Internap 10Q 2001 Q2 Quarterly report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended June 30, 2001

/ /	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)

WASHINGTON
(State or other jurisdiction of
incorporation or organization)

91-1896926
(IRS Employer identification No.)

601 Union Street, Suite 1000
Seattle, Washington 98101
(Address of principal executive offices)

(206) 441-8800
(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 the number of shares outstanding of each of the registrant's classes of common stock as of the latest practicable date: 150,555,935 shares of common stock, no par value, outstanding as of August 9, 2001.

INTERNAP NETWORK SERVICES CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2001
TABLE OF CONTENTS

			Page
PART I.	FINANCIAL INFORMATION
	Item 1.	Financial Statements (unaudited)
		Condensed Consolidated Balance Sheets June 30, 2001 and December 31, 2000	3
		Condensed Consolidated Statements of Operations Three- and six-month periods ended June 30, 2001 and 2000	4
		Condensed Consolidated Statements of Cash Flows Three- and six-month periods ended June 30, 2001 and 2000	5
		Condensed Consolidated Statement of Shareholders' Equity and Comprehensive Loss Six-month period ended June 30, 2001	6
		Notes to Condensed Consolidated Financial Statements	7
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	14
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20
PART II.	OTHER INFORMATION
	Item 2.	Changes in Securities and Use of Proceeds	30
	Item 6.	Exhibits and Reports on Form 8-K	30
	Signatures		31

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INTERNAP NETWORK SERVICES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands)

			June 30, 2001			December 31, 2000
ASSETS
Current assets:
	Cash and cash equivalents		$	46,152		$	102,160
	Short-term investments and investment income receivable			8,471			51,805
	Accounts receivable, net of allowance of $1,174 and $1,370, respectively			15,353			20,291
	Prepaid expenses and other assets			2,700			3,303

		Total current assets		72,676			177,559
Property and equipment, net of accumulated depreciation of $49,323 and 27,363 respectively				163,892			152,153
Restricted cash				8,515			8,515
Investments				3,936			29,090
Note receivable				6,000			6,000
Goodwill and other intangible assets, net of accumulated amortization of $20,785 and $54,334, respectively				47,529			268,959
Deposits and other assets				6,079			7,834

		Total assets	$	308,627		$	650,110

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
	Accounts payable		$	20,061		$	26,846
	Accrued liabilities			13,494			18,483
	Deferred revenue			1,852			3,491
	Notes payable, current portion			2,279			2,320
	Line of credit			10,000			10,000
	Capital lease obligations, current portion			21,333			18,132

		Total current liabilities		69,019			79,272
Deferred revenue				11,175			11,239
Notes payable, less current portion				1,902			2,989
Capital lease obligations, less current portion				27,976			24,657

		Total liabilities		110,072			118,157

Commitments and contingencies
Shareholders' equity:
	Common stock, no par value, 500,000 shares authorized; 150,482 and 148,779 shares issued and outstanding, respectively			785,351			786,183
	Deferred stock compensation			(6,869	)		(11,715	)
	Accumulated deficit			(580,003	)		(244,915	)
	Accumulated items of other comprehensive income			76			2,400

		Total shareholders' equity		198,555			531,953

		Total liabilities and shareholders' equity	$	308,627		$	650,110

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

INTERNAP NETWORK SERVICES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share amounts)

			Three-month Periods Ended June 30,						Six-month Periods Ended June 30,
			2001			2000			2001			2000
Revenues			$	29,285		$	13,647		$	57,725		$	22,538

Costs and expenses:
	Cost of network and customer support			41,288			20,475			79,130			35,801
	Product development			3,426			1,863			7,230			3,441
	Sales and marketing			10,215			8,000			24,709			15,689
	General and administrative			15,480			5,306			32,936			9,694
	Amortization of goodwill and other intangible assets			6,972			2,157			26,800			2,157
	Amortization of deferred stock compensation			109			2,550			2,318			5,624
	Restructuring costs			—			—			4,342			—
	Impairment of goodwill and other intangible assets			—			—			195,986			—

		Total operating costs and expenses		77,490			40,351			373,451			72,406

Loss from operations				(48,205	)		(26,704	)		(315,726	)		(49,868	)

Other income (expense):
	Interest income			898			4,412			2,788			7,338
	Loss on investments			(19,314	)		—			(19,314	)		—
	Interest and financing expense			(1,648	)		(505	)		(2,836	)		(890	)

		Total other income (expense)		(20,064	)		3,907			(19,362	)		6,448

		Net loss	$	(68,269	)	$	(22,797	)	$	(335,088	)	$	(43,420	)

Basic and diluted net loss per share			$	(0.45	)	$	(0.16	)	$	(2.24	)	$	(0.32	)

Weighted average shares used in computing basic and diluted net loss per share				150,261			138,193			149,706			135,406

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

INTERNAP NETWORK SERVICES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

					Six-month Periods Ended June 30,
					2001			2000
CASH FLOWS FROM OPERATING ACTIVITIES
	Net loss				$	(335,088	)	$	(43,420	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation and amortization				49,233			8,227
		Impairment of goodwill and other intangible assets				195,986			—
		Provision for doubtful accounts				2,658			321
		Non-cash compensation and warrant expense				2,340			5,624
		Loss on disposal of fixed assets				341			—
		Loss on sale of investment securities				14,490			—
		Loss on write-down of investment security				4,824			—
		Loss from equity-method investment				74			—
		Changes in operating assets and liabilities:
			Accounts receivable			2,280			(6,218	)
			Investment income receivable			896			(2,057	)
			Prepaid expenses, deposits and other assets			2,358			(2,212	)
			Accounts payable			2,192			2,298
			Deferred revenue			(1,703	)		401
			Accrued liabilities			(6,345	)		1,050

				Net cash used in operating activities		(65,464	)		(35,986	)

CASH FLOWS FROM INVESTING ACTIVITIES
	Purchases of property and equipment					(28,629	)		(15,184	)
	Proceeds from disposal of property and equipment					508			76
	Investment in subsidiary, net of cash acquired					—			(6,262	)
	Repayment of full recourse notes assumed for outstanding common stock					—			642
	Restriction of cash					—			(4,620	)
	Purchase of investments					(6,022	)		(144,902	)
	Investment in equity-method investment					(2,833	)		—
	Redemption of investments					54,735			31,138

				Net cash provided by (used in) investing activities		17,759			(139,112	)

CASH FLOWS FROM FINANCING ACTIVITIES
	Principal payments on notes payable					(1,128	)		(515	)
	Payments on capital lease obligations					(8,849	)		(3,067	)
	Proceeds from equipment leaseback financing					—			717
	Proceeds from issuance of and exercise of warrants to purchase capital stock, net of issuance costs					—			444
	Proceeds from exercise of stock options					336			2,138
	Proceeds from issuance of common stock					1,338			143,463

				Net cash (used in) provided by financing activities		(8,303	)		143,180

	Net increase (decrease) in cash and cash equivalents					(56,008	)		(31,918	)
	Cash and cash equivalents at beginning of period					102,160			155,184

	Cash and cash equivalents at end of period				$	46,152		$	123,266

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
	Cash paid for interest, net of amounts capitalized				$	2,829		$	881

	Purchase of property and equipment financed with capital leases				$	15,369		$	13,946

	Change in accounts payable attributable to purchases of property and equipment				$	(8,979	)	$	137

	Acquisition liabilities assumed and accrued acquisition costs				$	1,356		$	—

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

INTERNAP NETWORK SERVICES CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE LOSS

SIX-MONTH PERIOD ENDED JUNE 30, 2001

(Unaudited, in thousands)

	Common Stock										Accumulated Items of Other Comprehensive Income (Loss)
	Common Stock				Deferred Stock Compensation			Accumulated Deficit						Total Shareholders' Equity			Comprehensive Loss
	Shares	Value			Deferred Stock Compensation			Accumulated Deficit						Total Shareholders' Equity			Comprehensive Loss
Balances, December 31, 2000	148,779	$	786,183		$	(11,715	)	$	(244,915	)	$	2,400		$	531,953			—
Amortization of deferred stock compensation	—		(1,489	)		3,807			—			—			2,318			—
Reversal of Deferred stock compensation for terminated employees	—		(1,039	)		1,039			—			—			—			—
Exercise of employee stock options	890		336			—			—			—			336			—
Issuance of warrant to purchase 35,000 shares of common stock to a non-employee	—		22			—			—			—			22
Issuance of employee stock purchase plan shares	813		1,338			—			—			—			1,338			—
Net loss	—		—			—			(335,088	)		—			(335,088	)	$	(335,088	)
Unrealized gain on Investments	—		—			—			—			(16,814	)		(16,814	)		(16,814	)
Realized loss on Investments	—		—			—			—			14,490			14,490			14,490

Comprehensive loss	—		—			—			—			—			—		$	(337,412	)

Balances, June 30, 2001	150,482	$	785,351		$	(6,869	)	$	(580,003	)	$	76		$	198,555

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

INTERNAP NETWORK SERVICES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation:

The unaudited condensed consolidated financial statements have been prepared by Internap Network Services Corporation pursuant to the rules and regulations of the Securities and Exchange Commission and include all the accounts of Internap Network Services Corporation and its wholly owned subsidiaries. Certain information and footnote 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. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the our financial position as of June 30, 2001, our operating results for the three- and six-month periods ended June 30, 2001 and 2000, our cash flows for the six-month periods ended June 30, 2001 and 2000 and changes in our shareholders' equity for the six month period ended June 30, 2001. The balance sheet at December 31, 2000 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 filed with the Securities and Exchange Commission.

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, recoverability of long-lived assets, depreciation of property and equipment, restructuring allowances, amortization of deferred stock compensation and the allowance for doubtful accounts. Actual results could differ from those estimates.

Certain prior year balances have been reclassified to conform to current year presentation. These reclassifications have not impacted net loss or cash flows.

The results of operations for the three and six month periods ended June 30, 2001 are not necessarily indicative of the results that may be expected for the future periods.

The Company recognizes revenues when persuasive evidence of an arrangement exists, the service has been provided, the fees for the service rendered are fixed or determinable and collectibility is probable. Customers are billed for services on the first day of each month either on a usage or a flat-rate basis. The usage based billing relates to the month prior to the month in which the billing occurs, whereas certain flat rate billings relate to the month in which the billing occurs. Revenues associated with billings for installation of customer network equipment are amortized over the estimated duration of the customer relationship taking into account cancellations and renewals, in accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 101, as the installation service is integral to the Company's primary service offering. Deferred revenues consist of revenues for services to be delivered in the future which are amortized over the respective service period and billings for initial installation of customer network equipment.

2. Impairment and Restructuring Costs

began experiencing larger than expected customer attrition throughout our customer base. As a result of the customer attrition, we revised our revenue projections which required us to also make significant cost cutting measures and capital expenditure reductions. The cost cutting measures and capital expenditure reductions required that we discontinue the development of a series of executed but undeveloped collocation leases acquired from CO Space. Therefore, on February 28, 2001, management and the board of directors approved a restructuring plan that included the elimination of the completion of the executed but undeveloped leases and the termination of core collocation development personnel.

Consequently, pursuant to the guidance provided by Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), management completed a cash flow analysis of the collocation assets, including the assets acquired from CO Space. The cash flow analysis showed that the estimated cash flows were less than the carrying value of the collocation assets. Accordingly, pursuant to SFAS 121, management estimated the fair value of the collocation assets to be $78.5 million based upon a discounted future cash flow analysis. As the estimated fair value of the collocation assets was less than their recorded amounts, we recorded an impairment charge of approximately $196.0 million as follows (in millions):

Asset Impaired		Book Value		Accumulated Amortization		Net Book Value Impaired
Goodwill		$	229.2	$	53.1	$	176.1
Assembled workforce			2.0		0.5		1.5
Trade name and trademarks			2.8		0.6		2.2
Completed real estate leases			19.3		4.5		14.8
Customer relationships			1.8		0.4		1.4

	Total	$	255.1	$	59.1	$	196.0

In addition to the impairment cost, we recorded related restructuring costs totaling $4.3 million primarily attributable to estimated costs for severance for the termination of 65 employees and contractors, anticipated losses related to subleasing the undeveloped leases, and other associated costs.

3. Net Loss Per Share

Basic and diluted net loss per share has been computed using the weighted average number of shares of common stock outstanding during the period, less the weighted average number of unvested shares of common stock issued that are subject to repurchase. We have excluded all warrants, outstanding options to purchase common stock and shares subject to repurchase from the calculation of diluted net loss per share, as such securities are antidilutive for all periods presented. Basic and diluted

net loss per share for the three- and six-month periods ended June 30, 2001 and 2000 are calculated as follows (in thousands, except per share amounts):

		Three-month Periods Ended June 30,						Six-month Periods Ended June 30,
		2001			2000			2001			2000
		(unaudited)			(unaudited)			(unaudited)			(unaudited)
Net loss		$	(68,269	)	$	(22,797	)	$	(335,088	)	$	(43,420	)

Basic and diluted:
	Weighted-average shares of common stock outstanding used in computing basic and diluted net loss per share		150,261			138,193			149,706			135,406

	Basic and diluted net loss per share	$	(0.45	)	$	(0.16	)	$	(2.24	)	$	(0.32	)

Antidilutive securities not included in diluted net loss per share calculation:
	Options to purchase common stock		13,907			19,491			13,907			19,491
	Warrants to purchase common		1,681			1,626			1,681			1,626
	Unvested shares of common stock subject to repurchase		50			150			50			150

			15,638			21,267			15,638			21,267

4. Invesments

On April 10, 2001 we announced the formation of a joint venture with NTT-ME Corporation of Japan. The formation of the joint venture involved our investment of $2.83 million to acquire 51% of the common stock of the newly formed entity, Internap Japan. We are unable to assert a level of influence on the joint venture's operational and financial policies and practices to account for the joint venture as a subsidiary whose assets, liabilities, revenues and expenses would be consolidated (due to certain minority interest protections afforded to our joint venture partner, NTT-ME Corporation). We are, however, able to assert sufficient influence to account for our investment in the joint venture as an equity-method investment under Accounting Principles Board Opinion No. 18 "The Equity Method of Accounting for Investments in Common Stock" and consistent with EITF 96-16 "Investor's accounting for an investee when the investor has a majority of the voting interest but the minority shareholder or shareholders have certain approval or veto rights." During the period ended June 30, 2001, we recognized our proportional share of Internap Japan's losses totaling $74,000, resulting in net investment balance of $2.76 million. Our investment in Internap Japan is reflected as a component of long-term investments.

Pursuant to an investment agreement among Internap, Ledcor Limited Partnership, Worldwide Fiber Holdings Ltd. and 360networks, Inc. ("360networks"), on April 17, 2000, we purchased 374,182 shares of 360networks Class A Non-Voting Stock at $5.00 per share and, on April 26, 2000, we purchased 1,122,545 shares of 360networks Class A Subordinate Voting Stock at $13.23 per share. The total cash investment was $16.7 million. During the three-month period ended June 30, 2001, we liquidated our entire investment in 360networks for cash proceeds of $2.2 million and recognized a loss on investment totaling $14.5 million.

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 income (expense). On February 22, 2000, pursuant to an investment agreement, we purchased 588,236 shares of Aventail Corporation ("Aventail") Series D preferred stock at $10.20 per share for a total cash investment of $6.0 million. As Aventail is a privately held enterprise for which no active market for its securities exists, the investment is recorded as a cost basis investment. During the three-month period ended June 30, 2001 we concluded based on available information, specifically Aventail's most recent round of financing, that our investment in Avetail had experienced a decline in value that was other than temporary. As a result we recognized a $4.8 million loss on investment when we reduced its recorded basis to $1.2 million, its estimated value as of June 30, 2001.

Investments consisted of the following (in thousands):

December 31, 2000	Cost Basis		Unrealized Gain		Unrealized Loss			Recorded Value
U.S. Government, Government Agency and Corporate Debt Securities	$	54,738	$	41	$	(2	)	$	54,777
Equity Securities		16,722		2,900		(539	)		19,083
Cost Basis Investments		6,000		—		—			6,000

	$	77,460	$	2,941	$	(541	)	$	79,860

June 30, 2001	Cost Basis		Unrealized Gain		Unrealized Loss		Recorded Value
U.S. Government, Government Agency and Corporate Debt Securities	$	8,395	$	76	$	—	$	8,471
Equity Method Investment		2,756		—		—		2,756
Cost Basis Investments		1,180		—		—		1,180

	$	12,331	$	76	$	—	$	12,407

5. Note Receivable

On August 10, 2000, we lent Speedera Networks $6.0 million in exchange for Speedera's convertible promissory note, which bears interest at the prime rate plus 3%. The note initially matured on May 9, 2001. In two separate amendments executed in December 2000 and February 2001, we agreed to modify the note to eliminate the conversion feature and to extend the note's maturity through the earlier of May 2004 or the completion of a transaction in which there is a change in control of Speedera or in which Speedera sells substantially all its assets. The $6.0 million loan is currently outstanding and is recorded at the current outstanding balance as a note receivable.

6. Stock-Based Compensation Plans

On May 4, 2001, (the "Cancellation Date") we allowed employees to cancel certain outstanding stock option grants to purchase 8.9 million shares of common stock. We have agreed to grant to these same employees options purchase 8.9 million shares of common stock (the "New Options") to be granted six months plus one day after the Cancellation Date, or November 5, 2001 (the "Grant Date"); provided, however, the exercise price of the New Options will be the fair value of our common stock on the Grant Date, the related employees cancel all options granted six months prior to the Cancellation Date, the related employees do not receive any additional grants of options prior to the

Grant Date, and the related employees are common law employees of Internap on the Grant Date. Internap accounts for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair value of Internap's stock at the date of grant over the exercise price to be paid to acquire the stock. Therefore, we will not recognize compensation expense related to the grant of the New Options.

During the first six months of 2001, we terminated the employment of individuals for whom we had recognized deferred stock compensation and had recognized related expense on unvested options using an accelerated amortization method. Accordingly, during the six months ended June 30, 2001, we reduced our deferred stock compensation, which would have been amortized to future expense, by $1.0 million and we reduced our amortization to expense of deferred stock compensation by $1.5 million to reverse previously recognized expense on unvested options.

7. Property and Equipment

Property and equipment consists of the following (in thousands):

	June 30, 2001			December 31, 2000
	(unaudited)
Network equipment	$	36,579		$	32,777
Network equipment under capital lease		61,514			52,637
Furniture, equipment and software		32,753			24,066
Furniture, equipment and software under capital lease		4,410			4,414
Leasehold improvements		77,959			65,622

		213,215			179,516
Less: Accumulated depreciation and amortization ($24,027 and $12,069 related to capital leases at June 30, 2001 and December 31, 2000, respectively)		(49,323	)		(27,363	)

Property and equipment, net	$	163,892		$	152,153

8. Comprehensive Loss

For the six month period ended June 30, 2001 and 2000, comprehensive loss was $337.4 million and $37.6 million, respectively. The difference between net loss and comprehensive loss of $2.3 million and $5.8 million for the periods ended June 30, 2001 and 2000, respectively, is due to net unrealized gains and losses on available-for-sale securities.

9. Contingencies

On or about July 3, 2001, a lawsuit was filed against us, certain of our officers and directors, and certain firms that participated as underwriters during our initial public offering of common stock on or about September 29, 1999. The suit alleges that the prospectus and registration statement issued in connection with the offering misrepresented the commissions and other consideration paid to the underwriters in connection therewith, in violation of the federal securities laws. The lawsuit was filed on behalf of a purported plaintiff class consisting of persons who acquired shares of the Registrant's common stock between September 29, 1999 through December 6, 2000. We believe the allegations are without merit and plan to vigorously defend against the litigation.

10. Recent Accounting Pronouncements

We adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities—Deferral of the Effective Date of SFAS No. 133" and SFAS No. 138, "Accounting for Derivative Instruments and Certain Hedging Activities," effective January 1, 2001. These pronouncements establish accounting and reporting standards for derivative instruments and hedging activies which, among other things, require that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those derivatives at fair value. Our adoption of SFAS No. 133 has not materially impacted our financial position, results of operations or cash flows.

During July 2001 the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 141 "Business Combinations" (SFAS No.141) which is effective for all business combinations initiated after July 1, 2001. SFAS No. 141, supersedes APB Opinion No. 16, Business Combinations, and FASB Statement No. 38, Accounting for Pre-acquisition Contingencies of Purchased Enterprises, and requires that all business combinations be accounted for using the purchase method of accounting. Further, SFAS No. 141 requires certain intangibles to be recognized as assets apart from goodwill if they meet certain criteria and also requires expanded disclosures regarding the primary reasons for consummation of the combination and the allocation of the purchase price paid to the assets acquired and liabilities assumed by major balance sheet caption. We are currently in the process of assessing the impact of this statement on our financial position.

During July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 142 "Goodwill and Other Intangible Assets" (SFAS No. 142) which is effective for fiscal years beginning after December 15, 2001. SFAS No. 142 supercedes APB Opinion No. 17, Intangible Assets, and addresses financial accounting and reporting for intangible assets acquired individually or with a group of other assets and the accounting and reporting for goodwill and other intangible assets subsequent to their acquisition. Under the model set forth in SFAS No. 142, goodwill is no longer amortized to earnings, but instead be subject to periodic testing for impairment. We are currently in the process of assessing the impact of this statement on our financial position.

11. Subsequent Events

On July 25, 2001 we announced that we entered into a definitive agreement for a $101 million private placement of units at an effective per unit purchase price that will be the lower of $1.60 or 100% of the volume weighted average price for the five trading days from August 9, 2001 through August 15, 2001. We will also issue and sell additional units in consideration of the interest and other amounts earned on the escrow account as described below. Each unit is comprised of one-twentieth (¹/20) of a share of Series A preferred stock and a five-year warrant to purchase one-fourth (¹/4) of a share of common stock. Each share of Series A preferred stock will be immediately convertible into twenty shares of common stock. The five-year warrants, which will be immediately exercisable on issuance, will have an exercise price equal to the lower of $2.2753 per share, or the volume weighted average price for the five trading days from August 9, 2001 to August 15, 2001. The offering proceeds are being held in escrow subject to, among other conditions, the completion of an affirmative shareholder vote authorizing the issuance of the securities. All investors have entered into lock-up agreements prohibiting any sale or hedging transactions in Internap's securities through the date of closing and prohibiting any sale or hedging transaction in the purchased securities after the date of closing until expiration of such lock-up agreements. We have agreed to file a registration statement for the resale of the shares of common stock issuable upon conversion of the Series A preferred stock and

the exercise of the warrants within twenty days after the closing of the offering. The offering is expected to close during the third quarter of 2001, subject to a shareholder vote and the satisfaction of other closing conditions.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain statements in this Quarterly Report on Form 10-Q, including, without limitation, statements containing the words "believes," "anticipates," "estimates," "expects" and words of similar import, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us described below and elsewhere in this Quarterly Report, and in other documents we file with the Securities and Exchange Commission.

OVERVIEW

Internap is a leading provider of high performance Internet connectivity services targeted at businesses seeking to maximize the performance of mission-critical Internet-based applications. Customers connected to one of our service points have their data optimally routed to and from destinations on the Internet using our overlay network, which analyzes the traffic situation on the multiplicity of networks that comprise the Internet and delivers mission-critical information and communications faster and more reliably. Use of our overlay network results in lower instances of data loss and greater quality of service than services offered by conventional Internet connectivity providers. As of June 30, 2001, we provided our high performance Internet connectivity services to 783 customers.

We offer our high performance Internet connectivity services at dedicated line speeds of 1.5 Megabits per second, or Mbps, to 1,000 Mbps to customers desiring a superior level of Internet performance. We provide our high performance connectivity services through the deployment of service points, which are highly redundant network infrastructure facilities coupled with our patented routing technology. Service points maintain high speed, dedicated connections to major global Internet networks, commonly referred to as backbones, such as AT&T, Cable & Wireless USA, Genuity, Global Crossing Telecommunications, Intermedia, Qwest Communications International, Sprint Internet Services, UUNET Technologies and Verio (an NTT Communications Corporation). As of June 30, 2001, we operated 36 service points which are located in the Amsterdam, Atlanta (two service points), Boston (two service points), Chicago (two sevice points), Dallas (three service points), Denver, Fremont, CA, Houston (two service points), London, Los Angeles (three service points), Miami, New York (three service points), Orange County, Philadelphia (two service points), San Diego (two service points), San Francisco, San Jose (two service points), Santa Clara, Seattle (three service points) and Washington, D.C. (two service points) metropolitan areas.

We believe our service points provide a superior quality of service over the public Internet enabling our customers to realize the full potential of their existing Internet-based applications, such as e-commerce and on line trading. In addition, we believe our service points will enable our customers to take advantage of new services, such as using the Internet to conduct video conferencing, make telephone calls or send facsimiles, create private networks, distribute multimedia documents and send and receive audio and video feeds.

Impairment and Restructuring Costs

On June 20, 2000, we completed the acquisition of CO Space which was accounted for under the purchase method of accounting. The purpose of the acquisition was to provide us access to an estimated large collocation market that desired to purchase Internet connectivity in addition to collocation services such as those provided by Co Space. During the first quarter of 2001, we began experiencing larger than expected customer attrition throughout our customer base. As a result of the customer attrition, we revised our revenue projections which required us to also make significant cost cutting measures and capital expenditure reductions. The cost cutting measures and capital expenditure

reductions required that we discontinue the development of a series of executed but undeveloped collocation leases acquired from CO Space. Therefore, on February 28, 2001, management and the board of directors approved a restructuring plan that included the elimination of the completion of the executed but undeveloped leases and the termination of core collocation development personnel. Consequently, management estimated the fair value of the collocation assets to be $78.5 million based upon discounted future cash flows. As the estimated fair value of the collocation assets was less than their recorded amounts, we recorded an impairment charge of approximately $196.0 million as follows (in millions):

Asset Impaired		Book Value		Accumulated Amortization		Net Book Value Impaired
Goodwill		$	229.2	$	53.1	$	176.1
Assembled workforce			2.0		0.5		1.5
Trade name and trademarks			2.8		0.6		2.2
Completed real estate leases			19.3		4.5		14.8
Customer relationships			1.8		0.4		1.4

	Total	$	255.1	$	59.1	$	196.0

In addition to the impairment charge, we recorded related restructuring costs totaling $4.3 million primarily relating to estimated costs for severance relating to the termination of 65 employees and contractors, anticipated losses related to subleasing the undeveloped leases, and other associated costs.

Deferred Stock Compensation

Results Of Operations

The following table sets forth, as a percentage of total revenues, selected statement of operations data for the periods indicated:

			Three-month Periods Ended June 30,				Six-month Periods Ended June 30,
			2001		2000		2001		2000
Revenues			100	%	100	%	100	%	100	%

Costs and expenses:
	Cost of network and customer support		141		150		137		159
	Product development		12		14		13		15
	Sales and marketing		35		59		43		70
	General and administrative		53		39		57		43
	Amortization of goodwill and other intangible Assets		24		16		46		10
	Amortization of deferred stock compensation		—		19		4		25
	Restructuring costs		—		—		8		—
	Impairment of goodwill and other intangible assets		—		—		340		—

		Total operating costs and expenses	265		297		648		322

Loss from operations			(165	)	(197	)	(548	)	(222	)

Other income (expense):
	Interest income		3		32		5		33
	Loss on investments		(66	)	—		(33	)	—
	Interest and financing expense		(6	)	(4	)	(5	)	(4	)

		Total other income (expense)	(69	)	28		(33	)	29

	Net loss		(234	)%	(169	)%	(581	)%	(193	)%

Six-month Periods Ended June 30, 2001 and 2000

Net Loss. Net loss for the six-month period ended June 30, 2001 was $335.1 million, or $2.24 share, as compared to $43.4 million, or $0.32 per share, for the same period in the preceding year. The increase in net loss was primarily due to restructuring and impairment costs representing 69% of the increase. Excluding these costs, net loss for the six-month period ending June 30, 2001 was $134.8 million, or $0.90 per share.

Revenues. Revenues increased 156% from $22.5 million for the six-month period ended June 30, 2000 to $57.7 million for the six-month period ended June 30, 2001. The increase of $35.2 million was attributable to increased sales at our existing service points, the deployment of service points from June 30, 2000 through June 30, 2001 and revenues from collocation services acquired through our acquisition of CO Space during June 2000.

Costs of Network and Customer Support. Costs of network and customer support increased 121% from $35.8 million for the six-month period ended June 30, 2000 to $79.1 million for the six-month period ended June 30, 2001. This increase of $43.3 million was primarily due to increased connectivity costs related to added and increased usage of connections to Internet backbone and competitive local exchange providers at each service point, comprising 35% of the increase, and to a lesser extent, depreciation expense related to the equipment at deployed service points, comprising 26% of the increase, rent and facility costs, comprising 23% of the increase and additional compensation costs, comprising 11% of the increase. Network and customer support costs as a percentage of total revenues

are generally greater than 100% for newly deployed service points because we purchase Internet connectivity capacity from the backbone providers in advance of securing new customers.

Product Development. Product development costs increased 112% from $3.4 million for the six-month period ended June 30, 2000 to $7.2 million for the six-month period ended June 30, 2001. This increase of $3.8 million was due to increased compensation costs, representing 61% of the increase and increased facility costs, representing 19% of the increase.

Sales and Marketing. Sales and marketing costs increased 57% from $15.7 million for the six-month period ended June 30, 2000 to $24.7 million for the six-month period ended June 30, 2001. This increase of $9.0 million was primarily due to advertising costs, comprising 56% of the increase, and, to a lesser extent, increased compensation costs comprising 33% of the increase.

General and Administrative. General and administrative costs increased 239% from $9.7 million for the six-month period ended June 30, 2000 to $32.9 million for the six-month period ended June 30, 2001. This increase of $23.2 million was primarily due to increased compensation costs, representing 22% of the increase, increased facility costs, representing 21% of the increase, increased depreciation expense, representing 21% of the increase, and increased bad debt expense, representing 10% of the increase.

Other Income (Expense). Other income (expense), net, decreased from $6.4 million of other income for the six-month period ended June 30, 2000 to ($19.4) million of other expense for the six-month period ended June 30, 2001. This decrease was primarily due to losses incurred on investments in 360Networks and Aventail totaling $19.3 million and increased interest expense associated with increased capital leases and a decline in interest income stemming from decreasing investment and interest earning asset balances.

Three-month Periods Ended June 30, 2001 and 2000

Net Loss. Net loss for the three-month period ended June 30, 2001 was $68.3 million, or $0.45 share, as compared to $22.8 million, or $0.16 per share, for the same period in the preceding year. The increase in net loss was primarily due the operational expansion that occurred during the period between June 30, 2000 and June 30, 2001.

Revenues. Revenues increased 115% from $13.6 million for the three-month period ended June 30, 2000 to $29.3 million for the three-month period ended June 30, 2001. The increase in revenue of $15.7 million was attributable to increased sales at our existing service points and the deployment of service points from June 30, 2000 through June 30, 2001.

Costs of Network and Customer Support. Costs of network and customer support increased 102% from $20.5 million for the three-month period ended June 30, 2000 to $41.3 million for the three-month period ended June 30, 2001. This increase of $20.8 million was primarily due to increased connectivity costs related to added and increased usage of connections to Internet backbone and competitive local exchange providers at each service point, comprising 35% of the increase, and to a lesser extent, depreciation expense related to the equipment at deployed service points, comprising 25% of the increase, and increased rent and facility costs, comprising 25% of the increase. Network and customer support costs as a percentage of total revenues are generally greater than 100% for newly deployed service points because we purchase Internet connectivity capacity from the backbone providers in advance of securing new customers.

Product Development. Product development costs increased 79% from $1.9 million for the three-month period ended June 30, 2000 to $3.4 million for the three-month period ended June 30, 2001. This increase of $1.5 million was due to increased compensation costs, representing 56% of the increase and increased rent and facility costs, representing 36% of the increase.

Sales and Marketing. Sales and marketing costs increased 28% from $8.0 million for the three-month period ended June 30, 2000 to $10.2 million for the three-month period ended June 30, 2001. This increase of $2.2 million was primarily due to compensation costs, comprising 62% of the increase, and, to a lesser extent, increased advertising comprising 38% of the increase.

General and Administrative. General and administrative costs increased 192% from $5.3 million for the three-month period ended June 30, 2000 to $15.5 million for the three-month period ended June 30, 2001. This increase of $10.2 million was primarily due to increased depreciation expense, representing 32% of the increase and to a lesser extent increased compensation costs, representing 20% of the increase, and increased facility costs, representing 16% of the increase. We expect general and administrative costs to decrease as a percentage of our total cost structure during future periods.

Other Income (Expense). Other income (expense), net, decreased from $3.9 million of other income for the three-month period ended June 30, 2000 to ($20.1) million of other expense for the three-month period ended June 30, 2001. This decrease was primarily due to losses incurred on investments in 360Networks and Aventail totaling $19.3 million and increased interest expense associated with increased capital leases and a decline in interest income stemming from decreasing investment and interest earning asset balances.

Liquidity and Capital Resources

At June 30, 2001, we had cash, cash equivalents and short-term investments of $54.6 million and a revolving line of credit and equipment financing arrangements allowing us to borrow up to $105.0 million. Interest rates under these facilities range from 3% to 22%, and these facilities expire at various dates through 2004. These financial arrangements contain financial covenants including covenants to maintain certain liquidity ratios and minimum net worth. Except for a line of credit liquidity covenant, we were in compliance with all such financial covenants as of June 30, 2001. During June 2001, we obtained a waiver for the line of credit liquidity covenant through August 31, 2001. In addition, these financing arrangements also include subjective covenants that allow the financial institutions to reduce the available credit based on general credit worthiness.

Net cash used in operations was $65.5 million and $36.0 million during the six-month periods ended June 30, 2001 and 2000, respectively. Net cash used in operations during six-month period ended June 30, 2001 was primarily due to funding of net operating losses, in addition to decreases in deferred revenue and accrued liabilities, offset by non-cash impairment and other charges, decreases in operating asset balances and increases in accounts payable. Net cash used in operations during six-month period ended June 30, 2000 was primarily due to funding of net operating losses, in addition to increases in operating asset balances offset by non-cash depreciation and other charges and increases in operating liability balances.

Net cash provided by (used in) investing activities was $17.8 million and ($139.1) million during the six-month periods ended June 30, 2001 and 2000, respectively. Net cash provided by investing activities during the six-month period ended June 30, 2001 reflects the disposition of investment securities offset by cash used for the purchase of property and equipment. Net cash used in investing activities during the six-month period ended June 30, 2000, reflects the investment of cash proceeds raised from the issuance of common stock, the restriction of certain cash balances and cash purchases of property and equipment. Purchases of property and equipment related to service point deployments were primarily financed by capital leases (such purchases are excluded from the net cash used in investing activities in the statement of cash flows), and totaled $15.4 million and $13.9 million during the six-month periods ended June 30, 2001 and 2000, respectively.

Net cash (used in) provided by financing activities was ($8.3) million and $143.2 million during the six-month periods ended June 30, 2001 and 2000, respectively. Net cash used by financing activities during the six-month period ended June 30, 2001 primarily reflects cash payments made on notes

payable and capital lease obligations while cash provided by financing activities during the six-month period ended June 30, 2000 reflects the proceeds from sales of our equity securities.

On July 25, 2001 we announced that we entered into a definitive agreement for a $101 million private placement of units at an effective per unit purchase price that will be the lower of $1.60 or 100% of the volume weighted average price for the five trading days from August 9, 2001 through August 15, 2001. We will also issue and sell additional units in consideration of the interest and other amounts earned on the escrow account as described below. Each unit is comprised of one-twentieth (¹/20) of a share of Series A preferred stock and a five-year warrant to purchase one-fourth (¹/4) of a share of common stock. Each share of Series A preferred stock will be immediately convertible into twenty shares of common stock. The five-year warrants, which will be immediately exercisable on issuance, will have an exercise price equal to the lower of $2.2753 per share, or the volume weighted average price for the five trading days following the tenth trading day after the public announcement of our second quarter results. The offering proceeds are being held in escrow subject to, among other conditions, the completion of an affirmative shareholder vote authorizing the issuance of the securities. All investors have entered into lock-up agreements prohibiting any sale or hedging transactions in Internap's securities through the date of closing and prohibiting any sale or hedging transaction in the purchased securities after the date of closing until expiration of such lock-up agreements. We have agreed to file a registration statement for the resale of the shares of common stock issuable upon conversion of the Series A preferred stock and the exercise of the warrants within twenty days after the closing of the offering. The offering is expected to close during the third quarter of 2001, subject to a shareholder vote and the satisfaction of other closing conditions.

We expect to spend significant additional capital to support ongoing operations, capital requirements related to expected increased sales and, to a lesser extent, product development and the development of our internal systems and software. We expect to continue to expend significant amounts of capital on property and equipment related to the expansion of facility infrastructure, computer equipment and for research and development laboratory and test equipment to support on-going research and development operations.

During the next 12 months, we expect to meet our cash requirements with existing cash, cash equivalents, short-term investments, cash flow from sales of our services and proceeds from the private placement. However, our capital requirements depend on several factors, including the rate of market acceptance of our services, the ability to expand our customer base, the rate of deployment of additional service points and other factors. If our capital requirements vary materially from those currently planned, or if we fail to generate sufficient cash flow from the sales of our services, we may require additional financing sooner than anticipated or we may have to delay or abandon some or all of our development and expansion plans or otherwise forego market opportunities. We intend to invest cash in excess of current operating requirements in short-term, interest-bearing, investment-grade securities.

Recent Accounting Pronouncements

We adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities—Deferral of the Effective Date of SFAS No. 133" and SFAS No. 138, "Accounting for Derivative Instruments and Certain Hedging Activities," effective January 1, 2001. These pronouncements establish accounting and reporting standards for derivative instruments and hedging activities which, among other things, require that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those derivatives at fair value. Our adoption of SFAS No. 133 has not materially impacted our financial position, results of operations or cash flows.

During July 2001 the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 141 "Business Combinations" (SFAS No.141) which is effective for all business combinations initiated after July 1, 2001. SFAS No. 141, supersedes APB Opinion No. 16, Business Combinations, and FASB Statement No. 38, Accounting for Pre-acquisition Contingencies of Purchased Enterprises and requires that all business combinations be accounted for using the purchase method of accounting. Further, SFAS No. 141 requires certain intangibles to be recognized as assets apart from goodwill if they meet certain criteria and also requires expanded disclosures regarding the primary reasons for consummation of the combination and the allocation of the purchase price paid to the assets acquired and liabilities assumed by major balance sheet caption. We are currently in the process of assessing the impact of this statement on our financial position.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We maintain investment portfolio holdings of various issuers, types, and maturities, the majority of which are commercial paper and government securities. These securities are generally classified as available for sale and, consequently, are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income. We also have a $1.2 million equity investment in Aventail, an early stage, privately held company, a $2.8 million equity investment in our joint venture with NTT-ME Corporation of Japan, and a $6.0 million note receivable due from Speedera, an early stage, privately held company. These strategic investments are inherently risky, in part because the market for the products or services being offered or developed by Aventail, our joint venture and Speedera has not been proven and may never materialize. Because of risk associated with these investments, we could lose our entire initial investments.

The remaining portion of our investment portfolio, with a fair value of $8.4 million as of June 30, 2001, is invested in commercial paper, government securities and corporate indebtedness that could experience an adverse decline in fair value should an increase in interest rates occur. In addition, declines in interest rates could have an adverse impact on interest earnings for our investment portfolio. We do not currently hedge against these interest rate exposures.

As of June 30, 2001, our cash equivalents mature within three months and our short-term investments generally mature in less than one year. Therefore, as of June 30, 2001, we believe the reported amounts of cash and cash equivalents, investments and lease obligations to be reasonable approximations of fair value and the market risk arising from our holdings to be minimal.

Substantially all of our revenues are currently in U.S. dollars and from customers primarily in the United States. Therefore, we do not believe we currently have any significant direct foreign currency exchange rate risk.

RISK FACTORS

Risks Related to the Company's Business

We Will Require Additional Capital in the Immediate Future and May Not Be Able to Secure Adequate Funds on Timely Basis or on Terms Acceptable to Us. The continued operation of our business, as well as any future expansion and development, will require significant capital, which we may be unable to obtain, to fund our capital expenditures and operations, including working capital needs. Our principal capital expenditures and lease payments include the purchase, lease and installation of network equipment such as routers, telecommunications equipment and other computer equipment as well as data center leasehold improvements.

On July 25, 2001, we announced our entrance into a definitive Unit Purchase Agreement to issue approximately $101 million aggregate purchase price of units, with each unit consisting of¹/20 of a share of our Series A preferred stock and a warrant to purchase¹/4 of a share of our common stock, in a private placement to a group of investors. Pending shareholder approval at our upcoming annual meeting, the funds from this financing are being held in escrow. Under the terms of the Unit Purchase Agreement, we are required to close the financing by September 15, 2001, which date may be delayed until October 15, 2001 if the delay is caused solely by the review of our public filings by the Securities Exchange Commission. Also, a majority in interest of the purchasers of the units may extend the October 15, 2001 extension deadline until October 31, 2001 in its sole discretion. We may be unable to secure shareholder approval on a timely basis in accordance with these deadlines. Failure to close the $101 million financing would significantly adversely affect our results of operations and financial conditions and would significantly impact our status as a going concern beyond 2001.

Given our recent efforts to reduce our capital and operations expenditures, we do not currently contemplate any expansion and development in the immediate future. Any such expansion or development would require significant capital in addition to the $101 million financing. We nevertheless anticipate future capital requirements associated with our ongoing operations. The timing and amount of future capital requirements would vary significantly depending on numerous factors, including regulatory, technological, competitive and other developments in our industry. We expect to meet our cash requirements during the next 12 months with existing cash, cash equivalents, short-term investments, cash flow from sales of our services and proceeds from additional financing. However, our capital requirements depend on several factors, including the rate of market acceptance of our services, the ability to expand our customer base, the rate of deployment of any additional service points (which we do not currently contemplate) and other factors. If our capital requirements vary materially from those currently planned, or if we fail to generate sufficient cash flow from the sales of our services, we may require additional financing sooner than anticipated or we may have to delay or abandon some or all of our development and expansion plans or otherwise forego market opportunities.

We may not be able to obtain future equity or debt financing on favorable terms, if at all. Future borrowing instruments, such as credit facilities and lease agreements, are likely to contain covenants restricting our ability to incur further indebtedness and will likely require us to pledge assets as security for borrowings thereunder. Our inability to obtain additional capital on satisfactory terms may delay or prevent the expansion of our business.

We Have a History of Losses and Expect Future Losses and May Not Achieve or Sustain Annual Profitability. We have incurred net losses in each quarterly and annual period since we began operations. We incurred net losses of $7.0 million, $49.9 million and $185.5 million for the years ended December 31, 1998, 1999 and 2000, respectively. Our net loss for the three month period ended June 30, 2001 was $68.3 million. As of June 30, 2001, our accumulated deficit was $580.0 million. As a result of our expansion plans, we expect to incur net losses and negative cash flows from operations on a quarterly and annual basis for at least the next 24 months, and we may never become profitable.

Our Limited Operating History Makes It Difficult to Evaluate Our Prospects. The revenue and income potential of our business and market is unproven, and our limited operating history makes it difficult to evaluate our prospects. We have only been in existence since 1996, and our services are only offered in limited regions. Investors should consider and evaluate our prospects in light of the risks and difficulties frequently encountered by relatively new companies, particularly companies in the rapidly evolving Internet infrastructure, connectivity and collocation markets.

Our Actual Quarterly Operating Results May Disappoint Analysts' Expectations, Which Could Have a Negative Impact on our Stock Price. Our stock price could suffer in the future, as it has in the past, as a result of any failure to meet the expectations of public market analysts and investors about our results of operations from quarter to quarter. Any significant unanticipated shortfall of revenues or increase in expenses could negatively impact our expected quarterly results of operations should we be unable to make timely adjustments to compensate for them. Furthermore, a failure on our part to estimate accurately the timing or magnitude of particular anticipated revenues or expenses could also negatively impact our quarterly results of operations.

Because our quarterly results of operations have fluctuated in the past and will continue to fluctuate in the future, investors should not rely on the results of any past quarter or quarters as an indication of future performance in our business operations or stock price. For example, increases in our quarterly revenues for the quarters ended June 30, 2000, through June 30, 2001, have varied between 3.0% and 53.5%, and total operating costs and expenses, as a percentage of revenues, have fluctuated between 264.6% and 1,040.7%. Fluctuations in our quarterly operating results depend on a number of factors. Some of these factors are industry and economy risks over which we have no control, including the introduction of new services by our competitors, fluctuations in the demand and sales cycle for our services, fluctuations in the market for qualified sales and other personnel, changes in the prices for Internet connectivity we pay backbone providers, our ability to obtain local loop connections to our service points at favorable prices, integration of people, operations, products and technologies of acquired businesses and general economic conditions.

Other factors that may cause fluctuations in our quarterly operating results arise from strategic decisions we have made or may make with respect to the timing and magnitude of capital expenditures such as those associated with the deployment of additional service points and the terms of our Internet connectivity purchases. For example, our practice is to purchase Internet connectivity from backbone providers at new service points and license collocation space from providers before customers are secured. We also have agreed to purchase Internet connectivity from some providers without regard to the amount we resell to our customers.

Some of Our Customers Are Emerging Internet-Based Businesses That May Not Pay Us for Our Services on a Timely Basis and May Not Succeed Over the Long Term. A portion of our revenues is derived from customers that are emerging Internet-based businesses. The unproven business models of some of these customers and an uncertain economic climate make their continued financial viability uncertain. Some of these customers have encountered financial difficulties and, as a result, have delayed or defaulted on their payments to us. In the future others may also do so. If these payment difficulties are substantial, our business and financial results could be seriously harmed.

We Would Incur Additional Expense Associated with the Deployment of Any New Service Points and May Be Unable to Effectively Integrate New Service Points into Our Existing Network, Which Could Disrupt Our Service. New service points, if any, would result in substantial new operating expenses, including expenses associated with hiring, training, retaining and managing new employees, provisioning capacity from backbone providers, purchasing new equipment, implementing new systems, leasing additional real estate and incurring additional depreciation expense. In addition, if we do not institute adequate financial and managerial controls, reporting systems, and procedures with which to operate multiple service points in geographically dispersed locations, our operations will be significantly harmed.

Furthermore, in any effort to deploy new service points, we would face various risks associated with significant construction projects, including identifying and locating service point sites, construction delays, cost estimation errors or overruns, delays in connecting with local exchanges, equipment and material delays or shortages, the inability to obtain necessary permits on a timely basis, if at all, and other factors, many of which are beyond our control and all of which could delay the deployment of a new service point.

If We Are Unable to Continue to Receive Cost-Effective Service from Our Backbone Providers, We May Not Be Able to Provide Our Internet Connectivity Services on Profitable Terms, and These Backbone Providers May Not Continue to Provide Service to Us. In delivering our services, we rely on Internet backbones, which are built and operated by others. In order to be able to provide high performance routing to our customers through our service points, we must purchase connections from several Internet backbone providers. There can be no assurance that these Internet backbone providers will continue to provide service to us on a cost-effective basis, if at all, or that these providers will provide us with additional capacity to adequately meet customer demand. Furthermore, it is very unlikely that we could replace our Internet backbone providers on comparable terms.

Currently, in each of our fully operational domestic service points, we have connections to some combination of the following nine backbone providers: AT&T, Cable & Wireless USA, Genuity, Global Crossing Telecommunications, Intermedia Communications, Qwest Communications International, Sprint Internet Services, UUNET Technologies and Verio (an NTT Communications Corporation). We may be unable to maintain relationships with, or obtain necessary additional capacity from, these backbone providers. Furthermore, we may be unable to establish and maintain relationships with other backbone providers that may emerge or that are significant in geographic areas, such as Asia and Europe, in which we locate our service points.

Competition from More Established Competitors Who Have Greater Revenues Could Decrease Our Market Share. The Internet connectivity services market is extremely competitive, and there are few substantial barriers to entry. We expect competition from existing competitors to intensify in the future, and we may not have the financial resources, technical expertise, sales and marketing abilities or support capabilities to compete successfully in our market. Many of our existing competitors have greater market presence, engineering and marketing capabilities, and financial, technological and personnel resources than we do. As a result, our competitors may have several advantages over us as we seek to develop a greater market presence.

Our competitors currently include backbone providers that provide connectivity services to us, regional Bell operating companies which offer Internet access, and global, national and regional Internet service providers. In addition, Internet backbone providers may make technological developments, such as improved router technology or the introduction of improved routing protocols, that will enhance the quality of their services. We also expect to encounter additional competition from international Internet service providers as well as international telecommunications companies in the countries where we provide services.

Competition from New Competitors Could Decrease Our Market Share. We also believe new competitors will enter our market. These new competitors could include computer hardware, software, media and other technology and telecommunications companies. A number of telecommunications companies and online service providers have been offering or expanding their network services. Further, the ability of some of these potential competitors to bundle other services and products with their network services could place us at a competitive disadvantage. Various companies are also exploring the possibility of providing, or are currently providing, high-speed data services using alternative delivery methods including the cable television infrastructure, direct broadcast satellites, wireless cable and wireless local loop.

Pricing Pressure Could Decrease Our Market Share. Increased price competition or other competitive pressures could erode our market share. We currently charge, and expect to continue to charge, more for our Internet connectivity services than our competitors. By bundling their services and reducing the overall cost of their solutions, telecommunications companies that compete with us may be able to provide customers with reduced communications costs in connection with their Internet connectivity services or private network services, thereby significantly increasing the pressure on us to decrease our prices. We may not be able to offset the effects of any such price reductions even with an increase in the number of our customers, higher revenues from enhanced services, cost reductions or otherwise. In addition, we believe that the Internet connectivity industry is likely to encounter consolidation in the future. Consolidation could result in increased pressure on us to decrease our prices. Furthermore, the recent downturn in the U.S. economy has resulted in many companies who require Internet connectivity to reevaluate the cost of such services. We believe that a prolonged economic downturn could result in existing and potential customers being unwilling to pay for premium Internet connectivity services, which would harm our business.

A Failure in Our Network Operations Center, Service Points or Computer Systems Would Cause a Significant Disruption in Our Internet Connectivity Services. Although we have taken precautions against systems failure, interruptions could result from natural disasters as well as power loss, telecommunications failure and similar events. Our business depends on the efficient and uninterrupted operation of our network operations center, our service points and our computer and communications hardware systems and infrastructure. If we experience a problem at our network operations center, we may be unable to provide Internet connectivity services to our customers, provide customer service and support or monitor our network infrastructure or service points, any of which would seriously harm our business.

Because We Have Limited Experience Operating Internationally, Our International Operations May Not Be Successful. Although we currently have service points in London and Amsterdam and a joint venture with NTT-ME Corporation operating a service point in Tokyo, we have limited experience operating internationally. We may not be able to adapt our services to international markets or market and sell these services to customers abroad. In addition to general risks associated with international business operations, we face the following specific risks in our international business operations:

•: difficulties in establishing and maintaining relationships with foreign customers as well as foreign backbone providers and local vendors, including collocation and local loop providers;
•: difficulties in locating, building and deploying network operations centers and service points in foreign countries, and managing service points and network operations centers across disparate geographic areas; and
•: exposure to fluctuations in foreign currency exchange rates.

We may be unsuccessful in our efforts to address the risks associated with our international operations, and our international sales growth may therefore be limited.

Our Brand Is Relatively New, and Failure to Develop Brand Recognition Could Hurt Our Ability to Compete Effectively. To successfully execute our strategy, we must strengthen our brand awareness. If we do not build our brand awareness, our ability to realize our strategic and financial objectives could be hurt. Many of our competitors have well-established brands associated with the provision of Internet connectivity services. To date, we have attracted our existing customers primarily through a relatively small sales force, word of mouth and a limited, print-focused advertising campaign. In order to build our brand awareness, we must continue to provide high quality services.

We Are Dependent upon Our Key Employees and May Be Unable to Attract or Retain Sufficient Numbers of Qualified Personnel. Our future performance depends to a significant degree upon the continued contributions of our executive management team and key technical personnel. The loss of members of

our executive management team or key technical employees could significantly harm us. Any of our officers or employees can terminate his or her relationship with us at any time. To the extent we are able to expand our operations and deploy additional service points, our workforce will be required to grow. Accordingly, our future success depends on our ability to attract, hire, train and retain a substantial number of highly skilled management, technical, sales, marketing and customer support personnel. Competition for qualified employees is intense. Consequently, we may not be successful in attracting, hiring, training and retaining the people we need, which would seriously impede our ability to implement our business strategy.

If We Are Not Able to Support Our Growth Effectively, Our Expansion Plans May Be Frustrated or May Fail. Our inability to manage growth effectively would seriously harm our plans to expand our Internet connectivity services into new markets. Since the introduction of our Internet connectivity services, we have experienced a period of rapid growth and expansion, which has placed, and continues to place, a significant strain on all of our resources. For example, as of December 31, 1996, we had one operational service point and nine employees compared to 36 operational service points and 672 full-time employees as of June 30, 2001. In addition, we had $13.6 million in revenues for the three-month period ended June 30, 2000, compared to $29.3 million in revenues for the three-month period ended June 30, 2001. Furthermore, we have recently begun to offer our services in Europe and Japan, through our joint venture Internap Japan. We have also recently begun to resell certain products and services of Akamai Technologies, Inc., Cisco Systems, Inc and Polycom, Inc.. We expect our recent growth to continue to strain our management, operational and financial resources. For example, we may not be able to install adequate financial control systems in an efficient and timely manner, and our current or planned information systems, procedures and controls may be inadequate to support our future operations. The difficulties associated with installing and implementing new systems, procedures and controls may place a significant burden on our management and our internal resources.

If We Fail to Adequately Protect Our Intellectual Property, We May Lose Rights to Some of Our Most Valuable Assets. We rely on a combination of patent, copyright, trademark, trade secret and other intellectual property law, nondisclosure agreements and other protective measures to protect our proprietary technology. Internap and P-NAP are trademarks of Internap that are registered in the United States. In addition, we have three patents that have been issued by the United States Patent and Trademark Office, or USPTO. The dates of issuance for these patents range from September 1999 through December 1999, and each of these patents is enforceable for a period of 20 years after the date of its filing. We cannot assure you that these patents or any future issued patents will provide significant proprietary protection or commercial advantage to us or that the USPTO will allow any additional or future claims. We have eight additional applications pending, two of which are continuation in patent filings. We may file additional applications in the future. Our patents and patent applications relate to our service point technologies and other technical aspects of our services. In addition, we have filed corresponding international patent applications under the Patent Cooperation Treaty.

It is possible that any patents that have been or may be issued to us could still be successfully challenged by third parties, which could result in our loss of the right to prevent others from exploiting the inventions claimed in those patents. Further, current and future competitors may independently develop similar technologies, duplicate our services and products or design around any patents that may be issued to us. In addition, effective patent protection may not be available in every country in which we intend to do business.

In addition to patent protection, we believe the protection of our copyrightable materials, trademarks and trade secrets is important to our future success. We rely on a combination of laws, such as copyright, trademark and trade secret laws and contractual restrictions, such as confidentiality agreements and licenses, to establish and protect our proprietary rights. In particular, we generally enter into confidentiality agreements with our employees and nondisclosure agreements with our

customers and corporations with whom we have strategic relationships. In addition, we generally register our important trademarks with the USPTO to preserve their value and establish proof of our ownership and use of these trademarks. Any trademarks that may be issued to us may not provide significant proprietary protection or commercial advantage to us. Despite any precautions that we have taken, intellectual property laws and contractual restrictions may not be sufficient to prevent misappropriation of our technology or deter others from developing similar technology.

We May Face Litigation and Liability Due to Claims of Infringement of Third Party Intellectual Property Rights. The telecommunications industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. From time to time, third parties may assert patent, copyright, trademark, trade secret and other intellectual property rights to technologies that are important to our business. Any claims that our services infringe or may infringe proprietary rights of third parties, with or without merit, could be time-consuming, result in costly litigation, divert the efforts of our technical and management personnel or require us to enter into royalty or licensing agreements, any of which could significantly harm our operating results. In addition, in our customer agreements, we agree to indemnify our customers for any expenses or liabilities resulting from claimed infringement of patents, trademarks or copyrights of third parties. If a claim against us was to be successful, and we were not able to obtain a license to the relevant or a substitute technology on acceptable terms or redesign our products to avoid infringement, our ability to compete successfully in our competitive market would be impaired.

Because We Depend on Third Party Suppliers for Key Components of Our Network Infrastructure, Failures of These Suppliers to Deliver Their Components as Agreed Could Hinder Our Ability to Provide Our Services on a Competitive and Timely Basis. Any failure to obtain required products or services from third party suppliers on a timely basis and at an acceptable cost would affect our ability to provide our Internet connectivity services on a competitive and timely basis. We are dependent on other companies to supply various key components of our infrastructure, including the local loops between our service points and our Internet backbone providers and between our service points and our customers' networks. In addition, the routers and switches used in our network infrastructure are currently supplied by a limited number of vendors, including Cisco Systems. Additional sources of these services and products may not be available in the future on satisfactory terms, if at all. We purchase these services and products pursuant to purchase orders placed from time to time. Furthermore, we do not carry significant inventories of the products we purchase, and we have no guaranteed supply arrangements with our vendors. We have in the past experienced delays in installation of services and receiving shipments of equipment purchased. To date, these delays have neither been material nor have adversely affected us, but these delays could affect our ability to deploy service points in the future on a timely basis. If Cisco Systems does not provide us with our routers, or if our limited source suppliers fail to provide products or services that comply with evolving Internet and telecommunications standards or that interoperate with other products or services we use in our network infrastructure, we may be unable to meet our customer service commitments.

We Have Acquired and May Acquire Other Businesses, and these Acquisitions Involve Numerous Risks. During 2000, we acquired CO Space and VPNX, respectively, in purchase transactions. We may engage in additional acquisitions in the future in order to, among other things, enhance our existing services and enlarge our customer base. Acquisitions involve a number of risks that could potentially, but not exclusively, include the following:

•: difficulties in integrating the operations, personnel, technologies, products and services of the acquired companies in a timely and efficient manner;
•: diversion of management's attention from normal daily operations;
•: insufficient revenues to offset significant unforeseen costs and increased expenses associated with the acquisitions;

•: difficulties in completing projects associated with in-process research and development being conducted by the acquired businesses;
•: risks associated with our entrance into markets in which we have little or no prior experience and where have a stronger market presence;
•: deferral of purchasing decisions by current and potential customers as they evaluate the likelihood of success of the acquisitions;
•: difficulties in pursuing relationships with potential strategic partners who may view the combined company as a more direct competitor than our predecessor entities taken independently;
•: issuance by us of equity securities that would dilute ownership of existing shareholders;
•: incurrence of significant debt, contingent liabilities and amortization expenses; and
•: loss of key employees of the acquired companies.

Acquiring high technology businesses as a means of achieving growth is inherently risky. To meet these risks, we must maintain our ability to manage effectively any growth that results from using these means. Failure to manage effectively our growth through mergers and acquisitions could harm our business and operating results and could result in impairment of related long-term assets.

Risks Related to Our Industry

Because the Demand for Our Services Depends on Continued Growth in Use of the Internet, a Slowing of this Growth Could Harm the Development of the Demand for Our Services. Critical issues concerning the commercial use of the Internet remain unresolved and may hinder the growth of Internet use, especially in the business market we target. Despite growing interest in the varied commercial uses of the Internet, many businesses have been deterred from purchasing Internet connectivity services for a number of reasons, including inconsistent or unreliable quality of service, lack of availability of cost-effective, high-speed options, a limited number of local access points for corporate users, inability to integrate business applications on the Internet, the need to deal with multiple and frequently incompatible vendors and a lack of tools to simplify Internet access and use. Capacity constraints caused by growth in the use of the Internet may, if left unresolved, impede further development of the Internet to the extent that users experience delays, transmission errors and other difficulties. Further, the adoption of the Internet for commerce and communications, particularly by those individuals and enterprises that have historically relied upon alternative means of commerce and communication, generally requires an understanding and acceptance of a new way of conducting business and exchanging information. In particular, enterprises that have already invested substantial resources in other means of conducting commerce and exchanging information may be particularly reluctant or slow to adopt a new strategy that may make their existing personnel and infrastructure obsolete. Additionally, even individuals and enterprises that have invested significant resources in the use of the Internet may, for cost reduction purposes during difficult economic times, decrease future investment in the use of the Internet. The failure of the market for business related Internet solutions to further develop could cause our revenues to grow more slowly than anticipated and reduce the demand for our services.

Because the Internet Connectivity Market Is New and Our Viability Is Uncertain, There Is a Risk Our Services May Not Be Accepted. We face the risk that the market for high performance Internet connectivity services might fail to develop, or develop more slowly than expected, or that our services may not achieve widespread market acceptance. This market has only recently begun to develop, is evolving rapidly and likely will be characterized by an increasing number of entrants. There is significant uncertainty as to whether this market ultimately will prove to be viable or, if it becomes viable, that it will grow. Furthermore, we may be unable to market and sell our services successfully

and cost-effectively to a sufficiently large number of customers. We typically charge more for our services than do our competitors, which may affect market acceptance of our services. We believe the danger of nonacceptance is particularly acute during economic slowdowns. Finally, if the Internet becomes subject to a form of central management, or if the Internet backbone providers establish an economic settlement arrangement regarding the exchange of traffic between backbones, the problems of congestion, latency and data loss addressed by our Internet connectivity services could be largely resolved, and our core business rendered obsolete.

If We Are Unable to Respond Effectively and on a Timely Basis to Rapid Technological Change, We May Lose or Fail to Establish a Competitive Advantage in Our Market. The Internet connectivity industry is characterized by rapidly changing technology, industry standards, customer needs and competition, as well as by frequent new product and service introductions. We may be unable to successfully use or develop new technologies, adapt our network infrastructure to changing customer requirements and industry standards, introduce new services, such as virtual private networking and video conferencing, or enhance our existing services on a timely basis. Furthermore, new technologies or enhancements we use or develop may not gain market acceptance. Our pursuit of necessary technological advances may require substantial time and expense, and we may be unable to successfully adapt our network and services to alternate access devices and technologies.

If our services do not continue to be compatible and interoperable with products and architectures offered by other industry members, our ability to compete could be impaired. Our ability to compete successfully is dependent, in part, upon the continued compatibility and interoperability of our services with products and architectures offered by various other industry participants. Although we intend to support emerging standards in the market for Internet connectivity, there can be no assurance that we will be able to conform to new standards in a timely fashion, if at all, or maintain a competitive position in the market.

New Technologies Could Displace Our Services or Render Them Obsolete. New technologies and industry standards have the potential to replace or provide lower cost alternatives to our services. The adoption of such new technologies or industry standards could render our existing services obsolete and unmarketable. For example, our services rely on the continued widespread commercial use of the set of protocols, services and applications for linking computers known as Transmission Control Protocol/Internetwork Protocol, or TCP/IP. Alternative sets of protocols, services and applications for linking computers could emerge and become widely adopted. A resulting reduction in the use of TCP/IP could render our services obsolete and unmarketable. Our failure to anticipate the prevailing standard or the failure of a common standard to emerge could hurt our business. Further, we anticipate the introduction of other new technologies, such as telephone and facsimile capabilities, private networks, multimedia document distribution and transmission of audio and video feeds, requiring broadband access to the Internet, but there can be no assurance that such technologies will create opportunities for us.

Service Interruptions Caused by System Failures Could Harm Customer Relations, Expose Us to Liability and Increase Our Capital Costs. Interruptions in service to our customers could harm our customer relations, expose us to potential lawsuits and require us to spend more money adding redundant facilities. Our operations depend upon our ability to protect our customers' data and equipment, our equipment and our network infrastructure, including our connections to our backbone providers, against damage from human error or "acts of God." Even if we take precautions, the occurrence of a natural disaster or other unanticipated problem could result in interruptions in the services we provide to our customers.

Capacity Constraints Could Cause Service Interruptions and Harm Customer Relations. Failure of the backbone providers and other Internet infrastructure companies to continue to grow in an orderly manner could result in capacity constraints leading to service interruptions to our customers. Although

the national telecommunications networks and Internet infrastructures have historically developed in an orderly manner, there is no guarantee that this orderly growth will continue as more services, users and equipment connect to the networks. Failure by our telecommunications and Internet service providers to provide us with the data communications capacity we require could cause service interruptions.

Our Network and Software Are Vulnerable to Security Breaches and Similar Threats Which Could Result in Our Liability for Damages and Harm Our Reputation. Despite the implementation of network security measures, the core of our network infrastructure is vulnerable to computer viruses, break-ins, network attacks and similar disruptive problems. This could result in our liability for damages, and our reputation could suffer, thereby deterring potential customers from working with us. Security problems caused by third parties could lead to interruptions and delays or to the cessation of service to our customers. Furthermore, inappropriate use of the network by third parties could also jeopardize the security of confidential information stored in our computer systems and in those of our customers.

Although we intend to continue to implement industry-standard security measures, in the past some of these industry-standard measures have occasionally been circumvented by third parties, although not in our system. Therefore, there can be no assurance that the measures we implement will not be circumvented. The costs and resources required to eliminate computer viruses and alleviate other security problems may result in interruptions, delays or cessation of service to our customers, which could hurt our business.

Should the Government Modify or Increase Regulation of the Internet, the Provision of Our Services Could Become More Costly. There is currently only a small body of laws and regulations directly applicable to access to or commerce on the Internet. However, due to the increasing popularity and use of the Internet, international, federal, state and local governments may adopt laws and regulations that affect the Internet. The nature of any new laws and regulations and the manner in which existing and new laws and regulations may be interpreted and enforced cannot be fully determined. The adoption of any future laws or regulations might decrease the growth of the Internet, decrease demand for our services, impose taxes or other costly technical requirements or otherwise increase the cost of doing business on the Internet or in some other manner have a significantly harmful effect on us or our customers. The government may also seek to regulate some segments of our activities as it has with basic telecommunications services. Moreover, the applicability to the Internet of existing laws governing intellectual property ownership and infringement, copyright, trademark, trade secret, obscenity, libel, employment, personal privacy and other issues is uncertain and developing. We cannot predict the impact, if any, that future regulation or regulatory changes may have on our business.

Part II. OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Our initial public offering of common stock was effected through a registration statement on Form S-1 (File No. 333-84035) that was declared effective by the Commission on September 29, 1999. As of June 30, 2001, we had used the estimated aggregate net proceeds of $201.6 million from our initial public offering as follows:

Construction of plant, building and facilities:		$27.8 million
Purchase and installation of machinery and equipment:		$36.3 million
Purchases of real estate:		$ —
Acquisition of other businesses:		$12.2 million
Repayment of indebtedness:		$12.4 million
Working capital:		$112.9 million
Temporary investments (interest bearing treasury securities and corporate paper):		$ —

Our follow-on public offering of common stock was effected through a registration statement on Form S-1 (File No. 333-95503) that was declared effective by the Commission on April 6, 2000. As of June 30, 2001, we had used the estimated aggregate net proceeds of $142.9 million from our follow-on public offering as follows:

Construction of plant, building and facilities:		$6.9 million
Purchase and installation of machinery and equipment:		$21.7 million
Purchases of real estate:		$ —
Acquisition of other businesses:		$ —
Repayment of indebtedness:		$10.0 million
Working capital:		$58.0 million
Temporary investments (interest bearing treasury securities and corporate paper):		$46.3 million

The foregoing amounts represent our best estimate of our use of proceeds for the period indicated. No portion of payments of any commissions, finders fees, expenses paid to or for underwriting or other offering expenses were made to our directors or officers or their associates, holders of 10% or more of any class of our equity securities or to our affiliates.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a): Exhibits:

Exhibit Number		Description
10.1		Employment Agreement, dated June 13, 2001, between Registrant and Michael Vent.
10.2		Form of Employment Agreement between Registrant and David Benton, Robert Gionesi, Sandra Manougian, Ali Marashi, Paul McBride, Alan Norman and John Scanlon.

(b): Reports on Form 8-K:

No reports on Form 8-K were filed by the Company during the six-month period ended June 30, 2001.

SIGNATURES

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 on this 14th day of August, 2001.

		INTERNAP NETWORK SERVICES CORPORATION (Registrant)

		By:		/s/ PAUL E. MCBRIDE Paul E. McBride Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INTERNAP NETWORK SERVICES CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited, in thousands)
INTERNAP NETWORK SERVICES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited, in thousands, except per share amounts)
INTERNAP NETWORK SERVICES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in thousands)
INTERNAP NETWORK SERVICES CORPORATION CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE LOSS SIX-MONTH PERIOD ENDED JUNE 30, 2001 (Unaudited, in thousands)
INTERNAP NETWORK SERVICES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

RISK FACTORS
Part II. OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

SIGNATURES

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. freshman Good

Internap (INAPQ) 10-Q2001 Q2 Quarterly report

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