16)  (4)
Total operating costs and expenses  65,898   59,334   127,343   123,988 
Loss from operations  (3,573)  (840)  (2,965)  (11,960)
                 
Non-operating (income) expense:                
Interest income  (507)  (671)  (1,208)  (1,364)
Interest expense  180   267   490   490 
Write-off of investment  —   1,178   —   1,178 
Other, net  22   (20)  103   (19)
Total non-operating (income) expense  (305)  754   (615)  285 
                 
Loss before income taxes and equity in earnings of equity method investment  (3,268)  (1,594)  (2,350)  (12,245)
Provision for income taxes  46   106   297   156 
Equity in earnings of equity-method investment, net of taxes  (77)  (17)  (149)  (24)
Net loss $(3,237) $(1,683) $(2,498) $(12,377)
                 
Net loss per share, basic and diluted $(0.07) $(0.03) $(0.05) $(0.28)
                 
Weighted average shares used in computing basic and diluted net loss per share  49,208   48,515   49,159   44,932 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


6- 4 - -

INTERNAP NETWORK SERVICES CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)BALANCE SHEETS
(In thousands)
   Common Stock                     
                   Accumulated         
           Additional       Other       Total 
       Par   Paid-In   
Accumulated
   Comprehensive   
Treasury
   Stockholders' 
   Shares   Value   Capital   Deficit   Income   Stock    Equity 
                             
Three months ended
March 31, 2008:
                            
Balance, December 31, 2007  49,759  $50  $1,208,191  $(862,010) $402  $—  $346,633 
Net income  —   —   —   739   —   —   739 
Change in unrealized gains and losses on
investments, net of taxes
  —   —   —   —   (345)   —   (345) 
Foreign currency translation adjustment  —   —   —   —   57   —   57 
Total comprehensive income                          451 
Stock compensation plans activity  49   —   198   —   —   —   198 
Stock-based compensation  426   —   2,143   —   —   (135)   2,008 
Balance, March 31, 2008  50,234  $50  $1,210,532  $(861,271) $114  $(135) $349,290 
thousands, except per share amounts)
 
Three months ended
March 31, 2007:
                      
Balance, December 31, 2006  35,873  $36  $982,624  $(856,455) $320  $—  $126,525 
Net loss  —   —   —   (10,695)   —   —   (10,695) 
Change in unrealized gains and losses on
investments, net of taxes
  —   —   —   —   83   —   83 
Foreign currency translation adjustment  —   —   —   —   (38)   —   (38) 
Total comprehensive loss                          (10,650) 
Stock issued in connection with VitalStream acquisition  12,206   12   208,281   —   —   —   208,293 
Stock compensation plans activity  575   1   3,723   —   —   —   3,724 
Stock-based compensation  312   —   1,625   —   —   —   1,625 
Balance, March 31, 2007  48,966  $49  $1,196,253  $(867,150) $365  $—  $329,517 
  
June 30,
2008
  
December 31,
2007
 
ASSETS      
Current assets:      
Cash and cash equivalents $54,931  $52,030 
Short-term investments in marketable securities  12,355   19,569 
Accounts receivable, net of allowance of $8,827 and $5,470, respectively  29,570   36,429 
Inventory  657   304 
Prepaid expenses and other assets  9,350   8,464 
Deferred tax asset, current portion  406   479 
Total current assets  107,269   117,275 
         
Property and equipment, net of accumulated depreciation of $175,787 and $165,543, respectively  74,571   65,491 
Investments  8,061   1,138 
Intangible assets, net of accumulated amortization of $27,042 and $23,921, respectively  39,887   43,008 
Goodwill  190,677   190,677 
Restricted cash  1,000   4,120 
Deposits and other assets  2,867   2,287 
Deferred tax asset, non-current  3,023   3,014 
Total assets $427,355  $427,010 
         
LIABILITIES AND STOCKHOLDERS' EQUITY        
Current liabilities:        
Notes payable, current portion $4,920  $2,413 
Accounts payable  18,874   19,624 
Accrued liabilities  9,844   10,159 
Deferred revenues, current portion  3,922   4,807 
Capital lease obligations, current portion  810   805 
Restructuring liability, current portion  1,929   2,396 
Other current liabilities  112   108 
Total current liabilities  40,411   40,312 
         
Notes payable, less current portion  14,888   17,354 
Deferred revenues, less current portion  2,299   2,275 
Capital lease obligations, less current portion  120   452 
Restructuring liability, less current portion  7,057   7,697 
Deferred rent  13,158   11,011 
Deferred tax liability  632   398 
Other long-term liabilities  821   878 
Total liabilities  79,386   80,377 
         
Commitments and contingencies        
         
Stockholders' equity:        
Preferred stock, $0.001 par value, 20,000 shares authorized, none issued or outstanding  —   — 
Common stock, $0.001 par value; 60,000 shares authorized; 50,190 and 49,759 shares outstanding at June 30, 2008 and December 31, 2007, respectively  50   50 
Additional paid-in capital  1,212,759   1,208,191 
Accumulated deficit  (864,508)  (862,010)
Accumulated other comprehensive income  (61)  402 
Treasury stock, at cost, 51 shares at June 30, 2008  (271)  — 
Total stockholders' equity  347,969   346,633 
Total liabilities and stockholders' equity $427,355  $427,010 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

7- 5 - -


INTERNAP NETWORK SERVICES CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
  
Six Months Ended
June 30,
 
  2008  2007 
CASH FLOWS FROM OPERATING ACTIVITIES      
Net loss $(2,498) $(12,377)
Adjustments to reconcile net loss to net cash provided by operating activities:        
Asset impairment  —   3,632 
Acquired in-process research and development  —   450 
Depreciation and amortization  13,538   12,532 
Gain on disposal of assets  (16)  (4) 
Provision for doubtful accounts  3,697   626 
Income from equity method investment  (149)  (24)
Non-cash changes in deferred rent  2,147   (1,035)
Stock-based compensation expense  4,449   4,415 
Deferred income taxes  298   — 
Other, net  (32)  81 
Changes in operating assets and liabilities, excluding effects of acquisition:        
Accounts receivable  3,000   (3,644) 
Inventory  (353)  46 
Prepaid expenses, deposits and other assets  (1,302)  184 
Accounts payable  (750)  1,500 
Accrued and other liabilities  (578)  (2,646) 
Deferred revenues  (699)  375 
Accrued restructuring charge  (1,107)  8,149 
Net cash provided by operating activities  19,645   12,260 
         
CASH FLOWS FROM INVESTING ACTIVITIES        
Purchases of property and equipment  (19,521)  (17,024)
Purchases of investments in marketable securities  (16,245)  (17,141) 
Maturities of investments in marketable securities  16,295   10,992 
Change in restricted cash, excluding effects of acquisition  3,120   — 
Cash received from acquisition, net of costs incurred for the transaction  —   3,203 
Net cash used in investing activities  (16,351)  (19,970)
         
CASH FLOWS FROM FINANCING ACTIVITIES        
Principal payments on notes payable  —   (2,852)
Payments on capital lease obligations  (393)  (1,240) 
Stock compensation plans  42   6,819 
Other, net  (42)  (33) 
Net cash (used in) provided by financing activities  (393)  2,694 
         
Net increase (decrease) in cash and cash equivalents  2,901   (5,016) 
Cash and cash equivalents at beginning of period  52,030   45,591 
Cash and cash equivalents at end of period $54,931  $40,575 
SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION:        
Common stock issued and stock options assumed for acquisition of VitalStream $—  $208,293 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
- 6 - -
INTERNAP NETWORK SERVICES CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(In thousands)

  Common  Stock                     
                  Accumulated         
          Additional      Other      Total 
      Par  Paid-In  Accumulated  Comprehensive  Treasury  Stockholders' 
  Shares  Value  Capital  Deficit  Income  Stock  Equity 
                             
SIX MONTHS ENDED JUNE 30, 2008:
                 
Balance, December 31, 2007  49,759  $50  $1,208,191  $(862,010) $402  $—  $346,633 
Net loss  —   —   —   (2,498)  —   —   (2,498)
Change in unrealized gains and losses on investments, net of taxes  —   —   —   —   (472)  —   (472)
Foreign currency translation adjustment  —   —   —   —   9   —   9 
Total comprehensive loss*                          (2,961)
Stock compensation plans activity  75   —   313   —   —   (271)  42 
Stock-based compensation  356   —   4,255   —   —   —   4,255 
Balance, June 30, 2008  50,190  $50  $1,212,759  $(864,508) $(61) $(271) $347,969 
                             
SIX MONTHS ENDED JUNE 30, 2007:
                 
Balance, December 31, 2006  35,873  $36  $982,624  $(856,455) $320  $—  $126,525 
Net loss  —   —   —   (12,377)  —   —   (12,377)
Change in unrealized gains and losses on investments, net of taxes  —   —   —   —   207   —   207 
Foreign currency translation adjustment  —   —   —   —   18   —   18 
Total comprehensive loss*                          (12,152)
Stock issued in connection with VitalStream acquisition  12,206   12   208,281   —   —   —   208,293 
Stock compensation plans activity  937   2   6,817   —   —   —   6,819 
Stock-based compensation  490   —   4,415   —   —   —   4,415 
Balance, June 30, 2007  49,506  $50  $1,202,137  $(868,832) $545  $—  $333,900 

*Total comprehensive loss was $(3,412) and $(1,502) for the three months ended June 30, 2008 and 2007, respectively.

The accompanying notes are an integral part of these condensed consolidated financial statements.
- 7 - -
INTERNAP NETWORK SERVICES CORPORATION
UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.Nature Of Operations And Basis Of Presentation

Internap Network Services Corporation (“Internap,” “we,” “us,” “our,” or the “Company”) delivers high performance and reliable Internet solutions through a suite of network optimization and delivery products and services. These solutions, combined with progressive and proactive technical support, enable companies to confidently migrate business-critical applications, including audio and video streaming and monetization services, to the Internet. Our suite of products and services support a broad range of Internet applications. We serve both domestic and international customers in the financial services, healthcare, technology, retail, travel, media/entertainment, and other markets. Our product and service offerings are complemented by Internet Protocol, or IP, access solutions such as data center services, content delivery networks, or CDN, and managed security. We deliver services through our 5053 service points across North America, Europe and the Asia-Pacific region. Our Private Network Access Points, or P-NAPs, feature multiple direct high-speed connections to major Internet networks including AT&T Inc., Sprint Nextel Corporation, Verizon Communications Inc., Savvis, Inc., Global Crossing Limited, and Level 3 Communications, Inc. We operate and manage the Company in three business segments: IP services, data center services and CDN services.

Our unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC, and include all the accounts of the Company and its wholly owned subsidiaries. Certain information and note disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States, have been condensed or omitted pursuant to such rules and regulations. The unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of our financial position as of March 31,June 30, 2008 and our operating results, cash flows, and changes in stockholders’ equity for the interim periods presented. The balance sheet at December 31, 2007 has been derived from our audited financial statements as of that date. These financial statements and the related notes should be read in conjunction with our financial statements and notes thereto contained in our Annual Report on Form 10-K/A for the year ended December 31, 2007 filed with the SEC.
 
The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities and revenues and expenses in the financial statements. Examples of estimates subject to possible revision based upon the outcome of future events include, among others, the provision for doubtful accounts, network cost accruals, sales, use and other taxes, recoverability of long-lived assets and goodwill, depreciation of property and equipment, restructuring allowances and stock-based compensation, the allowance for doubtful accounts and billing adjustments, network cost accruals and sales, use and other taxes.compensation. Actual results could differ from those estimates.
 
The results of operations for the three and six months ended March 31,June 30, 2008 are not necessarily indicative of the results that may be expected for any future periods or for the year ending December 31, 2008.

Reclassifications

For the three and six months ended March 31, 2008,June 30, 2007, we have classified all revenuerevenues 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 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 income (loss).loss.
- 8 - -
INTERNAP NETWORK SERVICES CORPORATION
UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

The effect of these reclassifications is shown below (in thousands):

 Three Months Ended March 31, 2007 
 
IP
Services
 
Data
Center
Services
 
CDN
Services
 Other Total 
Three Months Ended June 30, 2007: 
IP
Services
 
Data
Center
Services
 
CDN
Services
 Other Total 
Revenues:                        
Previously reported $29,037  $18,303  $2,052  $4,142  $53,534  $29,345 $19,927 $5,235 $3,987 $58,494 
Reclassification of sales credits and billing adjustments (328) (295) -- 623 --  (106) (125) (13) 244 — 
Reclassification of termination fees and professional and reseller products and services  607  90  --  (697)  --   501  54  —  (555)  — 
Revised $29,316  $18,098  $2,052  $4,068  $53,534  $29,740 $19,856 $5,222 $3,676 $58,494 
                      
Direct costs of network, sales and services, exclusive of depreciation
and amortization:
                        
Previously reported $10,223  $14,305  $663  $3,438  $28,629  $10,516 $14,095 $1,958 $3,048 $29,617 
Reclassification of professional and reseller products and services  117  --  --  (117)  --   57  —  —  (57)  — 
Revised $10,340  $14,305  $663  $3,321  $28,629  $10,573 $14,095 $1,958 $2,991 $29,617 
    
Six Months Ended June 30, 2007:               
Revenues:                    
Previously reported $58,382  $38,230  $7,287  $8,129  $112,028 
Reclassification of sales credits and billing adjustments  (434)  (420)  (13)  867   — 
Reclassification of termination fees and professional and reseller products and services  1,108   144   —   (1,252)  — 
Revised $59,056  $37,954  $7,274  $7,744  $112,028 
                     
Direct costs of network, sales and services, exclusive of depreciation and amortization:                    
Previously reported $20,738  $28,400  $2,621  $6,486  $58,245 
Reclassification of professional and reseller products and services  174   —   —   (174)  — 
Revised $20,912  $28,400  $2,621  $6,312  $58,245 
 
8- 9 - -
 
INTERNAP NETWORK SERVICES CORPORATION
UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

2.Fair Value
Effective January 1, 2008, we adopted Statement of Financial Accounting Standards, or SFAS, No. 157, “Fair Value Measurements.” The 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 10 for further 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.
The following table represents the fair value hierarchy for our financial assets (cash equivalents and investments in marketable securities) measured at fair value on a recurring basis as of March 31, 2008 (in thousands):
  Level 1  Level 2  Level 3  Total 
Money market funds and other $33,307  $—  $—  $33,307 
Corporate debt securities  —   7,643   —   7,643 
Commercial paper  —   14,474   —   14,474 
Auction rate securities  —   —   6,820   6,820 
Total $33,307  $22,117  $6,820  $62,244 

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. They are variable rate bonds tied to short-term interest rates with maturities on the face of the securities in excess of 90 days and have interest rate resets through a modified Dutch auction, at predetermined short-term intervals, usually every 7, 28 or 35 days. Auction rate securities generally trade at par value and are callable at par value at the option of the issuer.  Interest received during a given period is based upon the interest rate determined through the auction process. While we continue to earn interest on our auction rate securities at maximum 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. We have used a discounted cash flow model to estimate fair value of our investments in auction rate securities as of March 31, 2008. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, timing and amount of cash flows and expected holding period of the auction rate securities. Based on this assessment of fair value, we recorded an unrealized loss of approximately $0.3 million related to our auction rate securities as of March 31, 2008. We believe this unrealized loss is primarily attributable to the limited liquidity of these investments and have no reason to believe that any of the underlying issuers are presently at risk of default.  We have also changed the classification of the auction rate securities to noncurrent investments as of March 31, 2008, from current investments as of December 31, 2007.  The following table provides a summary of changes in fair value of the Company’s Level 3 financial assets as of March 31, 2008 (in thousands):  

  
 Auction rate
securities
 
Balance at December 31, 2007 $7,150 
Unrealized loss included in other comprehensive income  (330)
Balance at March 31, 2008 $6,820 

We have also adopted the provisions of the Financial Accounting Standards Board Staff Position, or FSP, No. FAS 157-2 delaying the effective date of SFAS No. 157 by one year for nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a non-recurring basis.
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INTERNAP NETWORK SERVICES CORPORATION 
UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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 a wholly owned subsidiary of Internap. VitalStream provides products and services for storing and delivering digital media to large audiences over the Internet and advertisement insertion and related advertising services to companies that stream digital media over the Internet. VitalStream also enhances our position as a leading provider of high performance route control products and services by adding complementary service offerings in the rapidly growing content delivery and on-line advertising markets. Integrating VitalStream's digital media delivery platform into our portfolio of products and services enables us to provide customers with one of the most complete product lines in content delivery solutions, content monetization and on-line advertising, while supporting the significant long-term growth opportunities in the network services market. We accounted for the transaction using the purchase method of accounting in accordance with SFAS No. 141, “Business Combinations.” Our results of operations include the activities of VitalStream from February 21, 2007.
 
    The following unaudited pro forma consolidated financial information reflects theour results of operations of the Company for the threesix months ended March 31,June 30, 2007 as if the acquisition of VitalStream had occurred at the beginning of the period. NetPro forma net loss and net loss per share for the threesix months ended March 31,June 30, 2007 include non-recurring charges for restructuring and asset impairment of $11.4 million and acquired in-process research and development of $0.5 million. These pro forma results are not necessarily indicative of what the Company’sour operating results would have been had the acquisition actually taken place at the beginning of the period (in thousands, except per share amounts):

 
Three Months
Ended March 31,
 
 2007 
Pro forma revenue $55,862 
Six Months Ended June 30, 2007:   
Pro forma revenues $114,356 
Pro forma net loss  (14,213)  (18,191)
Pro forma net loss per share, basic and diluted  (0.31)  (0.34)
 
4.3.Segments
 
The following tables show operating results for our reportable segments, along with reconciliations from segment gross profit to income (loss)loss before income taxes and equity in earnings of equity-method investment:

Three Months Ended March 31, 2008  
IP
Services
  
Data
Center
Services
  
CDN
Services
  Other  Total 
IP
Services
 
Data
Center
Services
 
CDN
Services
 Other Total 
Three Months Ended June 30, 2008:               
Revenues$31,124 $25,185 $5,744 $— $62,053  $30,395  $26,511  $5,419  $—  $62,325 
Direct costs of network, sales and services, exclusive of
depreciation and amortization
               
11,290  18,124  1,949  —  31,363 
Direct costs of network, sales and services, exclusive of depreciation and amortization, included below  11,401   20,028   2,055   —   33,484 
Segment profit$19,834 $7,061 $3,795 $—  30,690  $18,994  $6,483  $3,364  $—   28,841 
Other operating expenses             30,082                  32,414 
Income from operations          608 
Loss from operations                  (3,573) 
Non-operating income             310                   305 
Income before income taxes and equity in            
Loss before income taxes and equity in                    
earnings of equity-method investment            $918                  $(3,268)
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INTERNAP NETWORK SERVICES CORPORATION
UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Three Months Ended March 31, 2007  
IP
Services
  
Data
Center
Services
  
CDN
Services
  Other  Total 
IP
Services
 
Data
Center
Services
 
CDN
Services
 Other Total 
Three Months Ended June 30, 2007:               
Revenues$29,316 $18,098 $2,052 $4,068 $53,534  $29,740  $19,856  $5,222  $3,676  $58,494 
Direct costs of network, sales and services, exclusive of
depreciation and amortization
               
10,340  14,305  663  3,321  28,629 
Direct costs of network, sales and services, exclusive of depreciation and amortization, included below  10,573   14,095   1,958   2,991   29,617 
Segment profit$18,976 $3,793 $1,389 $747  24,905  $19,167  $5,761  $3,264  $685   28,877 
Other operating expenses             36,024                  29,717 
Loss from operations          (11,119)                  (840) 
Non-operating income             468 
Non-operating expense                  (754) 
Loss before income taxes and equity in                                
earnings of equity-method investment            $(10,651)                 $(1,594)

Six Months Ended June 30, 2008:               
Revenues $61,519  $51,696  $11,163  $—  $124,378 
Direct costs of network, sales and services, exclusive of depreciation and amortization, included below  22,691   38,152   4,004   —   64,847 
Segment profit $38,828  $13,544  $7,159  $—   59,531 
Other operating expenses                  62,496 
Loss from operations                  (2,965) 
Non-operating income                  615 
Loss before income taxes and equity in                    
earnings of equity-method investment                 $(2,350)

Six Months Ended June 30, 2007:               
Revenues $59,056  $37,954  $7,274  $7,744  $112,028 
Direct costs of network, sales and services, exclusive of depreciation and amortization, included below  20,912   28,400   2,621   6,312   58,245 
Segment profit $38,144  $9,554  $4,653  $1,432   53,783 
Other operating expenses                  65,743 
Loss from operations                  (11,960) 
Non-operating loss                  (285)
Loss before income taxes and equity in                    
earnings of equity-method investment                 $(12,245)
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INTERNAP NETWORK SERVICES CORPORATION
UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

5.4.Stock-Based Compensation
 
During the three months endedOn March 31,20, 2008, we granted options to purchase 0.5 million shares of Internap common stock and 0.5 million unvested shares of Internap restricted common stock in conjunction with annual performance evaluations and bonuses.

Included in this amount are 0.2 million unvested shares of restricted common stock grantedwith performance-based vesting.  The awards will vest in increments of one-third beginning on March 20, 2008 with performance and service conditions and athe first anniversary of the grant date fair valueif the Company achieves revenue and adjusted earnings levels established by the board of $4.30 per share. Wedirectors.  The term adjusted earnings is defined in the long-term incentive plan.  The Company will either meet or not meet both goals in a given year.  With respect to all shares of performance-based restricted stock that do not vest during any of the three years, 50% of such shares will vest on the fourth anniversary of the date of grant.  For the performance-based restricted stock awards, we recognize compensation expense if management deemsbased on management’s assessment of the probability that meeting the performance conditions is probable.will be achieved. Management must use its judgment to determinemake the probability that the performance condition will be metassessment and, as of March 31,June 30, 2008, believes the performance conditionconditions will not be met.

We have also recorded a $0.3 million liability classified as performance based awards to be issued in lieu of cash bonuses to certain members of senior management if performance targets are achieved.  If actual results differ from management’s assumptions, future results related to these performance based awards could be materially different.

Total stock-based compensation was $2.4$2.1 million and $1.6$2.8 million for the three months ended March 31,June 30, 2008 and 2007, respectively.respectively, and $4.4 million for the six months ended June 30, 2008 and 2007. These amounts include less than $0.1 million of capitalized stock-based compensation during the threesix months ended March 31,June 30, 2008. We use the Black-Scholes option valuation model to determine stock-based compensation expense.
 
10
INTERNAP NETWORK SERVICES CORPORATION 
UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
6.Net Income (Loss) Per Share
We computed basic net income (loss) per share using the weighted average number of shares of common stock outstanding during the period. We computed diluted net income (loss) per share using the weighted average number of common and potentially dilutive shares outstanding during the period. Potentially dilutive shares consist of the incremental common shares issuable upon the exercise of outstanding stock options and warrants and unvested restricted stock using the treasury stock method. The treasury stock method calculates the dilutive effect for only those stock options and warrants for which the sum of proceeds, including unrecognized compensation and any windfall tax benefits, is less than the average stock price during the period presented. This method excludes potentially dilutive shares from the computation of net income (loss) per share if their effect is antidilutive.
Basic and diluted net income (loss) per share for the three months ended March 31, 2008, and 2007 are calculated as follows (in thousands, except per share amounts):

  
Three months ended
March 31,
 
  2008  2007 
Net income (loss) $739  $(10,695)
         
Weighed average shares outstanding, basic  49,110   40,997 
         
Effect of dilutive securities:        
Stock compensation plans  220   — 
Weighted average shares outstanding, diluted  49,330   40,997 
         
Basic net income (loss) per share $0.02  $(0.26)
Diluted net income (loss) per share $0.01  $(0.26)
         
Anti-dilutive securities not included in diluted net income (loss) per share calculation:        
Stock compensation plans  2,981   4,521 
Warrants to purchase common stock  34   34 
Total anti-dilutive securities  3,015   4,555 

7.Contingencies and Litigation
From time to time, we may be subject to legal proceedings, claims and litigation arising in the ordinary course of business. Although the outcome of these matters is currently not determinable, we do not expect that the ultimate costs to resolve these matters will have a material adverse effect on our financial condition, results of operations or cash flows.

8.Income Taxes

At the end of each interim reporting period, we estimate the effective income tax rate expected to be applicable for the full year as required by Audit Principals Board Opinion No. 28, “Interim Financial Reporting.” The effective income tax rate determined is used to provide for income taxes on a year-to-date basis. The tax effect of any tax law changes and certain other discrete events are reflected in the period in which they occur.

Our effective income tax rate, as a percentage of pre-tax income, for the three months ended March 31, 2008 and 2007, was 27.3% and 1%, respectively. The fluctuation in the effective income tax rate is attributable to discrete events during 2007 – the release of our United Kingdom, or U.K., valuation allowance, unrecognized tax benefits, and the creation of a domestic deferred tax liability related to tax amortization of goodwill from the acquisition of VitalStream.  The effective income tax rate for the three months ended March 31, 2008 is comprised of the utilization of U.K. net operating losses and domestic tax amortization of VitalStream goodwill. The effective annual rate for 2008 could change due to number of factors including, but not limited to, our geographic profit mix between the U.K. and the United States, enactments of new tax laws, new interpretations of existing tax laws, rulings by and settlements with taxing authorities, and the expiration of the statute of limitations for open years.

We continue to maintain a full valuation allowance against our non-U.K. unrealized deferred tax assets of approximately $183.4 million, consisting primarily of net operating loss carryforwards. We may recognize deferred tax assets in future periods when they are estimated to be realizable, such as establishing expected continuing profitability on a consolidated basis or by certain of our foreign subsidiaries. To the extent we may owe income taxes in future periods, we intend to use our net operating loss carryforwards to the extent available to offset taxable income and reduce cash outflows for income taxes. Based on an analysis of our projected 2008 and 2009 domestic income, we may have sufficient positive evidence within the next twelve months to begin releasing the valuation allowance against our domestic deferred tax assets.
11
INTERNAP NETWORK SERVICES CORPORATION 
UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
9.5.Restructuring and Asset Impairment

DuringAs reported in our Annual Report on Form 10-K/A for the three monthsyear ended MarchDecember 31, 2007, we incurred a restructuring and impairment charge of $10.3 million.million during the three months ended March 31, 2007. The charge was the result of a review of our business, particularly in light of our acquisition of VitalStream and our plan to finalize the overall integration and implementation plan before the end of the first quarter.March 31, 2007. The charge to expense included $7.8 million for leased facilities, representing both the costs less anticipated sublease recoveries that will continue to be incurred without economic benefit to us and costs to terminate leases before the end of their term. The charge also included severance payments of $1.1 million for the termination of certain employees and $1.4 million for impairment of assets. Net related expenditures were estimated to be $10.7 million, of which $3.5 million has been paid through March 31,June 30, 2008, and the balance continuing through December 2016, the last date of the longest lease term.  These expenditures are expected to be paid out of operating cash flows. The impairment charge of $1.3 million was related to the leases referenced above and less than $0.1 million for other assets. Cost savings from the restructuring were estimated to be approximately $0.8 million per year through 2016, primarily for rent expense.

In 2001, we implemented significant restructuring plans that resulted in substantial charges for real estate and network infrastructure obligations, personnel and other charges. Additional related charges have subsequently been incurred as we continued to evaluate our restructuring reserve.

The following table displays the activity and balances for the restructuring activity for the threesix months ended March 31,June 30, 2008 (in thousands):
  
December 31,
2007
Restructuring
Liability
  
Cash
Payments
  Non-Cash Adjustments  
June 30,
2008
Restructuring
Liability
 
Activity for 2007 restructuring charge:            
Real estate obligations $6,312  $(438) $111  $5,985 
Employee separations  406   (260)  (77)  69 
                 
Total 2007 restructuring activity  6,718   (698)  34   6,054 
                 
Activity for 2001 restructuring charge:                
Real estate obligations  3,375   (409)  (34)  2,932 
                 
Total $10,093  $(1,107) $—  $8,986 
 
 
December 31,
2007
Restructuring
Liability
 
Cash
Payments
  
March 31,
2008
Restructuring
Liability
 
Activity for 2007 restructuring charge:       
Real estate obligations $6,312 $(186) $6,126 
Employee separations 406  (268)  138 
           
Total 2007 restructuring activity 6,718  (454)  6,264 
           
Activity for 2001 restructuring charge:          
   Real estate obligations 3,375  (199)  3,176 
           
Total $10,093 $(653) $9,440 
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INTERNAP NETWORK SERVICES CORPORATION
UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

We also recorded a $1.1 million impairment charge during the threesix months ended March 31,June 30, 2007 for our sales order-through-billing system. This impairment charge was not related to any specific segment.

As disclosed in our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2007, we perform our annual impairment analysis of goodwill as of August 1 of each year in accordance with Statement of Financial Accounting Standard, or SFAS, No. 142, “Goodwill and Other Intangible Assets.”  Under SFAS No. 142, the impairment analysis of goodwill and other intangible assets not subject to amortization must be based on estimated fair values.  The valuation of intangible assets requires assumptions and estimates of many critical factors, including revenue and market growth, operating cash flows, market multiples, and discount rates.  We have experienced declines in our consolidated operating results during the first two quarters of 2008 as compared to our projections.  Adverse changes in expected operating results and/or unfavorable changes in other economic factors used to estimate fair values could result in a non-cash impairment charge in the future under SFAS No. 142.  An impairment of goodwill may also lead us to record an impairment of other intangible assets.

6.Income Taxes

At the end of each interim reporting period, we estimate the effective income tax rate expected to be applicable for the full year as required by Accounting Principals Board Opinion No. 28, “Interim Financial Reporting.” The effective income tax rate determined is used to provide for income taxes on a year-to-date basis. The tax effect of any tax law changes and certain other discrete events are reflected in the period in which they occur.

Our effective income tax rate, as a percentage of pre-tax net income, for the six months ended June 30, 2008 and 2007 was (13%) and (1%), respectively.  The fluctuation in the effective income tax rate is attributable to discrete events including the creation of a deferred tax liability related to the tax amortization of goodwill from the acquisition of VitalStream in February 2007.  Movement in the deferred tax asset caused a corresponding movement in the provision for income taxes during the six months ended June 30, 2008.  The effective income tax rate for the year ending December 31, 2008 could further change due to number of factors including, but not limited to, our geographic profit mix between the U.K. and the United States, enactments of new tax laws, new interpretations of existing tax laws and rulings by taxing authorities.

We continue to maintain a full valuation allowance against our non-U.K. unrealized deferred tax assets of approximately $185.0 million, consisting primarily of net operating loss carryforwards.  We may recognize deferred tax assets in future periods when they are estimated to be realizable, such as establishing expected continuing profitability on a consolidated basis or by certain of our foreign subsidiaries. To the extent we may owe income taxes in future periods, we intend to use our net operating loss carryforwards to the extent available to offset taxable income and reduce cash outflows for income taxes.  Based on an analysis of our projected 2008 and 2009 domestic income, we may have sufficient positive evidence within the next twelve months to begin releasing the valuation allowance against our domestic deferred tax assets.

Tax years 2005 through 2007 remain open to examination by United States Department of Treasury. Currently in the U.K., the tax years which remain open to examination include 2004 through 2007.  Additionally, other state and foreign jurisdictions remain open to examination. Net operating losses carryforwards remain subject to examination for the corresponding jurisdiction's statutory period following the period which the net operating loss is fully utilized.
7.Net Loss Per Share
We computed basic and diluted net loss per share using the weighted average number of shares of common stock outstanding during the period. We have excluded all outstanding options and warrants to purchase common stock and unvested restricted stock as such securities are anti-dilutive for all periods presented.
- 13 - -
INTERNAP NETWORK SERVICES CORPORATION
UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Basic and diluted net loss per share for the three and six months ended June 30, 2008, and 2007 are calculated as follows (in thousands, except per share amounts):

             
  
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
  2008  2007  2008  2007 
Net loss $(3,237) $(1,683) $(2,498) $(12,377)
                 
Weighed average shares outstanding, basic and diluted  49,208   48,515   49,159   44,932 
                 
Net loss per share, basic and diluted $(0.07) $(0.03) $(0.05) $(0.28)
                 
Anti-dilutive securities not included in diluted net loss per share calculation:                
Stock compensation plans  4,137   4,411   4,137   4,411 
Warrants to purchase common stock  34   34   34   34 
                 
Total anti-dilutive securities  4,171   4,445   4,171   4,445 

8.Investments

Fair Value

Effective January 1, 2008, we adopted SFAS No. 157, “Fair Value Measurements.” The 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 10 for further 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.
The following table represents the fair value hierarchy for our financial assets (cash equivalents and investments in marketable securities) measured at fair value on a recurring basis as of June 30, 2008 (in thousands):
  Level 1  Level 2  Level 3  Total 
Money market funds and other $48,538  $—  $—  $48,538 
Corporate debt securities  —   7,680   —   7,680 
Commercial paper  —   4,755   —   4,755 
Auction rate securities  —   —   6,727   6,727 
Total $48,538  $12,435  $6,727  $67,700 
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INTERNAP NETWORK SERVICES CORPORATION
UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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. They are variable rate bonds tied to short-term interest rates with maturities on the face of the securities in excess of 90 days and have interest rate resets through a modified Dutch auction, at predetermined short-term intervals, usually every 7, 28 or 35 days. Auction rate securities generally trade at par value and are callable at par value at the option of the issuer.  Interest received during a given period is based upon the interest rate determined through the auction process. While we continue to earn 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. We have used a discounted cash flow model to estimate fair value of our investments in auction rate securities as of June 30, 2008. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, timing and amount of cash flows and expected holding period of the auction rate securities. Based on this assessment of fair value, during the three and six month periods ended June 30, 2008 we recorded an unrealized loss of approximately $0.1 million and $0.4 million, respectively, related to our auction rate securities. We believe this unrealized loss is primarily attributable to the illiquidity of these investments and have no reason to believe that any of the underlying issuers are presently at risk of default.  We have classified our auction rate securities as noncurrent investments as of June 30, 2008, versus current investments as of December 31, 2007.  The following table provides a summary of changes in fair value of the Company’s Level 3 financial assets as of June 30, 2008 (in thousands):  

  
Auction Rate
Securities
 
Balance at December 31, 2007 $7,150 
Unrealized loss included in other comprehensive income for the three months ended March 31, 2008  (330)
Balance at March 31, 2008  6,820 
Unrealized loss included in other comprehensive income for the three months ended June 30, 2008  (93)
Balance at June 30, 2008 $6,727 
Investment in Aventail

We account for investments without readily determinable fair values at cost. Realized gains and losses and declines in value of securities judged to be other-than-temporary are included in other expense. We incurred a charge during the three months ended June 30, 2007, totaling $1.2 million, representing the write-off of the remaining carrying value of our investment in series D preferred stock of Aventail 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, 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.

9.Contingencies and Litigation

From time to time, we may be subject to legal proceedings, claims and litigation arising in the ordinary course of business. Although the outcome of these matters is currently not determinable, we do not expect that the ultimate costs to resolve these matters will have a material adverse effect on our financial condition, results of operations or cash flows.
  
10.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 accounting principals generally accepted in the United States, or 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 Financial Accounting Standards Board, or FASB, issued Staff Position, or FSP, FAS 157-1, which provides supplemental guidance on the application of SFAS No. 157, and FSP FAS 157-2, which delays the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on at least an annual basis until 2009. In accordance with FSP 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 March 31,June 30, 2008. The provisions of SFAS No. 157 have not been applied to non-financialnonfinancial assets and non financialnonfinancial liabilities. The major categorycategories of assets and liabilities that isare measured at fair value, for which we have not applied the provisions of SFAS No. 157, includesinclude reporting units measured at fair value in the first step of a goodwill impairment test under SFAS No. 142, “Goodwill“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.

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INTERNAP NETWORK SERVICES CORPORATION
UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 permits companies to choose to measure, on an instrument-by-instrument basis, many financial instruments and certain other assets and liabilities at fair value that are not currently required to be measured at fair value. SFAS No. 159 is effective as of the beginning of a fiscal year that begins after November 15, 2007. We did not elect to adopt fair value accounting to any assets or liabilities allowed by SFAS No. 159.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations,” or SFAS No. 141R. SFAS No. 141R 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 are currently in the process of evaluating the impact that the adoption of SFAS No. 141R will have on our financial position, results of operations and cash flows.
 
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements.” 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 significant impact, if any, 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, with early application encouraged. We do not expect the adoption of SFAS No. 161 to have a material effect on our financial position, results of operations and cash flows.

In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets.” FSP 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 FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008. We do not expect the adoption of FSP FAS 142-3 to have a material effect on our financial position, results of operations and cash flows.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principals.” SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. This statement is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” We do not expect the adoption of SFAS No. 162 to have a material effect on our financial position, results of operations and cash flows.

12- 16 - -


 
INTERNAP NETWORK SERVICES CORPORATION
   
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and accompanying notes provided under Part I, Item 1 of this Quarterly Report on Form 10-Q.

Overview
 
We deliver high performance and reliable Internet solutions through a suite of network optimization and delivery products and services. These solutions, combined with progressive and proactive technical support, enable companies to confidently migrate business-critical applications, including audio and video streaming and monetization services, to the Internet. Our suite of products and services support a broad range of Internet applications. We currently have more than 3,700 customers, serving financial services, healthcare, technology, retail, travel, and media/entertainment markets. Our customers are located in the United States and abroad and include several Fortune 1000 and mid-tier enterprises. Our product and service offerings are complemented by Internet protocol, or IP, access solutions such as data center services, content delivery networks, or CDN, and managed security. We deliver services through our 5053 service points across North America, Europe and the Asia-Pacific region. Our Private Network Access Points, or P-NAPs, feature multiple direct high-speed connections to major Internet networks including AT&T Inc., Sprint Nextel Corporation, Verizon Communications Inc., Savvis, Inc., Global Crossing Limited, and Level 3 Communications, Inc.
 
The key characteristic that differentiates us from our competition is our portfolio of patented and patent-pending route optimization solutions that address the inherent weaknesses of the Internet and overcome the inefficiencies of traditional IP connectivity options. Our intelligent routing technology can facilitate traffic over multiple carriers, as opposed to just one carrier's network, to ensure highly reliable performance over the Internet.
 
We believe our unique managed multi-network approach provides better performance, control and reliability compared to conventional Internet connectivity alternatives. Our service level agreements guarantee performance across the entire Internet in the United States, excluding local connections, whereas providers of conventional Internet connectivity typically only guarantee performance on their own network.
  
We operate in three business segments: IP services, data center services and CDN services. For additional information about these segments, see note 43 to the unaudited condensed consolidated financial statements included in Part I, Item 1.

As discussed in note 1 to the accompanying unaudited condensed consolidated financial statements, we reclassified prior period credits for sales and billing adjustments, early termination fee revenues, and revenues and direct costs for professional and reseller products and services, except for third party CDN services, from other revenuerevenues to the most closely-related business segment. These reclassifications were made to prior periods to provide a more accurate view of the results of operations of the business segments.  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 income (loss).loss.
 
The following is a brief description of each of our reportable business segments.

IP Services
 
Our patented and patent-pending network performance optimization technologies address the inherent weaknesses of the Internet, allowing enterprises to take advantage of the convenience, flexibility and reach of the Internet to connect to customers, suppliers and partners. Our solutions take into account the unique performance requirements of each business application to ensure performance as designed, without unnecessary cost. Prior to recommending appropriate network solutions for our customers’ applications, we consider key performance objectives including (1) performance and cost optimization, (2) application control and speed and (3) delivery and reach. Our charges for IP services are based on a fixed-fee, usage or a combination of both fixed fee and usage.
 
Our IP services segment also includes our flow control platform, or FCP. The FCP provides network performance management and monitoring for companies with multi-homed networks and redundant Internet connections.  The FCP proactively reviews customer networks for the best performing route, or the most cost-effective route and routes according to our customers’customer specific requirements.  We offer FCP as either a one-time hardware purchase or as a monthly subscription service. Sales of FCP also generate annual maintenance fees and professional service fees for installation and ongoing network configuration. Since the FCP emulates our P-NAP service in many ways, this product affords us the opportunity to serve customers outside of our P-NAP market footprint. FCP represents less than 5% of our IP services and consolidated revenuerevenues for the three and six months ended March 31,June 30, 2008 and 2007.
 
13- 17 - -
 
Data Center Services
 
Our data center services provide a single source for network infrastructure, IP and security, all of which are designed to maximize solution performance while providing a more stable, dependable infrastructure, and are backed by guaranteed service levels and our team of dedicated support professionals. We offer a comprehensive solution at 4244 service points, including eight locations managed by us and 3436 locations managed by third parties.parties, referred to as partner sites.

Data center services also enable us to have a more flexible product offering, including bundling our high performance IP connectivity and managed services, such as content delivery, along with hosting customers' applications. We charge monthly fees for data center services based on the amount of square footage that the customer leases in our facilities. We also have relationships with various providers to extend our P-NAP modelservices into markets with high demand.

CDN Services
 
Our CDN services enable our customers to quickly and securely stream and distribute video, audio, advertising, and software to audiences across the globe through strategically located data centers. Providing capacity-on-demand to handle large events and unanticipated traffic spikes, content is delivered with high quality regardless of audience size or geographic location. Our MediaConsole®MediaConsole content management tool provides our customers the benefit of a single, easy to navigate system featuring Media Asset Management, Digital Rights Management, or DRM, support, and detailed reporting tools. With MediaConsole, our customers can use one application to manage and control access to their digital assets, deliver advertising campaigns, view network conditions, and gain insight into habits of their viewing audience.

Our CDN and monetization services provide a complete turnkey solution for the monetization of online media. These multi-faceted “live” and “on-demand” advertisement insertion and advertising placement solutions include a full campaign management suite, inventory prediction tools, audience research and metrics, and extensive reporting features to effectively track advertising campaigns in real-time. Online advertising solutions enable our customers to offset the costs associated with the creation, transformation, licensing, and management of online content. Prior to our acquisition of VitalStream on February 20, 2007, we did not offer proprietary CDN services. Instead, we were a reseller of third party CDN services for which results of operations are included in other revenues and direct costs of network, sales and services, discussed below.

Other
 
Other revenues and direct costs of network, sales and services isare made up of third party CDN services. Throughout 2007, other revenues and other direct costs of network decreased steadily as the revenue streams from our acquisition of VitalStream replaced the activity of the former third party CDN service provider.
 
Recent Accounting Pronouncements

Recent accounting pronouncements are summarized in note 10 to the accompanying unaudited condensed consolidated financial statements.

Results of Operations

Revenues. Revenues are generated primarily from the sale of IP services, data center services and CDN services. Our revenues typically consist of monthly recurring revenues from contracts with terms of one year or more. These contracts usually have fixed minimum commitments based on a certain level of usage with additional charges for any usage over a specified limit. We also provide premise-based route optimization products and other ancillary services, such as server management and installation services, virtual private networking services, managed security services, data back-up, remote storage, restoration services, and professional services.

Direct costs of network, sales and services. Direct costs of network, sales and services are comprised primarily of:

 
· 
●
costs for connecting to and accessing Internet network service providers, or ISPs, and competitive local exchange providers;
   
 · ●facility and occupancy costs for housing and operating our and our customers’ network equipment;
   
 · ●costs of license fees for operating systems software, advertising royalties to content rights owners and advertising distribution costs;
   
 · ●costs incurred for providing additional third party services to our customers; and
   
 · ●costs of FCP solutions sold.
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To the extent a network access point is located a distance from the respective ISP, we may incur additional local loop charges on a recurring basis. Connectivity costs vary depending on customer demands and pricing variables while network access point facility costs are generally fixed in nature. Direct costs of network, sales and services do not include compensation, depreciation or amortization.
14
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.

Direct costs of customer support. Direct costs of customer support consist primarily of compensation and other personnel costs for employees engaged in connecting customers to our network, installing customer equipment into network access point facilities and servicing customers through our network operations centers. In addition, facilities costs associated with the network operations center are included in direct costs of customer support.

Product development costs. Product development costs consist principally of compensation and other personnel costs, consultant fees and prototype costs related to the design, development and testing of our proprietary technology, enhancement of our network management software and development of internal systems. Costs for software to be sold, leased or otherwise marketed are capitalized upon establishing technological feasibility and ending when the software is available for general release to customers. Costs associated with internal use software are capitalized when the software enters the application development stage until the software is ready for its intended use. All other product development costs are expensed as incurred.

Sales and marketing costs. Sales and marketing costs consist of compensation, commissions and other costs for personnel engaged in marketing, sales and field service support functions, as well as advertising, tradeshows, direct response programs, new service point launch events, management of our web site, and other promotional costs.

General and administrative costs. General and administrative costs consist primarily of compensation and other expense for executive, finance, human resources and administrative personnel, professional fees, and other general corporate costs.

Liquidity. Although we have been in existence since 1996, we have experienced significant operational restructurings in recent years, which include substantial changes in our senior management team, streamlining our cost structure, consolidating network access points,Three 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, 2005 and for the year ended December 31, 2007. For the three months ended March 31, 2008, we recognized net income of $0.7 million. As of March 31, 2008, our accumulated deficit was $861.3 million.
ThreeSix Months Ended March 31,June 30, 2008 and 2007
 
Following is a summary of our results of operations and financial condition, which is followed by more in-depth discussion and analysis.

Our first quarter 2008 results are aligned along our business reporting units, which are IP services, data center services and CDN services.  We eliminated other revenues and associated other direct costs of network, which primarily included early termination fees and professional services. We reclassified the comparable prior period to conform to the current period presentation and to provide a consistent presentation for year-over-year results.  The reclassification had no impact on total revenue for prior periods but did modify previously stated revenue totals of the individual business units.
Operations forFor the three months ended March 31,June 30, 2008, presented us with several challenges.  Our sales credits and billing adjustments issue that carried over from the end of 2007, the delayed filing of our annual report on Form 10-K/A and the repositioning of our CDN business unit impacted our growth during the quarter.  Revenue for the three months ended March 31, 2008 totaled $62.1total revenues were $62.3 million, an increase of 16%7% over the three months ended March 31,June 30, 2007.  IncreasesWhile all three of our reporting segments contributed, strong demand in our data center services IP services and CDN services revenue all contributued tosegment was the primary driver of the year over year increase in total revenue of $8.5 million and segmentrevenues.  Segment profit of $30.7 million.
Operating expenses, including stock-based compensation, but excluding direct costs of network, depreciation, amortization, and certain one-time items, totaled $23.5was $28.8 million for the three months ended March 31,June 30, 2008, representing 37.9% of total revenue,essentially flat compared to $18.6 million, or 34.8%the same period in 2007.   Segment profit as a percentage of total revenue,revenues decreased to 46% from 49% for the three months ended March 31, 2007.  The increaseJune 30, 2008 and 2007, respectively.  This decline as a percentage of revenues was principally due to the data center services segment having additional opening and expansion costs that preceded associated revenues in sites operated by us.  Total operating costs and expenses for the three months ended March 31,June 30, 2008 is dueincluded an increase in the provision for doubtful accounts of $3.0 million.  This increase in the allowance primarily to higher product development costs, increased stock-based compensation and increased sales and marketing expense as a percentageaddressed accounts receivable outstanding greater than 90 days, the majority of revenue.which were in our CDN services segment.
 
Net income for the three months ended March 31, 2008 totaled $0.7 million as comparedWe continue to maintain a lossstrong balance sheet and sufficient liquidity. Our balance of $10.6 million for the same three month period a year ago.  The improvement was primarily a result of an $11.3 million restructuring and asset impairment charge incurred in the first three months of 2007.
The total of our cash and cash equivalents, short-term investments in marketable securities and restricted cash was $64.4$68.3 million asand our accounts receivable, net of March 31,allowance, were $29.6 million at June 30, 2008. Quarterly days sales outstanding at June 30, 2008 a decrease of $11.3 milliondecreased to 43 days from 54 days at December 31, 2007.  The decrease was largely2007 due to the changeincreased allowance for doubtful accounts as well as improvement in classificationcollection times.  Our balance sheet also includes $230.6 million of auction rate securities from short-termintangibles, net of accumulated amortization, of which $190.7 million is goodwill.  The majority of the goodwill is attributable to long-term investmentsour acquisition of VitalStream.  We perform our annual assessment of goodwill for impairment as a result of illiquidityAugust 1 of each year, in conjunction with our annual budgeting process.  In completing the credit marketsanalysis, we will take into consideration the year to date performance of each of our business units and funds usedour expectations for the business units in future periods.  This analysis is expected to support our capital expenditure initiatives.be completed during the three months ended September 30, 2008.
 
Capital expenditures for the threesix months ended March 31,June 30, 2008 were $10.1$19.5 million due to continued expansion of data centers managed by us and investment in our CDN and IP services infrastructure.
 
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The following table sets forth, as a percentage of total revenue,revenues, selected statement of operations data for the periods indicated:

 
Three Months Ended
March 31,
  
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
 2008 2007  2008  2007  2008  2007 
Revenues:                  
Internet protocol (IP) services  50.1%54.8%  48.8%  50.8%  49.4% 52.7%
Data center services  40.6 33.8   42.5   34.0   41.6  33.9 
Content delivery network (CDN) services  9.3 3.8   8.7   8.9   9.0  6.5 
Other  — 7.6   —   6.3   —   6.9 
Total revenues  100.0 100.0   100.0   100.0   100.0   100.0 
                     
Operating expenses:      
Operating costs and expenses:               
Direct costs of network, sales and services, exclusive of depreciation and
amortization shown below:
                     
IP services  18.2 19.3   18.3   18.1   18.2  18.7 
Data center services  29.2 26.7   32.1   24.1   30.7  25.4 
CDN services  3.1 1.2   3.3   3.3   3.2  2.3 
Other  — 6.2   —   5.1   —  5.6 
Direct costs of amortization of acquired technology
  2.0 1.2 
Direct costs of amortization of acquired technologies  2.0   1.8   2.0  1.5 
Direct costs of customer support
  7.0 6.3   6.7   7.4   6.9  6.9 
Product development  3.7 2.4   3.3   3.0   3.5  2.7 
Sales and marketing  14.2 11.6   12.4   14.3   13.3  13.0 
General and administrative  12.9 14.6   13.6   13.5   12.7  13.9 
Provision for doubtful accounts  4.9   0.7   3.0   0.5 
Restructuring and asset impairment  — 21.2   —   —   —  10.1 
Acquired in-process research and development  — 0.9   —   —   —  0.4 
Depreciation and amortization  8.7 9.2   9.1   10.1   8.9   9.7 
Total operating costs and expenses  99.0 120.8   105.7   101.4   102.4   110.7 
Income (loss) from operations  1.0%(20.8)%
Loss from operations  (5.7)%  (1.4)%  (2.4)%  (10.7)%
  
Segment information. We have three business segments: IP services, data center services and CDN services. IP services include managed and premise-based high performance IP and route optimization technologies. Data center services include hosting of customer applications directly on our network to eliminate issues associated with the quality of local connections. We are increasingly bundling our data center services with our high performance IP connectivity services. CDN services include products and services for storing, delivering and monetizing digital media to large global audiences over the Internet. Prior to our acquisition of VitalStream on February 20, 2007, we did not offer proprietary CDN services. Instead, we were a reseller of third party CDN services for which revenues and direct costs are included in other revenues and direct costs of network, sales and services for the three and six months ended March 31,June 30, 2007, discussed below. Throughout 2007 our third party CDN services 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.
 
Our reportable segments are strategic business units that offer different products and services. As of March 31,June 30, 2008, our customer base totaled more than 3,700 customers across more than 20 metropolitan markets.
 
IP services. Revenue Revenues for IP services increased $1.8$0.7 million, or 6%2%, to $31.1$30.4 million for the three months ended March 31,June 30, 2008, compared to $29.3$29.7 million for the three months ended March 31,June 30, 2007. For the six-month period, IP services revenues increased $2.5 million, or 4%, to $61.5 million as of June 30, 2008, compared to $59.1 million as of June 30, 2007. The increase in IP revenuerevenues is driven by an increase in demand, and an increase in revenue from our premise-based FCP products and related hardware sales, partially offset by a decline in IP pricing. We continue to experience increasing demand for our traditional IP services, with IP traffic increasing approximately 47%55% from March 31,June 30, 2007 to March 31,June 30, 2008. The increase in IP traffic has resulted from an increase in the number of customers and 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 portion of our gains in customers and IP traffic. The blended rate chargedeffective price we charge our customers for IP Services measured in megabits per second, or Mbps, decreased approximately 23%24% from March 31,June 30, 2007 to March 31,June 30, 2008.
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Direct costs of IP network, sales and services, exclusive of depreciation and amortization, increased less than $1.0$0.8 million, or 9%8%, to $11.3$11.4 million for the three months ended March 31,June 30, 2008, compared to $10.3$10.6 million for the three months ended March 31,June 30, 2007. For the six-month period, the related direct costs increased $1.8 million, or 9%, to $22.7 million as of June 30, 2008, compared to $20.9 million as of June 30, 2007. Direct costs of IP network, sales and services increased towas 38% and 36% of IP services revenuerevenues for the three months ended March 31,June 30, 2008 fromand 2007, respectively, and 37% and 35% for the threesix months ended March 31, 2007.June 30, 2008 and 2007, respectively. IP services segment profit increased $0.8decreased $0.2 million to $19.8 million for the three months ended March 31, 2008, from $19.0 million for the three months ended March 31,June 30, 2008, from $19.2 million for the three months ended June 30, 2007 and increased $0.7 million to $38.8 million for the six months ended June 30, 2008 from $38.1 million for the six months ended June 30, 2007.  We continue to have a change in the mix of revenue with traditionally higher margin IP services, lower margin high volume customers, and FCP and other hardware sales. Connectivity costs vary based upon customer traffic and other demand-based pricing variables. Costs for IP services are especially subject to ongoing negotiations for pricing and minimum commitments. During the six months ended June 30, 2008 we renegotiated our agreements with several of our major network service providers which have resulted in higher minimum commitments but lower bandwidth rates. As our IP traffic continues to grow, we expect to have greater bargaining power for lower bandwidth rates and more opportunities to proactively manage network costs, such as utilization and traffic optimization among network service providers.

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Data center services. Data center services are a significant source of revenue growth for our business. RevenueRevenues for data center services increased $7.1more than $6.6 million, or 39%34%, to $25.2$26.5 million for the three months ended March 31,June 30, 2008, compared to $18.1$19.9 million for the for the three months ended March 31,June 30, 2007. For the six-month period, data center services revenues increased more than $13.7 million, or 36%, to $51.7 million as of June 30, 2008, compared to $38.0 million as of June 30, 2007. The reason for the increase is primarily due to our data center growth initiative, which we began executing during the second quarter of 2007 and is on-going. We have also structured our data center business to accommodate larger, global customers and ensure a platform for robust traffic growth.

The direct costs of data center services, exclusive of depreciation and amortization, increased $3.8$5.9 million, or 27%42%, to $18.1$20.0 million for the three months ended March 31,June 30, 2008, compared to $14.3$14.1 million for the three months ended March 31,June 30, 2007. For the six-month period, the related direct costs increased $9.8 million, or 34%, to $38.2 million as of June 30, 2008, compared to $28.4 million as of June 30, 2007. Data center services contributed $7.1$6.5 million of segment profit for the three months ended March 31,June 30, 2008, an increase of $3.3$0.7 million from $3.8$5.8 million offor the three months ended March 31,June 30, 2007. As dataData center services revenue has increased, directcontributed $13.5 million of segment profit for the six months ended June 30, 2008, an increase of more than $3.9 million from $9.6 million for the six months ended June 30, 2007.  Direct costs of data center services as a percentage of corresponding revenue have decreasedrevenues has increased to approximately 72%76% for the three months ended March 31,June 30, 2008 from 79%71% for the three months ended March 31,June 30, 2007 and has decreased to 74% for the six months ended June 30, 2008 from 75% for the six months ended June 30, 2007. This trend is the result of an increase

The growth in total occupancy at higher rates, while substantialdata center revenues and direct costs are subject to previously negotiated rates.services largely follows our expansion of data center space, and we believe the demand for data center services is outpacing industry-wide supply.  Direct costs of data center services, exclusive of depreciation and amortization, have substantial fixed cost components, primarily for rent, but also significant demand-based pricing variables, such as utilities, which are highest in the summer for cooling the facilities.
The growth in data center revenues and direct Direct costs services largely follows our expansion of data center space. We believe the demand for data center services is outpacing industry-wide supply, which contributes to our improvement of data center direct costs as a percentage of revenues vary with the mix of usage between sites operated by us and third parties, referred to as partner sites, as well as the utilization of total available space.  The initial operating costs, especially for rent, of sites operated by us causes us to recognize some costs ahead of revenues but overall is more profitable at minimum levels of utilization than the use of partner sites.  Conversely, costs in partner sites are more demand-based and therefore more closely tied with the recognition of revenues.  We seek to optimize the most profitable mix of available data center revenue. space operated by us and our partners.  The increased use of partner sites is one reason for the higher percentage of direct costs for the three-month period ended June 30, 2008 compared to the same period in 2007. 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.
At March 31,June 30, 2008, we had approximately 186,000207,000 square feet of data center space with a utilization rate of approximately 76%78%, as compared to approximately 162,000166,000 square feet of data center space with a utilization rate of approximately 75% at March 31,June 30, 2007. OurWe expect our recent data center expansion shouldwill provide us lower costs per occupied square foot in future periods, enabling us to increase revenuerevenues compared to relatively lower direct costs of data center services. At March 31,June 30, 2008, 104,000114,000 square feet of data center space, or approximately 56%55% of our total square feet, was in data centers operated by us versus data centers operated by our vendors, or partner sites.sites, as compared to 99,000 square feet or 60% of our total square feet at June 30, 2007. Additionally, approximately 57%71% of our available square feet as of March 31,June 30, 2008 and 2007 werewas in data centers operated by us. Both periods had a higher than usual percentage of available square feet in data centers operated by us because of recently completed build-outs of Internap operated data centers within each period.

CDN services. Revenue Revenues for our CDN services segment increased more than $3.6$0.2 million, or 4%, to $5.7$5.4 million for the three months ended March 31,June 30, 2008, compared to $2.1$5.2 million for the for the three months ended March 31,June 30, 2007. RevenueFor the six-month period, revenues for our CDN services segment increased $3.9 million to $11.2 million as compared to $7.3 million for the threesix months ended March 31,June 30, 2007, which only includes activity from ourthe acquisition date of VitalStream on February 20, 2007. Prior to the acquisition,As previously noted, we did not offer proprietary CDN services but instead,prior to our acquisition of VitalStream. Instead, we were a reseller of third party CDN services, which was included in other revenue, discussed below.services. We expect CDN services to be an area of significant growth and have upgraded and expanded related infrastructure, including in Europe and Asia, to serve the expected industry-wide demand, particularly in those regions. During the three months ended June 30, 2008 we expanded our presence into two new international CDN markets, Singapore and Sydney. Also, we extended our 100% uptime service level agreement, or SLA, to customers purchasing or renewing CDN services after January 1, 2008.  However, we have seen some softening in advertising-supported applications and longer sales cycles that have contributed to some weakness in the CDN services segment.

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Direct costs of network, sales and services, exclusive of depreciation and amortization, for our CDN services segment increased $1.3$0.1 million, or 5%, to $2.1 million for the three months ended June 30, 2008, compared to $2.0 million for the three months ended March 31,June 30, 2007. For the six-month period, direct costs of network, sales and services, exclusive of depreciation and amortization, for our CDN services segment increased $1.4 million, to $4.0 million for the six months ended June 30, 2008, compared to $0.7$2.6 million for the six months ended June 30, 2007. Segment profit for CDN services increased $0.1 million to $3.4 million for the three months ended March 31, 2007. Segment profit for CDN services was $3.8 million and $1.4June 30, 2008 from $3.3 million for the three months ended March 31,June 30, 2007. For the six months ended June 30, 2008, and 2007, respectively, an increase of $2.4 million.CDN segment profit increased $2.5 million to $7.2 million from $4.7 million at June 30, 2007. As noted with revenues above, costs for the threesix months ended March 31,June 30, 2007 only includesinclude activity fromafter our acquisition of VitalStream on February 20, 2007. Direct costs of CDN network, sales and services were approximately 34%38% of CDN services revenuerevenues for the three months ended March 31,June 30, 2008, compared to 32%37% for the three months ended March 31,June 30, 2007. Direct costs of CDN network, sales and services was 36% of CDN services revenues for both the six month periods ended June 30, 2008 and 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 in February 2007. However, the increase of direct costs as a percentage of revenues for the three months ended June 30, 2008 is primarily related to decreased revenues, as noted above. Direct costs of CDN network sales and services for the three months ended March 31, 2008, also includesinclude an allocation of approximately $0.4 million from direct costs of IP network sales and services based on the average cost of actual usage by the CDN segment.  As previously noted, we did not offer proprietaryThe CDN services prior tosegment will also further benefit from the renegotiated rates with our acquisition of VitalStream. Instead, we were a reseller of third party CDN services, which is included in other direct costs, below, duringnetwork service providers discussed above under IP Services. For the three and six months ended March 31,June 30, 2008, the allocation was $0.3 million and $0.7 million, respectively, as compared to $0.2 million for both the three and six months ended June 30, 2007.

Other. Other revenues and direct costs of network, sales and services include 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.

Other operating expenses.Other than direct costs of network, sales and services, our compensation and facilities-related costs have the most pervasive impact on operating expenses.  Compensation and benefits comprise our next largest expensesexpense after direct costs of network, sales and services. Cash-basis compensation and benefits increased $2.4$0.4 million to $14.1$13.9 million for the quarterthree months ended March 31,June 30, 2008 from $11.7$13.5 million for the quarterthree months ended March 31,June 30, 2007. Stock-basedCash-basis compensation increased $0.8$2.8 million to $2.4$28.0 million from $25.2 million for the quartersix months ended March 31, 2008 from $1.6 million for the quarter ended March 31,June 30, 2007.  The increases in cash-basis compensation and benefits are primarily due to increased headcount, largely attributable to a full three months of the additional employees resulting from the VitalStream acquisition.  For$0.6 million in severance accruals for two executives recorded in the three months ended March 31,June 30, 2008, VitalStreamadditional headcount and annual pay increases for employees accounted for approximately $1.1 million more cash-basis compensation,effective April 1, 2008. These increases were partially offset by a reduction in the bonus accrual since we are not currently on target to achieve our established financial performance goals. The six-month period is additionally increased by having a full six months of CDN employee expense compared to the threefour full months ended March 31,in 2007. Total headcount increased to 442455 at March 31,June 30, 2008 compared to 432431 at March 31,June 30, 2007.  Stock-based compensation decreased $0.7 million to $2.1 million for the three months ended June 30, 2008 from $2.8 million for the three months ended June 30, 2007. For the six months ended June 30, 2008 and 2007, stock-based compensation was $4.4 million. The decrease for the three-month period is due to the cancellation of unvested options and awards for executives who have left the Company.  Stock-based compensation is summarized by the following financial statement captions (in thousands):
  
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Other operating expenses also include stock-based compensation in the following amounts (in thousands):
  Three Months Ended June 30,  Six Months Ended June 30, 
  2008  2007  2008  2007 
Direct costs of customer support $326  $498  $812  $831 
Product development  157   220   409   421 
Sales and marketing  474   764   948   1,290 
General and administrative  1,117   1,307   2,280   1,873 
  $2,074  $2,789  $4,449  $4,415 
 
  
Three Months Ended
March 31,
 
  2008  2007 
Direct costs of customer support
 $486  $333 
Product development  253   201 
Sales and marketing  474   526 
General and administrative  1,162   565 
  $2,375  $1,625 
Overall, facilityFacilities and related costs, including repairs and maintenance, communications and office supplies but excluding direct costs of network, sales and sales,services, increased $0.2 million, to $1.9$2.0 million for the three months ended March 31,June 30, 2008 compared to $1.7$1.8 million for the three months ended March 31,June 30, 2007.  For the six months ended June 30, 2008, facility and related costs increased $0.3 million to $3.8 million, as compared to $3.5 million for the six months ended June 30, 2007. The increase includesincreases are primarily due to the impactrecent relocation and upgrade of one of our sales offices to a new, larger space and having associated costs from the VitalStream acquisition for the entire threea full six months ended March 31, 2008, compared to approximately five weeks in the three months ended March 31, 2007.of CDN operating expenses, partly offset by ongoing cost containment efforts.

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Operating costs are further discussed with the financial statement captions below.

Direct costs of amortization of acquired technologytechnologies. Direct costs of amortization of acquired technologytechnologies increased to $1.2 million for the three months ended March 31,June 30, 2008 from $0.7$1.1 million for the three months ended March 31,June 30, 2007. For the six-month period ended June 30, 2008, direct costs of amortization of acquired technologies increased to $2.5 million from $1.7 million for the six months ended June 30, 2007.  The increase of more than $0.5$0.8 million for the six months is due to a full threesix months of post-acquisition amortization of post-acquisition intangible technology assets from VitalStream.related to CDN.
 
Direct costs of customer support. Direct costs of customer support increased 29%decreased 3% to $4.4$4.2 million for three months ended March 31,June 30, 2008 from $3.4$4.3 million for the three months ended March 31,June 30, 2007. For the six months ended June 30, 2008, direct costs of customer support increased 11% to $8.6 million, as compared to $7.7 million for the six months ended June 30, 2007. The increasedecrease of $1.0$0.1 million for the three months was largely due to a $0.5$0.1 million decrease in facilities and related expenses. The six-month period increase of $0.9 million is primarily the result of a $0.7 million increase in cash-basis compensation a $0.2 million increase in stock-based compensation and a $0.2 million increase in facilities and related expenses, all discussed above.benefits.
 
Product development. Product development costs for the three months ended March 31,June 30, 2008 increased 83%17% to $2.3$2.1 million from $1.3$1.7 million for the three months ended March 31,June 30, 2007. For the six months ended June 30, 2008, product development costs increased 45% to $4.3 million, as compared to $3.0 million for the six months ended June 30, 2007. The increaseincreases for the three and six months ended June 30, 2008 of $1.0less than $0.4 million isand $1.3 million, respectively, are attributable to a $0.6 million increaseincreases in cash-basis compensation and a $0.2 million increase inbenefits and outside professional services. The increaseincreases in cash compensation includeswere $0.3 million and $0.8 million for the three and six months, respectively, and include the movement of some employees to product development that were formerly in professional services and customer support roles in sales, marketing and direct costs of customer support. WeThe increase in professional services of $0.1 million and $0.3 million for the three and six months ended June 30, 2008, respectively, are also completing more product development than we diddue to us using third party vendors for certain engineering services that were previously performed by our employees in early 2007, especially as it relates to our CDN, and have engaged an outside firm to perform software engineering.CDN.
 
                Sales and marketing. Sales and marketing costs for the three months ended March 31,June 30, 2008 increased 43%decreased 8% to $8.8$7.7 million from $6.2$8.3 million for the three months ended March 31,June 30, 2007. For the six months ended June 30, 2008, sales and marketing costs increased 14% to $16.5 million, as compared to $14.5 million for the six months ended June 30, 2007. The net increasedecrease of $2.6$0.6 million for the three months was comprised primarily of $1.9$0.3 million for stock-based compensation, $0.2 million for travel and entertainment and $0.1 million for cash-basis compensation. Cash-basis compensation andincludes a $0.3 million decrease in commissions partially offset by an increase in salary and other components of cash-basis compensation. The reduction in commissions is due to higher sales quotas under a new commission plan, adjustments for facilitiesnot meeting sales quotas and related expenses, both discussed above.the mix of new sales people to open sales positions. The six month increase of $2.0 million is primarily the result of a $1.7 million increase in cash-basis compensation includes anassociated with overall increase of $0.6 million in commissions, due to higher commissionable bookings, a full three months of VitalStream commissions, a different mix of employees receiving commissions and a new commission plan effective February 2008.headcount.
 
General and administrative. General and administrative costs for the three months ended March 31,June 30, 2008 increased 2%7% to $8.0$8.5 million from $7.8$7.9 million for the three months ended March 31,June 30, 2007. For the six months ended June 30, 2008, general and administrative costs increased 2% to $15.8 million, as compared to $15.5 million for the six months ended June 30, 2007. The three month increase of $0.2$0.6 million reflects a $0.6$0.4 million increase in both professional services and facilities and related expenses, partially offset by a $0.2 million decrease in stock-based compensation, acompensation.  The six month increase of $0.3 million reflects increases of $0.5 million increase in bad debt expense and a $0.3 million increase in taxes, licenses and fees.fees and $0.3 million in professional services. These six month increases were partially offset by a decrease of $0.6$0.5 million in facilities and related costs and $0.5 milliondecrease in cash-basis compensation. The increase in stock-based compensation is due to additional expense of $0.3 million related to the accrual of executive bonuses in stock-based compensation and a full three months of VitalStream employee expense. Bad debt expenseProfessional services was also higher due primarily to a full three monthshigher accounting fees, especially associated with international statutory audits, use of activity fromconsultants for process improvements, contract labor and other outside services. Compensation for the VitalStream acquisition and additional emphasis thatsix-month period was put on our review of sales credit activity subsequentimpacted by lower bonus accruals, as previously discussed.
Provision for doubtful accounts.  The provision for doubtful accounts increased to December 31, 2007, which hindered our collection efforts during$3.0 million for the three months ended March 31, 2008. TheJune 30, 2008 from $0.4 million for the three months ended June 30, 2007. For the six months ended June 30, 2008, the provision for doubtful accounts increased to $3.7 million from $0.6 million as of June 30, 2007.  As part of our regular review of sales credit activity is discussedthe aged accounts receivable balances and taking into consideration current economic conditions, we reserved $3.0 million of our customer accounts receivable, primarily in more detail under Item 4, Controls and Procedures, below. Cash-basis compensation decreased because of lower bonus accrualsthe CDN segment, that have not been collected to date.  We believe the ability to collect these valid receivables has become less than probable due to changes in circumstance with these customers. Many of these accounts were customers in 2007 and early 2008 but have since been disconnected from our service. We will continue to strongly focus on our customers' ability to make payment in light of the accrual of executive bonuses in stock-based compensation, as discussed above, and lower self-insured medical claims.current economic conditions.

Restructuring and asset impairment. During the three months ended March 31, 2007, we incurred a restructuring and impairment charge totaling $11.3 million. The charge was the result of a review of our business, particularly in light of our acquisition of VitalStream and our plan to finalize the overall integration and implementation plan before the end of the first quarter of 2007. The charge to expense included $7.8 million for leased facilities, representing both the costs less anticipated sublease recoveries that will continue to be incurred without economic benefit to us and costs to terminate leases before the end of their term. The charge also included severance payments of $1.1 million for the termination of certain employees and $1.4 million for impairment of assets. Net related expenditures are estimated to be $10.7 million, of which $3.5 million has been paid through March 31,June 30, 2008, and the balance continuing through December 2016, the last date of the longest lease term. These expenditures are expected to be paid out of operating cash flows. Cost savings from the restructuring were estimated to be approximately $0.8 million per year through 2016, primarily for rent expense.  We 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.

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InAs disclosed in our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2007, we perform our annual impairment analysis of goodwill as of August 1 of each year in accordance with SFAS No. 142, "Goodwill“Goodwill and Other Intangible Assets," we review our goodwill for impairment annually, or more frequently, if facts and circumstances warrant a review. The provisions ofAssets.”  Under SFAS No. 142, require that a two-step testthe impairment analysis of goodwill and other intangible assets not subject to amortization must be performed to assess goodwill for impairment. First,based on estimated fair values.  The valuation of intangible assets requires assumptions and estimates of many critical factors, including revenue and market growth, operating cash flows, market multiples, and discount rates.  We have experienced declines in our consolidated operating results during the fair valuefirst two quarters of each reporting unit is2008 as compared to its carrying value. If the fair value exceeds the carrying value, goodwill is not impaired and no further testing is performed. The second step is performed if the carrying value exceeds the fair value. The implied fair value of the reporting unit's goodwill must be determined and compared to the carrying value of the goodwill. If the carrying value of a reporting unit's goodwill exceeds its implied fair value, an impairment loss equal to the difference will be recorded. We completed our last annual goodwill impairment test as of August 1, 2007 and determined that the carrying amount of goodwill was not impaired.

The assumptions, inputs and judgments used in performing the valuation analysis are inherently subjective and reflect estimates based on known facts and circumstances at the time the valuation is performed. The use of different assumptions, inputs and judgments, or changes in circumstances, could materially affect the results of the valuation.projections.  Adverse changes in expected operating results and/or unfavorable changes in other economic factors used to estimate fair values could result in a non-cash impairment charge in the valuefuture under SFAS No. 142.  An impairment of our reporting units would necessitategoodwill may also lead us to record an impairment charge of our goodwill. In connection with our acquisition of VitalStream on February 20, 2007, we recorded $154.8 million of additional goodwill based on our allocation of the VitalStream purchase price, and subsequently decreased the total goodwill by $0.4 million as a result of the utilization of a portion of VitalStream’s net operating loss carryforwards. The total recorded amount of goodwill was $190.7 million as of March 31, 2008.

Generally, any adjustments made as a result of the impairment testing are required to be recognized as operating expense. As noted, our annual impairment review date is August 1.  We will begin the process of collecting information for the evaluation in the second half of the second quarter. If the preliminary stages of our review indicate a possible impairment, we will proceed to the second step and seek to complete such process as of a date earlier than August 1.
other intangible assets.

Depreciation and amortization. Depreciation and amortization, including other intangible assets but excluding acquired technologies, for the three months ended March 31,June 30, 2008 increased 10%decreased 4% to $5.4$5.7 million compared to $4.9$5.9 million for the three months ended March 31,June 30, 2007. The $0.5 million increase isFor the result of a full threesix months of the post-acquisitionended June 30, 2008, depreciation and amortization increased 2% to $11.1 million from $10.8 million for the six months ended June 30, 2007.

Write-off of VitalStream propertyinvestment. During the three months ended June 30, 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 equipmentall shares of series D preferred stock were cancelled and amortizable intangible assets and an increased depreciable basethe holders of assets as we upgraded our P-NAP facilities and continue to expand our data center facilities.series D preferred stock did not receive any consideration for such shares. We have not written-off any investments during 2008.
 
Income taxes. The provision for income taxes was $0.3less than $0.1 million and $0.1 million for the three months ended March 31,June 30, 2008 and 2007, respectively, and $0.3 million and $0.2 million for the six months ended June 30, 2008 and 2007, respectively. Our effective income tax rate, as a percentage of pre-tax net income, for the threesix months ended March 31,June 30, 2008 and 2007 was 27.3%(13%) and 1%(1%), respectively.  The fluctuation in the effective income tax rate is attributable to discrete events, during 2007 – the release of our United Kingdom, or U.K., valuation allowance, unrecognized tax benefits, andincluding the creation of a domestic deferred tax liability related to the tax amortization of goodwill from the acquisition of VitalStream.VitalStream in February 2007.  Movement in the deferred tax asset caused a corresponding movement in the provision for income taxes during the six months ended June 30, 2008.  The effective annualincome tax rate for the year ending December 31, 2008 could further change due to number of factors including, but not limited to, our geographic profit mix between the U.K. and the United States, enactments of new tax laws, new interpretations of existing tax laws and rulings by and settlements with taxing authorities, and the expiration of the statute of limitations for open yearsauthorities.

We continue to maintain a full valuation allowance against our non-U.K. unrealized deferred tax assets of approximately $183.4$185.0 million, consisting primarily of net operating loss carryforwards.  We may recognize deferred tax assets in future periods when they are estimated to be realizable, such as establishing expected continuing profitability on a consolidated basis or by certain of our foreign subsidiaries. To the extent we may owe income taxes in future periods, we intend to use our net operating loss carryforwards to the extent available to offset taxable income and reduce cash outflows for income taxes.  Based on an analysis of our projected 2008 and 2009 domestic income, we may have sufficient positive evidence within the next twelve months to begin releasing the valuation allowance against our domestic deferred tax assetsassets.
 
Tax years 2003 through 2006 remain open to examination by jurisdictions to which we are subject, and net operating losses from previous years are subject to adjustment upon audit prior to being fully utilized.
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Liquidity and Capital Resources
 
Cash Flow for the ThreeSix Months ended March 31,June 30, 2008 and 2007
 
Net cash from operating activities.activities
 
Net cash provided by operating activities was $6.0$19.6 million for the threesix months ended March 31,June 30, 2008. Our net income, adjustedloss, after adjustments for non-cash items, generated cash from operations of $11.0$21.4 million while changes in operating assets and liabilities represented a use of cash from operations of $5.0$1.8 million. The primary non-cash adjustment in 2008 was $6.6$13.5 million for depreciation and amortization, which includes the amortizable intangible assets acquired through the acquisition of VitalStream in 2007 and the expansion of our P-NAP and data center facilities throughout 2007 and the first quarter of 2008. Non-cash adjustments in 2008 also include $2.4$4.4 million for stock-based compensation expense and $3.7 million for the provision for doubtful accounts, both of which isare further discussed above in the section captioned “Results of Operations.” The changes in operating assets and liabilities includes an increaseinclude increases in prepaid expenses, deposits and other assets of $3.2$1.3 million, mostly due to a depositan increase in prepaid colocation setup costs and two additional deposits for one of our telecommunication vendors.landlords. There were also decreases in accrued expenses andrestructuring, accounts payable and deferred revenues of $1.8$1.1 million, $0.8 million and $1.5$0.7 million, respectively. The accrued expenses decrease was primarilyAccrued restructuring decreased due to the paymentdue to $1.1 million of employee bonusesscheduled cash payments during the threesix months ended March 31, 2008 and theJune 30, 2008. The decrease in accounts payable was due to a higher than normal balance at December 31, 2007. This higher balance at December 31, 2007 was largely due to the implementation near year-end of a new telecommunications expense management system for our direct costs and our ongoing data center expansion. The decrease in deferred revenues was caused by less deferred revenues related to our FCP product. These changes were partially offset by a decrease in accounts receivable of $2.8$3.0 million. The decrease in accountsAccounts receivable is due to a higher than normal balance atas of December 31, 2007 primarilyreflected some collection delays on certain larger, high credit quality customers that tend to pay over longer terms and an increase from the migration of formerlegacy VitalStream and other customers to Internap billing and systems platforms. Quarterly days sales outstanding at March 31,June 30, 2008 increaseddecreased to 4843 days from 3854 days at MarchDecember 31, 2007.2007 due to the increase in the allowance for doubtful accounts as well as improved collection times.
 
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Net cash provided by operating activities was $6.1$12.3 million for the threesix months ended March 31,June 30, 2007, and was primarily due to net loss adjustedadjustments for non-cash items of $1.5$20.7 million, and changes in operating assets and liabilities (excluding the effects of acquisition)$4.0 million, offset by net loss of $7.7$12.4 million. The non-cash adjustment of $12.5 million for depreciation and amortization is due in part to the amortizable intangible assets acquired through the acquisition of VitalStream on February 20, 2007 and the expansion of our P-NAP and data center facilities. The change in operating assets and liabilities includes an increase in payables is primarily related to the timingaccrued restructuring liability of payments with the March 31, 2007 balance being consistent with our normal operating expenses and payment terms.$8.1 million partially offset by an increase in accounts receivable of $3.6 million.

We anticipate continuing to generate cash flows from our results of operations, that is,or net income (loss) adjusted for non-cash items, and manage changes in operating assets and liabilities towards a net $0 change over time in subsequent periods. We also expect to use cash flows from operating activities to fund a portion of our capital expenditures and other requirements, to repay our outstanding debt as its becomes due and to meet our other commitments and obligations as they become due.
 
Net cash from investing activities.activities
 
Net cash used in investing activities for the threesix months ended March 31,June 30, 2008 was $8.1$16.4 million, primarily due to capital expenditures of $10.1$19.5 million, partially offset by decrease in restricted cash of $3.1 million. Our capital expenditures were principally for the continued expansion of our data center facilities, CDN infrastructure and upgrading our P-NAP facilities. We expect total capital expenditures of $45.0 to $50.0 million for the year ended December 31, 2008, funded from both cash from operations and borrowings from our credit agreement. Restricted cash decreased due to the maturity of three certificates of deposit which were securing certain letters of credit that were replaced and are now secured by our revolving credit facility.

Net cash used in investing activities for the threesix months ended March 31,June 30, 2007 was $1.4$20.0 million, primarily due to capital expenditures of $3.8$17.0 million and net purchases of short-term investments in marketable securities of $6.1 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.activities

Net cash used in financing activities for the threesix months ended March 31,June 30, 2008 was $0.2$0.4 million, primarily due to principal payments on capital leases of $0.2 million.leases.
 
Net cash provided by financing activities for the threesix months ended March 31,June 30, 2007 was $1.9$2.7 million. Cash provided by financing activities was primarily due to proceeds from stock optionscompensation plan activity of $3.7$6.8 million, partially offset by principal payments on a notenotes payable and capital leases of $1.9$4.1 million.

Liquidity.
 
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Liquidity
Although we have been in existence since 1996, we have experienced significant 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, 2007.  For the three and six months ended June 30, 2008, we recorded net incomelosses of $0.7$3.2 million for the three months ended March 31, 2008 and a net loss of $10.7$2.5 million, for the three months ended March 31, 2007.respectively. As of March 31,June 30, 2008, our accumulated deficit was $861.3$864.5 million. We cannot guarantee that we will be profitable in the future, given the competitive and evolving nature of the industry in which we operate. We may not be able to sustain or increase profitability on a quarterly basis, and our failure to do so would adversely affect our business, including our ability to raise additional funds.
 

We expect to meet our cash requirements in 2008 through a combination of net cash provided by operating activities, existing cash, cash equivalents and investments in marketable securities, and borrowings under our credit agreement, especially for capital expenditures.  We expect to incur these capital expenditures primarily for the continued expansion of our P-NAP and data center facilities. We may also utilize our revolving line of credit, particularly if we consider it economically favorable to do so. Our capital requirements depend on a number of factors, including the continued market acceptance of our services and products, the ability to expand and retain our customer base and other factors. If our cash requirements vary materially from those currently planned, if our cost reduction initiatives have unanticipated adverse effects on our business or if we fail to generate sufficient cash flows from the sales of our services and products, we may require greater or additional financing sooner than anticipated. We can offer no assurance that we will be able to obtain additional financing on commercially favorable terms, or at all, and provisions in our existing credit agreement limit our ability to incur additional indebtedness. We believe we have sufficient cash to operate our business for the foreseeable future.

Short-term investments.  Short-term investments primarily consist of high credit quality corporate debt securities, commercial paper and U.S. Government Agency debt securities. At March 31,June 30, 2008, our balance in short-term investments was $12.4 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 auction rate securities whose underlying assets are state-issued student and educational loans that are substantially backed by the federal government. At March 31,June 30, 2008, the carrying value of our balance in auction rate securities was $6.8$6.7 million, all of which carried AAA/Aaa ratings as of March 31,June 30, 2008.  Auction rate securities are variable rate bonds tied to short-term interest rates with maturities on the face of the securities in excess of 90 days and have interest rate resets through a modified Dutch auction, at predetermined short-term intervals, usually every 7, 28 or 35 days.  They have historically traded at par value and are callable at par value 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 reset.resets. 

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While we continue to earn interest on our auction rate securities at maximum 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. As discussed in note 8 to the accompanying unaudited condensed consolidated financial statements, we adopted SFAS No. 157, “Fair Value Measurements,” effective January 1, 2008.  We categorized our auction rate securities as level 3 assets in the fair value hierarchy.  Level 3 assets have usedunobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets. The fair value of our level 3 assets was $6.7 million at June 30, 2008, representing 10% of our total financial assets measured at fair value.
Given that observable auction rate securities market information was not available to determine the fair value of our auction rate securities, we compared the fair value of our securities using a discounted cash flow model as well as transaction data for bonds issued by a state student loan corporation that we consider to determinehave similar characteristics to our auction rate securities.  In determining the estimated fair value of our investments in auction rate securities as of March 31, 2008. The assumptions used in preparingusing the discounted cash flow model, includethere were several significant assumptions, including:
●projected interest income over the next five years,
●market risk adjusted discount rate, based on the London Inter-Bank Offered Rate, or LIBOR, swap rate adjusted for expected yield premium to compensate for the illiquidity resulting from failing auctions for such securities, and
●default or credit risk adjustments to the discount rate, based on the auction rate securities in our portfolio were all AAA/Aaa rated by nationally recognized rating agencies, collateralized by student loans and repayment of the underlying obligations substantially guaranteed by either a U.S. federal or municipal government institution.
While our valuation model was based on both level 2 (credit quality and interest rates) and level 3 inputs under the SFAS No. 157 fair value hierarchy, we determined that the level 3 inputs were the most significant to the overall fair value measurement, particularly the estimates for interest rates, timing and amount of cash flows and expected holding period of the auction rate securities.risk adjusted discount rates.  Based on this assessment of fair value, we recorded an unrealized loss of approximately $0.3$0.4 million in accumulated other comprehensive income within the stockholders’ equity section of our balance sheet related to our auction rate securities as of March 31,June 30, 2008. We believe this unrealized loss is temporary, primarily attributable to the limited liquidityilliquidity of these investments, and have no reason to believe that any of the underlying issuers are presently at risk of default.   We further anticipate that we will be able to sell our auction rate securities in the future without loss. Due to the uncertainty as to when the auction rate securities markets will improve, we changed the classification ofhave classified our auction rate securities toas non-current investments as of March 31,June 30, 2008, fromversus current investments as of December 31, 2007. In the meantime, we believe we have sufficient liquidity through our cash balances, other short-term investments and available credit.
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Restructuring liability.  We continue to have a liability of $9.4$9.0 million for restructuring, primarily for ongoing real estate obligations, related to restructuring plans implemented in 2001 and March 2007.  For additional information, refer to note 95 of the accompanying unaudited condensed consolidated financial statements provided under Part I, Item 1 of this Quarterly Report on Form 10-Q.statements.

Credit agreement.  On September 14, 2007, we entered into a $35.0 million credit agreement, or the Credit Agreement, with Bank of America, N.A., as administrative agent, and lenders who may become a party to the Credit Agreement from time to time.  VitalStream Holdings, Inc., VitalStream, Inc., PlayStream, Inc., and VitalStream Advertising Services, Inc., four of our subsidiaries, are guarantors of the Credit Agreement.

The Credit Agreement provides for a four-year revolving credit facility, or the Revolving Credit Facility, in the aggregate amount of up to $5.0 million which includes a $5.0 million sub-limit for letters of credit.  With the prior approval of the administrative agent, we may increase the total commitments by up to $15.0 million for a total commitment under the Revolving Credit Facility of $20.0 million.  The Revolving Credit Facility is available to finance working capital, capital expenditures and other general corporate purposes. As of March 31,June 30, 2008, no borrowings were outstanding under the Revolving Credit Facility. A total of $6.1$4.7 million of letters of credit were issued and outstanding as of March 31,June 30, 2008, including $4.0 millionall of which are secured by the Revolving Credit Facility and $2.1 million secured by restricted cash.Facility. The letters of credit primarily secure certain of our real estate leases.

The Credit Agreement also provides for a four-year term loan, or the Term Loan, in the amount of $30.0 million.  We borrowed $20.0 million concurrently with the closing and used a portion of the proceeds from the Term Loan to pay off our prior credit facility.  We intend to use the remaining proceeds to fund capital expenditures related to the expansion of our data center facilities. The balance outstanding on the Term Loan at March 31,June 30, 2008 was $19.8 million and is shown net of $0.2 million debt discount, which is being amortized to interest expense using the interest method over the term of the loan.

The interest rate on the Revolving Credit Facility and Term Loan is a tiered LIBOR-based rate that depends on our 12-month trailing EBITDA. As of March 31,June 30, 2008, the interest rate was 4.395%4.275%.

We are only required to make only interest payments on the Term Loan during the first 12 months of its four-year term.  Commencing on September 30, 2008, the last day of the first calendar quarter after the first anniversary of the closing, the outstanding amount of the Term Loan will amortize on a straight-line schedule with the payment of 1/16 of the original principal amount of the Term Loan due quarterly. We will pay allAll unpaid amounts are due at maturity, which is September 14, 2011.

The Credit Agreement includes customary representations, warranties, negative and affirmative covenants, including certain financial covenants relating to net funded debt to EBITDA ratio and fixed charge coverage ratio, as well as customary events of default and certain default provisions that could result in acceleration of the Credit Agreement.  As of March 31,June 30, 2008, we were in compliance with the financial and other covenants.

Capital leases. Our future minimum lease payments on remaining capital lease obligations at March 31,June 30, 2008 totaled $1.2$1.0 million.
 
Commitments and other obligations. We have commitments and other obligations that are contractual in nature and will represent a use of cash in the future unless there are modifications to the terms of those agreements. Network commitments primarily represent purchase commitments made to our largest bandwidth vendors and contractual payments to license data center space used for resale to customers. Our ability to improve cash used in operations in the future would be negatively impacted if we do not grow our business at a rate that would allow us to offset the service commitments with corresponding revenue growth.
 
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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Short-term investments in marketable securities. Short-term investments primarily consist of high credit quality corporate debt securities, commercial paper and U.S. Government Agency debt securities. All of our investments have original maturities greater than 90 days but less than one year. All short-term investments are classified as available for sale and reported at fair value. Due to the short-term nature of our investments in marketable securities, we do not believe there is any material exposure to market risk changes in interest rates. We estimate that a change in the effective yield of 100 basis points would change our interest income by approximately $0.1 million per year.
 
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Non-current investments.  Non-current investments include auction rate securities whose underlying assets are state-issued student and educational loans whichthat are substantially backed by the federal government. Auction rate securities are variable rate bonds tied to short-term interest rates with maturities on the face of the securities in excess of 90 days and have interest rate resets through a modified Dutch auction, at predetermined short-term intervals, usually every 7, 28 or 35 days.  Auction rate securities have historically traded at par value and are callable at par value 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.  Uncertainties in the credit markets affect the liquidity of our holdings in auction rate securities.  We did not experience any unsuccessful auction rate resets during the year ended or the initial rate resets immediately following December 31, 2007, however, we have experienced failures on each of our subsequent auction rate resets.  All of our auction rate securities auctions have now failed at least twice.multiple times. Nevertheless, we continue to receive interest every 28 days. While our investments are of high credit quality, at this time we are uncertain as to whether or when the liquidity issues relating to these investments will worsen or improve. Because of this illiquidity in the auction rate securities markets, we recorded an unrealized loss of $0.3$0.4 million in Marchduring the six months ended June 30, 2008 to reflect the estimated fair value of our auction rate securities. This unrealized loss is judged to be temporary and we anticipate that we will be able to sell our auction rate securities holdings in the future without loss. Due to the uncertainty as to when the auction rate securities markets will improve, we also changed the classification ofhave classified our investments in auction rate securities to non-current.as non-current investments as of June 30, 2008 versus current investments as of December 31, 2007. In the meantime, we believe we have sufficient liquidity through our cash balances, other short-term investments and available credit. As of March 31,June 30, 2008, we have a total of $6.8$6.7 million invested in auction rate securities.securities, representing 10% of our total financial assets measured at fair value. We estimate that a change in the effective yield of 100 basis points would change our interest income by less than $0.1 million per year.

 
Other investments. We have invested $4.1 million in Internap Japan Co, Ltd., or Internap Japan, our joint venture with NTT-ME Corporation and NTT Holdings. This investment is accounted for using the equity-method, and to date we have recognized $3.3$3.2 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 being offered by Internap Japan has not been proven and may never materialize.
                      
                 Interest rate risk. Our objective in managing interest rate risk is to maintain favorable long-term fixed rate or a balance of fixed and variable rate debt that will lower our overall borrowing costs within reasonable risk parameters. Currently, our strategy for managing interest rate risk does not include the use of derivative securities. We estimate that a change in the interest rate of 100 basis points would change our interest expense and payments by approximately $0.2 million per year. As of March 31,June 30, 2008, we had $19.8 million of outstanding debt with an interest rate of 4.395%4.275%.
 
Foreign currency risk. Substantially all of our revenue isrevenues are currently in U.S. dollars and from customers primarily in the United States. We do not believe, therefore, that we currently have any significant direct foreign currency exchange rate risk.
 
ITEM 4.  CONTROLS AND PROCEDURES

Disclosure Controls and Procedures
 
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 Securities Exchange Act of 1934, as amended. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of March 31,June 30, 2008 because of the material weakness described below.
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Changes in Internal Control over Financial Reporting
 
                Management identified the following material weakness in our internal control over financial reporting as of December 31, 2007, which has not yet been fully remediated:

We did not maintain effective controls over the completeness, accuracy, valuation, and disclosure of sales adjustments. Specifically, we did not maintain effective controls, including controls over the analysis of requests for sales credits and billing adjustments, to provide timely information for management to assess the completeness, accuracy, valuation, and disclosure of sales adjustments.  This control deficiency resulted in the misstatement of our revenue,revenues, net accounts receivable and related financial disclosures, and in the revision of the Company’s unaudited condensed consolidated financial statements for the quarter ended September 30, 2007 and in an adjustment to the consolidated financial statements for the quarter ended December 31, 2007. Additionally, this control deficiency could result in misstatements of the aforementioned accounts and disclosures that would result in a material misstatement of the consolidated financial statements that would not be prevented or detected. Accordingly, our management has determined that this control deficiency constitutes a material weakness.
 
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As a result of the material weakness described above, management concluded that our internal control over financial reporting was not effective as of December 31, 2007 based on the criteria established in Internal Control - Integrated Framework issued by the COSO.
 
Plan for Remediation of the Material Weakness

To remediate the material weakness described above and to enhance our internal control over financial reporting, management implemented plans in the first quarterand second quarters of 2008 to enhance its existing controls for the analysis of requests for sales adjustments, which include but are not limited to, the following additional processes and controls:

 ·●A single, common logging system for customers to record all disputes, disconnects and requests for credits,
 ·●A weekly review of a customer request log with appropriate designated management and approval pursuant to the schedule of authorization,
 ·●A more robust, proactive tracking of customer usage patterns and overall customer satisfaction, and
 ·●Perform aA review by the appropriate designated finance management personnel of the accounting estimates developed from the relevant, sufficient, and reliable data collected aboveabove.
 
TheA single, common logging system and customer tracking processes noted above have been put in place but continue to be tested and refined. The weekly reviewportal has been fully implemented, but remains subjectcreated to our internal control testingprovide customers with an interface to be fully remediated.record their disputes and to provide management with a more complete repository of customer issues that could impact revenue.  Designated management meet on a weekly basis to review and approve all customer disputes and requests for credits.  We have also developed a report for proactive tracking of customer usage patterns that highlights deviations. The review by finance management is ongoing as we continue to develop and accumulate the data from the other processes and controls.
 
Notwithstanding the material weakness, management believes that the financial statements included in this report fairly present in all material respects our financial position, results of operations and cash flows for the periods presented.
 
Other than the changes noted in the preceding paragraphs, there were no changes in internal controls over financial reporting that occurred during the period covered by this quarterly report that have materially affected, or that are reasonably likely to materially affect, our internal controls over financial reporting.
 
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PART II. OTHER INFORMATION
   
ITEM 1.   LEGAL PROCEEDINGS
 
 From time to time, we may be subject to legal proceedings, claims and litigation arising in the ordinary course of business. Although the outcome of these matters is currently not determinable, we do not expect that the ultimate costs to resolve these matters will have a material adverse effect on our financial condition, results of operations or cash flows.
 
ITEM 1A. RISK FACTORS
 
There have been no material changes from the Risk Factors we previously disclosed in our Annual Report on Form 10-K/A for the year ended December 31, 2007 filed with the Securities and Exchange Commission on April 30, 2008, as amended on June 5, 2008.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table sets forth information regarding our repurchases of securities for each calendar month in the quarter ended March 31,June 30, 2008:

ISSUER PURCHASES OF EQUITY SECURITIES
 
Period 
(a) Total Number of
      Shares (or Units)
      Purchased 1
  
(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
 
 
January 2008
 —  $—   —   — 
 
February 2008
 6,071   7.82   —   — 
 
March 2008
 17,112   5.10   —   — 
 
Total
 23,183  $5.81   —   — 
  
 
    
  
      (d)Maximum 
               Number (or  
               Approximate 
          (c)Total Number of    Dollar Value) of  
           Shares (or Units)   Shares (or Units) 
           Purchased as Part   That May Yet Be 
  (a)Total Number of  (b)Average Price   of Publicly    Purchased Under 
   Shares (or Units)   Paid per Share   Announced Plans   the Plans or 
Period  Purchased (1)   (or Unit)   or Programs   Programs 
April 2008   15,288  $ 4.67    —    — 
May 2008   811    4.90    —    — 
June 2008   11,602    5.29    —    — 
Total   27,701  $ 4.93    —    — 
 
1 These shares were surrendered to the Company to satisfy tax withholding obligations in connection with the vesting of restricted shares of Internap restricted common stock issued to employees.

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

(a)The annual meeting of stockholders was held on June 19, 2008.
(b)The names of all directors are set forth below. The proxies for the meeting were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. There were no solicitations in opposition to the nominees as listed in the proxy and all such nominees were elected.
(c)A brief description of each matter voted on and the approximate number of votes cast are as follows (on an actual vote cast basis):
  Number of Votes
      Withheld/ Broker
Description of Proposals For Against Abstain Non-Votes
Election of Directors for a term expiring in 2011:        
Eugene Eidenberg 31,017,589 N/A 7,359,929 N/A
William Harding 34,878,541 N/A 3,498,977 N/A
Daniel Stanzione  33,307,192 N/A  5,070,325 N/A
         
Election of one Director for a term expiring in 2010:        
Gary Pfeiffer 35,010,879 N/A 3,366,639 N/A
         
The following directors, who did not stand for election at the 2008 Annual Meeting, also currently sit on our Board of Directors: Charles Coe and Patricia L. Higgins, whose terms expire in 2009; and James P. DeBlasio and Kevin Ober, whose terms expire in 2010        
         
To amend the Certificate of Incorporation 36,323,000 1,644,824 409,692 N/A
         
To increase the number of shares available for issuance pursuant to the Amended and Restated Internap Network Services Corporation 2005 Incentive Stock Plan by four million shares 16,163,701 5,445,994 374,346 N/A
         
Ratification of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2008 37,066,068 1,127,649 183,800 N/A
ITEM 6.   EXHIBITS  EXHIBITS

Exhibit
Number
 Description
   
3.1*Certificate of Amendment of Certificate of Incorporation of Internap Network Services Corporation dated June 19, 2008.
10.1 General Release Agreement dated as of April 9, 2008 Executive Bonus Award Incentive Planbetween Internap Network Services and Vincent Molinaro (incorporated by reference herein to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 24,April 18, 2008).†
   
10.2 Amendment No. 1 to Credit Agreement entered into as of May 14, 2008 Long-Term Incentive Planby and among Bank of America, N.A. as Administrative Agent, Swing Line Lender, L/C Issuer and sole Lender, Internap Network Services Corporation and the Subsidiaries of Internap Network Services Corporation party thereto as Guarantors (incorporated by reference herein to Exhibit 10.210.1 to the Company’s Current Report on Form 8-K filed on March 24,May 16, 2008). †
10.3Joinder Agreement to the Employment Security Plan executed by George E. Kilguss, III (incorporated by reference herein to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on March 28, 2008). †
   
31.1* Rule 13a-14(a)/15d-14(a) Certification, executed by James P. DeBlasio, President, Chief Executive Officer and Director of 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, President, Chief Executive Officer and Director of the Company.
   
32.2* Section 1350 Certification, executed by George E. Kilguss, III, Vice President and Chief Financial Officer of the Company.
 
†   Management contracts and compensatory plans and arrangements required to be filed as exhibits pursuant to Item 15(c) of this Report.
*    Documents filed herewith.
 
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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
INTERNAP NETWORK SERVICES CORPORATION
(Registrant)
   
 By:  /s/  George E. Kilguss, III
 George E. Kilguss, III
 Vice President and Chief Financial Officer
 (Principal Financial and Accounting Officer)
  
 Date:  May 12,August 11, 2008
 
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