10-K405

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2001

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

For the transition period from                      to                     

Commission File Number: 000-27265

INTERNAP NETWORK SERVICES CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE	91-2145721
(State or other jurisdiction of incorporation or organization)	(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)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
Not Applicable	Not Applicable

Securities registered pursuant to Section 12(g) of the Act:

Common Stock

        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  ý        No  o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

        The aggregate market value of the voting common stock held by non-affiliates of the registrant, based on the closing sale price of the Common Stock on February 28, 2001 as reported on the Nasdaq Stock Market was approximately $153.6 million. Shares of Common Stock held by each current executive officer and director and by each person who is known by the registrant to own 5% or more of the outstanding Common Stock have been excluded from this computation in that such persons may be deemed to be affiliates of the Company. Share ownership information of certain persons known by the Company to own greater than 5% of the outstanding common stock for purposes of the preceding calculation is based solely on information on Schedules 13D or 13G filed with the Commission and is as of December 31, 2001. This determination of affiliate status is not a conclusive determination for other purposes.

The number of shares outstanding of the registrant's Common Stock as of February 28, 2002 was 152,138,632.

Documents Incorporated By Reference

        The Registrant has incorporated by reference into Part III of this Form 10-K portions of the Proxy Statement for its 2002 Annual Meeting of Stockholders to be held May 14, 2002. The definitive proxy statement shall be filed with the Securities and Exchange Commission on or before April 30, 2002.

TABLE OF CONTENTS

			Page
Part I.
	Item 1.	Business	3
	Item 2.	Properties	10
	Item 3.	Legal Proceedings	10
	Item 4.	Submission of Matters to a Vote of Security Holders	10
Part II.
	Item 5.	Market for Registrant's Common Stock and Related Stockholder Matters	11
	Item 6.	Selected Financial Data	12
	Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	13
	Item 7A	Quantitative and Qualitative Disclosures About Market Risk	29
	Item 8.	Financial Statements and Supplementary Data	38
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	38
Part III.
	Item 10.	Directors and Executive Officers of the Registrant	39
	Item 11.	Executive Compensation	39
	Item 12.	Security Ownership of Certain Beneficial Owners and Management	39
	Item 13.	Certain Relationships and Related Transactions	39
Part IV.
	Item 14.	Exhibits, Financial Statements and Reports on Form 8-K	40
	SIGNATURES		43

2

PART I

The statements contained in this annual report on Form 10-K that are not historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding Internap's expectations, beliefs, intentions or strategies regarding the future. Forward-looking statements include, without limitation, statements regarding the extent and timing of future revenues, expenses and customer demand, statements regarding the deployment of Internap's products and services and statements regarding reliance on third parties. All forward-looking statements included in this document are based on information available to us as of the date hereof, and Internap assumes no obligation to update any such forward-looking statements. It is important to note that our actual results could differ materially from those in such forward-looking statements as a result of certain factors, including, without limitation, those discussed in Item 7A on page 29, under the heading "Risk Factors" on page 30 and elsewhere in this annual report on Form 10-K.

ITEM 1. BUSINESS.

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 intelligently routed to and from destinations on the Internet using our overlay network, which analyzes the traffic situation on the many 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 December 31, 2001, we provided our high performance Internet connectivity services to 974 customers.

        We offer our high performance Internet connectivity services at dedicated line speeds of 1.5 to 1,000 million bits per second, or megabits per second, 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 proprietary routing technology. Service points maintain high speed, dedicated connections to major global Internet networks, commonly referred to as backbones, operated by AT&T, Cable & Wireless USA, Genuity, Global Crossing Telecommunications, Intermedia, Qwest Communications International, Sprint Internet

3

Services, UUNET Technologies (a Worldcom company) and Verio (an NTT Communications Corporation). As of December 31, 2001, we operated 35 service points in the following markets:

Market	Number of Service Points in Market
Amsterdam	1
Atlanta	2
Boston	2
Chicago	2
Dallas	3
Denver	1
Houston	1
London	1
Los Angeles	3
Miami	1
New York	3
Orange County	1
Philadelphia	2
San Diego	1
San Francisco	1
San Jose	3
Santa Clara, CA	1
Seattle	3
Washington, D.C.	2
Tokyo, Japan (through our joint venture with NTT-ME Corp. of Japan)	1
Total service points	35

        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, on-line trading, video and telephone conferencing, sending facsimiles, creating private networks, distributing multi-media documents and sending and receiving audio and video feeds.

Services

        We offer Internet connectivity services to our customers over T-1, DS-3, OC-3, OC-12 and Ethernet telecommunication connections at speeds ranging from 1.5 million bits per second to 1,000 million bits, or 1 gigabit, per second. T-1, DS-3, OC-3, OC-12 and Ethernet are several of the many possible media used to transport Internet Protocol packets across the Internet. Information such as voice calls, video conferencing or other data are transported over the Internet at various transmission rates: DS-3 carries 45 million bits per second, OC-3 carries 155 million bits per second, OC-12 carries 622 million bits per second and Ethernet carries voice calls or data at rates up to 1,000 million bits per second. Our list prices for a single T-1, DS-3 and OC-3 connection range from $2,695 to $155,000 per month depending on the connection purchased. Customers who connect to a service point with a DS-3 or faster connection have a choice of fixed rate pricing or usage-based pricing. Otherwise, customers pay a fixed fee for our Internet connectivity services. Usage-based pricing varies according to the volume of data sent and received over the connection.

        Customers that have networking equipment or servers located within service points may connect directly to our services using standard ethernet connections with speeds ranging from 10 million bits

4

per second to 1,000 million bits per second. We also offer our customers additional value added services, including:

•

Internap Diversity Plus.  Our Diversity Plus service allows customers to maintain multiple connections to Internap and backbone providers while still taking advantage of the optimal routing capabilities of the service point. In a typical Diversity Plus configuration, the customer has a connection to a service point and to one or more backbone providers of their choice. The customer's router is configured using our proprietary routing technology to route packets addressed to Internet destinations located on the alternate provider's backbone through the customer's direct connection while other packets are routed to the service point. In this manner, the customer can use the redundant Internet connections of the service point's routing capabilities.



•

Connections to Data Centers.  Our customers have their servers located on their own premises or at third party data centers. We connect to these customers either by establishing a circuit directly to their routers or through a connection we have with the network maintained by the third party data center operator. We have our own data centers in our Atlanta, Boston, Dallas, Houston, New York and Seattle service points at which a number of our customers have collocated their servers.



•

Installation Services.  We perform installation services necessary to connect our customers' networks to our service points.



•

Content Delivery.  We offer, as a reseller, a variety of Akamai content distribution services including FreeFlow, FreeFlow Streaming, FirstPoint, EdgeScape, EdgeSuite and SiteWise.



•

Video Conferencing.  We offer video conferencing services, comprised of video equipment and high quality connectivity managed network services in cooperation with a strategic partner.



•

Virtual Private Networking.  During 2002 we launched our virtual private networking services that allow customers to send and receive data over a secure site-to-site connection using the public Internet.

Technology

        Service Point Architecture.    Our service point architecture was engineered as a reliable and scalable network access point. Multiple routers and multiple backbone connections provide back-ups in case of the failure of any single service point circuit or device. Our service point architecture is designed to grow as our customers' traffic demands grow and as we add new customers and provides for the addition of significant backbone providers as necessary. We only deploy service points within carrier grade facilities. All service points are equipped with battery backup and emergency generators, as well as dual heating, ventilation and air conditioning systems.

        ASsimilator v3 (AS3) Intelligent Routing Technology.    The AS3 Intelligent Routing Technology is a software-based system for Internet Protocol route optimization. The AS3 system is a seamless integration of routing and performance databases, software components that support network and traffic flow analysis, routing policy update and route verification, and traffic and performance reporting; all of which interface with Internap's service point infrastructure, providing the intelligent, high-performance routing characteristics of the service point.

        AS3 assembles the global routing tables being advertised by all of the backbone and provider networks homed to a given service point in addition to the available bandwidth to each. It also collects network performance statistics across the entire Internet. Taking this data in concert with other important information, the AS3 system then determines the optimal path to each Internet destination for IP data traffic and inserts the appropriate routing policies into the service point infrastructure. As

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the performance and traffic landscape changes, AS3 will adjust its policies to reflect new optimal paths. AS3 not only controls the outbound routing to a backbone network from the service point, but makes an effort to influence the inbound routing from non-Internap controlled networks back to the service point.

        Distributed Network Management System.    We have developed a highly scalable proprietary network management system optimized for monitoring service points. With the use of our distributed network management system, our network operations center is capable of real-time monitoring of the backbones connected to each service point, customer circuits, network devices and servers 24 hours a day, seven days a week. This system provides our network operations center with proactive trouble notification, allowing for instantaneous identification and handling of problems, frequently before our customers become aware of network problems. This system also captures and provides bandwidth usage reports for billing and customer reports. Data provided by the system is an integral part of our capacity planning and provisioning process, helping us to forecast and plan upgrades before capacity becomes strained.

        Product Development Costs.    Our product development costs were approximately $3.9 million, $11.9 million and $12.2 million for the years ended December 31, 1999, 2000 and 2001, respectively. Included in product development costs for the years ended December 31, 1999, 2000 and 2001 were research and development expenses of $3.1 million, $7.7 million and $6.3 million, respectively. We anticipate future product development costs to remain consistent with those incurred during the current period.

Sales and Marketing

        Our sales and marketing objective is to achieve broad market penetration and increase brand name recognition by targeting enterprises that depend upon the Internet for mission-critical operations. As of December 31, 2001, we had 124 employees engaged in direct sales and 51 in sales administration and marketing located in our targeted markets. On January 9, 2002 pursuant to a business reorganization we reduced the number of employees engaged in direct sales and sales administration and marketing to 108 and 31, respectively, while we increased our focus on channel relationships.

        Sales.    We have developed a direct, high-end sales organization with managers and representatives who have extensive relevant sales experience with a broad range of telecommunications and technology companies. In addition, our highly trained technical sales engineers and client interaction engineers, who facilitate optimal routing solutions for our customers, are responsible for generating recurring sales revenues and serve to complement our sales force. When we deploy a new service point, we set up a dedicated team of sales representatives and engineers focused exclusively on that market. We believe this localized direct sales approach allows us to respond to regional competitive characteristics, educate customers, and identify and close business opportunities better than a centralized sales force. We have also developed an indirect sales channel for our products and services through relationships with our preferred collocation providers, content developers, cable companies, DSL service providers, consulting companies and Internet service providers.

        Marketing.    Our marketing efforts are designed to help educate customers in our targeted vertical markets to understand that a service provider is now available that can provide a quality of service over the entire Internet that enables them to launch and execute mission-critical Internet-based applications. We target key information technology executives as well as senior marketing and finance managers. In addition, we conduct comprehensive public relations efforts focused on cultivating industry analyst and media relationships with the goal of securing broad media coverage and public recognition of our proprietary high speed public Internet communications solutions.

6

        Our marketing organization is responsible for expanding our value added service offerings into horizontal markets as new bandwidth intensive applications such as telephone and facsimile transmissions over the Internet, virtual private networks, multimedia document distribution, audio and video feeds and other emerging technologies are introduced.

Competition

        The Internet-based connectivity services market is extremely competitive, and there are few substantial barriers to entry. We expect the market will continue to be extremely competitive 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. Our competitors include:

•

backbone providers that provide us connectivity services including AT&T, Cable & Wireless USA, Genuity, Global Crossing Telecommunications, Intermedia, Qwest Communications International, Sprint Internet Services, UUNET Technologies (a Worldcom company) and Verio (an NTT Communications Corporation);



•

regional Bell operating companies which offer Internet access;



•

global, national and regional Internet service providers; and



•

software based, early stage, Internet infrastructure companies focused on Internet Protocol route control products.

        We expect competition to intensify in the future. As new participants enter the Internet connectivity services market, we will face increased competition. Such new competitors could include computer hardware, software, media and other technology and telecommunications companies. A number of companies have expanded their Internet access products and services as a result of acquisitions. Further, the ability of some of our 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. In addition, Internet backbone providers may make technological developments, such as improved router technology, that will enhance the quality of their services.

        We believe the principal competitive factors in our market are speed and reliability of connectivity, quality of facilities, level of customer service and technical support, price, brand recognition, the effectiveness of sales and marketing efforts, and the timing and market acceptance of new solutions and enhancements to existing solutions developed by us and our competitors. We believe we presently are positioned to compete favorably with respect to most of these factors. In particular, many of our competitors have built and must maintain capital-intensive backbone infrastructures that are highly dependent on traditional public and private peering exchanges. Each backbone provider tries to offer high quality service within its own network but is unable to guarantee service quality once data leaves its network, and there is little incentive to optimize the interoperability of traffic between networks. We intelligently route traffic, thereby providing customers with a high level of service and increasing the efficiency of the backbone providers themselves. However, the market for Internet connectivity services is evolving rapidly, and we cannot assure you that we will compete successfully in the future. Further, we have purchase commitments to certain backbone providers that could harm our ability to compete with those backbones in the market. As a result, we may not maintain a competitive position against current or future competitors. See "Risk Factors—Competition from More Established Competitors Who Have Greater Revenues Could Decrease Our Market Share."

7

Intellectual Property

        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 which 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 have nine 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.

        We also enter into confidentiality and invention assignment agreements with our employees and consultants and control access to and distribution of our proprietary information. Despite our efforts to protect our proprietary rights, departing employees and other unauthorized parties may attempt to copy or otherwise obtain and use our products and technology. Monitoring unauthorized use of our products and technology is difficult, and we cannot be certain that the steps we have taken will prevent misappropriation of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States.

        From time to time, third parties may assert patent, copyright, trademark, trade secret and other intellectual property rights claims or initiate litigation against us or our suppliers or customers with respect to existing or future products and services. Although we have not been a party to any material claims alleging infringement of intellectual property rights, we cannot assure you that we will not be subject to these claims in the future. Further, we may in the future initiate claims or litigation against third parties for infringement of our proprietary rights to determine the scope and validity of our proprietary rights or those of our competitors. Any of these claims, with or without merit, may be time consuming, result in costly litigation and diversion of technical and management personnel or require us to cease using infringing technology, develop noninfringing technology or enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on acceptable terms, if at all. In the event of a successful claim of infringement and our failure or inability to develop noninfringing technology or license the infringed or similar technology on a timely basis, our business and results of operations may be seriously harmed.

Employees

        As of December 31, 2001, we employed 534 full-time persons, 36 in technical support, 99 in product development, 175 in sales and marketing, 134 in service delivery and support and 90 in finance and administration. On January 9, 2002, pursuant to a business reorganization, we reduced our employee force. As of February 28, 2002, we employed 468 full time employees, 41 in technical support, 82 in product development, 139 in sales and marketing, 123 in service delivery and support and 83 in finance and administration. None of our employees is represented by a labor union, and we have not experienced any work stoppages to date. We consider our employee relations to be good.

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Executive Officers

        Our executive officers and their ages as of December 31, 2001 were as follows:

Name	Age	Position	Since
Eugene Eidenberg	62	Chief Executive Officer	2001
Paul E. McBride(1)	39	Vice President of Finance & Administration, Chief Financial Officer and Secretary	1996
John Scanlon(2)	43	Vice President, Finance	2001
David T. Benton	44	Vice President, Employee Services	2000
Robert A. Gionesi	44	Vice President, Sales	2000
Sandra Manougian	43	Vice President, Service Delivery	2000
Ali Marashi	33	Vice President, Technical Services	2001

(1)

Mr. McBride resigned as an employee as of December 31, 2001.

(2)

As of February 13, 2002, Mr. Scanlon began serving as the Vice President of Finance & Administration, Chief Financial Officer and Secretary.

        Eugene Eidenberg has served as a director and chairman of the board of directors since November 1997. Effective in July 2001, Mr. Eidenberg began serving as Internap's Chief Executive Officer. Mr. Eidenberg has been a Managing Director of Granite Venture Associates LLC since 1999 and has served as a Principal of Hambrecht & Quist Venture Associates since 1998 and was an advisory director at the San Francisco investment banking firm of Hambrecht & Quist from 1995 to 1998. Mr. Eidenberg served for 12 years in a number of senior management positions with MCI Communications Corporation. His positions at MCI included Senior Vice President for Regulatory and Public Policy, President of MCI's Pacific Division, Executive Vice President for Strategic Planning and Corporate Development and Executive Vice President for MCI's international businesses. Mr. Eidenberg is currently a director of several private companies. Mr. Eidenberg holds a Ph.D. and a Master of Arts degree from Northwestern University and a Bachelor of Arts degree from the University of Wisconsin.

        Paul E. McBride was Vice President of Finance & Administration, Chief Financial Officer and Secretary until December 31, 2001, at which time he resigned as an employee. Prior to joining Internap in 1996, he was Vice President of Finance and Operations at ConnectSoft from February 1995 to March 1996. From December 1992 to January 1995, he served as Chief Financial Officer and Vice President of Finance at PenUltimate, Inc., a software developer. Mr. McBride holds a Bachelor of Arts in Economics and a Bachelor of Science in Finance from the University of Colorado, and holds a Master of Business Administration from the University of Southern California.

        John Scanlon was Vice President, Finance as of December 31, 2001 and is the current Vice President of Finance & Administration, Chief Financial Officer and Secretary. Since joining Internap in 1999, Mr. Scanlon has also served as Vice President, Service Planning, Director of Carrier Relations and Vice President of Product Marketing. Prior to joining Internap, Mr. Scanlon served as the President of Flat Rate Communications, Inc., which was acquired by Viatel. Mr. Scanlon continued on as a General Manager of Viatel after the acquisition. Prior to his work with Flat Rate, Mr. Scanlon spent over a decade at MCI Telecommunications as its Vice President and Director of Strategic Development, Director of Business Development and Director of Finance and Information Systems. Mr. Scanlon holds a Master in Business Administration with honors from St. Mary's College and a Bachelor of Science in Business Administration, Financial Management from Oregon State University.

        David T. Benton was Vice President, Employee Services as of December 31, 2001 and is the current Vice President, Service Delivery. Since joining Internap in 1999, Mr. Benton has also served as Director

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of Engineering Services. Prior to joining Internap, Mr. Benton held various positions at Nordstrom, Inc. from 1987 to 1999, including Strategic Planning Manager for the Executive Committee from 1998 to 1999 and Director of Application Development from 1992 to 1998. Mr. Benton holds a Bachelor in Business Administration, magna cum laude, and a Master of Business Administration, both from the University of Washington.

        Robert Gionesi is Vice President of Sales. Prior to joining Internap in 1998, Mr. Gionesi was Director of Sales for MCI's Commercial Global account segment in New York City where he was responsible for the sales and technical management of MCI's largest accounts. Prior to MCI, Mr. Gionesi held numerous senior sales positions at AT&T, including Regional Technical Manager, District Sales Manager and Senior Staff Manager for the Regional Vice President. Mr. Gionesi has a degree in Business Communications from Adelphi University in Garden City, New York and a Master of Science in Telecommunications and Computing Management from Polytechnic University in Brooklyn, New York.

        Sandra Manougian was Vice President, Service Delivery as of December 31, 2001 and is the current Vice President of Sales for the Western Region. Ms. Manougian joined Internap in June 1998 as the Regional Vice President of Sales for the Central Northwest territory. Prior to joining Internap, Ms. Manougian spent 16 years with MCI in various positions in Global Account Sales, Technical Consulting, Network Engineering, Network Planning, and Network & Field Operations. Ms. Manougian holds a Bachelor of Science in Business Administration from Seattle City University.

        Ali Marashi is Vice President, Technical Services, which includes responsibility for network and colocation operations. Since joining Internap in 2000, Mr. Marashi has also served as Vice President of Engineering, Director of Network Technology and Director of Backbone Engineering. Prior to joining Internap, Mr. Marashi was a lead Network Engineer for Networks and Distributed Computing at the University of Washington from July 1997 to March 2000, where he was responsible for senior-level design, development, and technical leadership and support for all networking initiatives and operations. Prior to that, Mr. Marashi was co-founder and Vice President of Engineering for interGlobe Networks, Inc., a TCP/IP consulting firm from 1995 to July 1997. Mr. Marashi holds a Bachelor of Science in Computer Engineering from the University of Washington.

ITEM 2. PROPERTIES.

        As of December 31, 2001, our executive offices are located in Seattle, Washington and consist of approximately 74,100 square feet that are leased under an agreement that expires in 2003. We lease facilities for our network operations center, sales offices and service points in a number of metropolitan areas and specific cities. We believe our existing facilities, including the additional space, are adequate for our current needs and that suitable additional or alternative space will be available in the future on commercially reasonable terms as needed.

ITEM 3. LEGAL PROCEEDINGS.

        From time to time, we may be involved in litigation relating to claims arising out of our ordinary course of business. We are not currently involved in any material legal proceedings.

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

        None.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.

        Our common stock is traded on the Nasdaq Stock Market under the symbol "INAP." Public trading of the common stock commenced on September 29, 1999. Prior to that time, there was no public market for our common stock. The table below sets forth the high and low bid price for our common stock for the periods indicated as adjusted for our 100% share dividend paid on January 7, 2000 to stockholders of record on December 27, 1999:

	High		Low
Year Ended December 31, 2001:
Fourth Quarter	$	1.50	$	0.80
Third Quarter		3.05		0.85
Second Quarter		3.75		0.77
First Quarter		10.25		1.31
Year Ended December 31, 2000:
Fourth Quarter		30.88		4.75
Third Quarter		54.25		24.00
Second Quarter		50.13		23.63
First Quarter		111.00		45.06

        As of February 28, 2002 the number of stockholders of record of our common stock was 1,407. Because many of our shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial stockholders represented by these record holders.

        We have never declared or paid any cash dividends on our stock. We currently intend to retain any earnings for use in our business and do not anticipate paying any cash dividends in the foreseeable future.

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ITEM 6. SELECTED FINANCIAL DATA.

        The following selected financial data are qualified by reference to, and should be read in conjunction with, our financial statements and the notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this annual report on Form 10-K. The statement of operations data presented below for the years ended December 31, 1999, 2000 and 2001, and the selected balance sheet data as of December 31, 2000 and 2001 are derived from our audited financial statements included elsewhere in this annual report on Form 10-K. The statement of operations data presented below for the years ended December 31, 1997 and 1998, and the selected balance sheet data as of December 31, 1997, 1998 and 1999 are derived from our audited financial statements that are not included in this annual report on Form 10-K.

			Year Ended December 31,
			1997			1998			1999			2000			2001
			(in thousands)
Revenues			$	1,045		$	1,957		$	12,520		$	69,613		$	117,404
Costs and expenses:
	Direct cost of network			832			1,990			17,848			62,465			98,915
	Customer support			8			666			5,796			20,320			21,480
	Product development			389			754			3,876			11,924			12,233
	Sales and marketing			261			2,822			17,519			35,390			38,151
	General and administrative			668			1,734			7,335			32,962			44,491
	Depreciation and amortization			297			736			4,808			20,522			48,550
	Amortization of goodwill and other intangible assets			—			—			—			54,334			38,116
	Amortization of deferred stock compensation			—			205			7,569			10,651			4,217
	Restructuring costs			—			—			—			—			64,096
	Impairment of goodwill and other intangible assets			—			—			—			—			195,986
	In-process research and development			—			—			—			18,000			—
		Total operating costs and expenses		2,455			8,907			64,751			266,568			566,235
Loss from operations				(1,410	)		(6,950	)		(52,231	)		(196,955	)		(448,831	)
Other income (expense):
Interest income (expense), net				(199	)		(23	)		2,314			11,498			(1,272	)
Loss on investments				—			—			—			—			(26,345	)
Loss on sales and retirements of property and equipment				—			—						—			(2,714	)
Total other income (expense)				(199	)		(23	)		2,314			11,498			(30,331	)
Net loss			$	(1,609	)	$	(6,973	)	$	(49,917	)	$	(185,457	)	$	(479,162	)
Basic and diluted net loss per share			$	(0.24	)	$	(1.04	)	$	(1.31	)	$	(1.30	)	$	(3.19	)
Weighted average shares used in computing basic and diluted net loss per share(1)				6,666			6,673			37,994			142,451			150,328

	As of December 31,
	1997		1998			1999		2000		2001
	(in thousands)
Balance Sheet Data:
Cash, cash equivalents and short-term investments	$	4,770	$	275		$	205,352	$	153,965	$	82,306
Total assets		5,987		7,487			245,546		650,110		284,977
Notes payable and capital lease obligations, less current portion		240		2,342			14,378		27,646		16,448
Series A convertible preferred stock		—		—			—		—		86,314
Total stockholders' equity (deficit)		4,829		(436	)		210,500		531,953		66,169

(1)

See note 2 of notes to financial statements for a description of the computation of basic and diluted net loss per share and the number of shares used to compute basic and diluted net loss per share.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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 35 service points have their data intelligently routed to and from destinations on the Internet using our overlay network, which analyzes the traffic situation on the many 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. Our customers are primarily businesses that desire high performance Internet connectivity services in order to run mission-critical Internet-based applications. Due to our high quality of service, we generally price our services at a premium to providers of conventional Internet connectivity services. We expect to remain a premium provider of high quality Internet connectivity services and anticipate continuing our pricing policy in the future. We believe customers will continue to demand the highest quality of service as their Internet connectivity needs grow and become even more complex and, as such, will continue to pay a premium for high quality service.

        The following discussion should be read in conjunction with the consolidated financial statements provided under Part II, Item 8 of this Annual Report on Form 10-K. Certain statements contained herein may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, as discussed more fully herein.

        The forward-looking information set forth in this Annual Report on Form 10-K is as of February 28, 2002, and Internap undertakes no duty to update this information. Should events occur subsequent to February 28, 2002 that make it necessary to update the forward-looking information contained in this Form 10-K, the updated forward-looking information will be filed with the SEC in a Quarterly Report on Form 10-Q or as a press release included as an exhibit to a Form 8-K, each of which will be available at the SEC's website at www.sec.gov. More information about potential factors that could affect our business and financial results is included in the section entitled "Risk Factors" beginning on page 30 of this Form 10-K.

Critical Accounting Policies and Estimates

        Our discussion and analysis of Internap's financial condition and results of operations are based upon the consolidated financial statements of Internap Network Services Corporation, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, doubtful accounts, investments, intangible assets, income taxes, restructuring costs, long-term service contracts, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.

        Management believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of Internap's consolidated financial statements.

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        We review the creditworthiness of our customers routinely. If we determine that collection of service revenues is uncertain, we do not recognize revenue until cash has been collected. Additionally, we maintain allowances for doubtful accounts resulting from the inability of our customers to make required payments on accounts receivable. If the financial condition of our customers were to deteriorate, additional allowances may be required.

        We classify our marketable securities for which there is a determinable fair value as available for sale in accordance with the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Available for sale securities are reported at fair value with the related unrealized gains and losses included in other comprehensive income. The fair values of investments are determined based on quoted market prices for those securities. The cost of securities sold is based on the specific identification method. We account for investments without readily determinable fair values at historical cost, as determined by our initial investment. Realized gains and losses and declines in value of securities judged to be other than temporary are recorded as a component of losses on investments.

        We account for investments that provide us with the ability to exercise significant influence, but not control, over an investee using the equity method of accounting. Significant influence, but not control, is generally deemed to exist if the Internap has an ownership interest in the voting stock of the investee of between 20% and 50%, although other factors, such as minority interest protections, are considered in determining whether the equity method of accounting is appropriate. As of December 31, 2001 we have a single investment that qualifies for equity method accounting, our joint venture with NTT-ME Corporation of Japan, Internap Japan. We record our proportional share of the losses of our investee one month in arrears. We record our investment in our equity method investee on the consolidated balance sheets as a component of non-current investments and our share of the investee's losses as loss on investment on the consolidated statements of operations.

        When circumstances warrant, we may elect to exit certain business activities or change the manner in which it conducts ongoing operations. When such a change is made, management will estimate the costs to exit a business or restructure ongoing operations. The components of the estimates may include estimates and assumptions regarding the timing and costs of future events and activities that represent management's best expectations based on known facts and circumstances at the time of estimation. Management periodically reviews its restructuring estimates and assumptions relative to new information, if any, of which it becomes aware. Should circumstances warrant, management will adjust its previous estimates to reflect what it then believes to be a more accurate representation of expected future costs. Because management's estimates and assumptions regarding restructuring costs include probabilities of future events, such estimates are inherently vulnerable to material changes due to unforeseen circumstances, changes in market conditions, regulatory changes, changes in existing business practices and other circumstances that could materially and adversely affect the results of operations.

        We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. Since inception we have recorded a valuation allowance equal to our net deferred tax assets. Although we consider the potential for future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we determine we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made.

        Management monitors its network service commitments with its network service providers. When management determines that a service commitment will not be achieved through the ordinary course of business and the service provider is not expected to provide relief from the commitment, management records an expense to the direct costs of network and a liability for the estimated shortfall. If we are

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unable to continue increasing our base of customers or if our customer base decreases, we may experience a deterioration of our operating margins.

Impairment and Restructuring Costs

        On February 28, 2001 and September 24, 2001, we announced two restructurings of our business. Under the restructuring programs, management decided to exit certain non-strategic real estate lease and license arrangements, consolidate and exit redundant network connections and streamline the operating cost structure. The total charges include restructuring costs of $71.6 million and a charge for asset impairment of $196.0 million. We expect to complete the majority of these restructuring activities during 2002, although certain remaining restructured real estate and network obligations represent long term contractual obligations that extend beyond 2002.

        During the first quarter of 2001, management and the board of directors approved a restructuring plan that included ceasing development of the executed but undeveloped leases and the termination of core collocation development personnel. Through the third quarter of 2001, the macroeconomic slowdown continued and management further reduced revenue projections for the business. As a result, on September 4, 2001, management approved a restructuring plan that reflected decisions to further reduce the cost structure and improve the operating efficiency of the business.

        The following table displays the activity and balances for restructuring and asset impairment activity for 2001 (in millions):

			Charge			Cash Reductions			Non-cash Write-downs			Non-cash Plan Adjustments			December 31, 2001 Reserve
Restructuring costs
	Real estate obligations		$	60.0	(a)	$	(14.7	)(a)	$	(3.7	)	$	(7.0	)	$	34.6
	Employee separations			3.3			(3.2	)		—			—			0.1
	Network infrastructure obligations			6.3			(1.9	)		(1.0	)		(0.7	)		2.7
	Other			2.0			(0.1	)		—			—			1.9
		Total restructuring costs		71.6			(19.9	)		(4.7	)		(7.7	)		39.3
Asset impairments
	Goodwill			176.1			—			(176.1	)		—			—
	Assembled workforce			1.5			—			(1.5	)		—			—
	Trade name and trademarks			2.2			—			(2.2	)		—			—
	Completed real estate leases			14.8			—			(14.8	)		—			—
	Customer relationships			1.4			—			(1.4	)		—			—
		Total asset impairments		196.0			—			(196.0	)		—			—
		Total	$	267.6		$	(19.9	)	$	(200.7	)	$	(7.7	)	$	39.3

(a)

Includes the use of $6.0 million in restricted cash related to payment of a lease deposit on our corporate office space.

        Of the $71.6 million recorded during 2001 as restructuring reserves, approximately $50.7 million related to the direct cost of network, $1.1 million related to customer support, $0.3 million related to product development, $1.5 million related to sales and marketing and $18.0 million related to general and administrative costs.

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Real Estate Obligations

        The restructuring plan requires us to abandon certain real estate leases and properties not in use and, based on the restructuring plan, will not be utilized by us in the future. Also included in real estate obligations is abandonment of certain collocation license obligations. Accordingly, we recorded restructuring costs of $60.0 million, which are estimates of losses in excess of sublease revenues or termination fees to be incurred on these real estate obligations over the remaining lease terms, expiring through 2015. We determined this cost based upon our estimate of anticipated sublease rates and time to sublease the facility. Should rental rates decrease in these markets or should it take longer than expected to sublease these properties, actual loss could exceed this estimate.

        During the fourth quarter 2001, we reduced our restructuring liability by $7.0 million. This reduction was due to favorable settlements to terminate the leases on three unbuilt colocation properties and renegotiation of an obligation on terms favorable to our original restructuring estimates, both of which occurred during the fourth quarter of 2001.

Employee Separations

        During 2001, 313 employees were involuntarily terminated. Employee separations occurred in all Internap departments. The majority of the costs related to the termination of employees were paid during 2001.

Network Infrastructure Obligations

        The changes to our network infrastructure require that we decommission certain network ports we do not currently use and will not use in the future per the restructuring plan. These costs have been accrued as components of the restructuring charge because they represent amounts to be incurred under contractual obligations in existence at the time the restructuring plan was initiated that will continue in the future with no economic benefit, or penalties to be incurred to cancel the related contractual obligations.

Asset Impairments

        On June 20, 2000, we completed the acquisition of CO Space, which was accounted for under the purchase method of accounting. The purchase price was allocated to net tangible assets and identifiable intangible assets and goodwill.

        On February 28, 2001, management and the board of directors approved a restructuring plan that included ceasing development of the executed but undeveloped leases and the termination of core collocation development personnel. Consequently, financial projections for the business were lowered and, pursuant to the guidance provided by Financial Accounting Standards Board 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 $79.5 million based upon a discounted future cash flow analysis. As estimated fair value of the collocation assets was less than their recorded amounts, we recorded an impairment charge of approximately $196.0 million.

Business Combinations

        On July 31, 2000, we completed our acquisition of VPNX.com. The acquisition was recorded using the purchase method of accounting under APB Opinion No. 16. The aggregate purchase price of the acquired company, plus related charges, was approximately $87.4 million and was comprised of issuance

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of our common stock, cash, acquisition costs and assumed options to purchase common stock. We issued approximately 2.0 million shares of common stock and assumed options to purchase VPNX common stock that were subsequently converted into options to purchase approximately 268,000 shares of our common stock to effect the transaction. Results of operations of VPNX have been included in our financial results from the closing date of the acquisition forward.

        As a result of the VPNX acquisition, we recorded a total of $67.9 million of goodwill and other intangible assets. Through December 31, 2001, the goodwill and other intangible assets are being amortized to expense over their useful lives, which are estimated to be three years, resulting in an expense of $9.4 million and $22.7 million for the years ended December 31, 2000 and 2001 respectively. We also recorded an expense of $18.0 million related to acquired in-process research and development costs for the year ended December 31, 2000. The amount allocated to acquired in-process research and development is related to technology acquired from VPNX that was expensed immediately subsequent to the closing of the acquisition since the technology had not completed the preliminary stages of development, had not commenced application development and did not have alternative future uses. Furthermore the technologies associated with the acquired in-process research and development did not have a proven market and are sufficiently complex so that the probability of completion of a marketable service or product could not be determined. The fair value of the acquired in-process research and development was determined using the income approach, which estimates the expected cash flows from projects once commercially viable and discounts expected future cash flows to present value. The percentage of completion for each project was determined based upon time and costs incurred on the project in addition to the relative complexity. The percentages of completion varied by individual project and ranged from 25% to 70%. The discount rate of 35% used in the present value calculation was derived from an analysis of weighted average costs of capital, weighted average returns on assets and venture capital rates of returns adjusted for the specific risks associated with the in-process research and development expense. The development of the acquired technologies remains a significant risk as the nature of the efforts to develop the acquired technologies into commercially viable services consists primarily of planning, designing and testing activities necessary to determine that the products can meet customer expectations.

Results of Operations

        Our revenues are generated primarily from the sale of Internet connectivity services at fixed rates or usage-based pricing to our customers that desire a DS-3 or faster connection and other ancillary services, such as collocation, content distribution, server management and installation services. We also offer T-1 and fractional DS-3 connections only at fixed rates. We recognize 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 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. Deferred revenues consist of revenues for services to be delivered in the future and consist primarily of advance billings, which are amortized over the respective service period and billings for initial installation of customer network equipment, which are amortized over the estimated life of the customer relationship.

        Direct cost of network is comprised of the costs for connecting to and accessing Internet backbone providers and competitive local exchange providers, costs related to operating and maintaining service points and data centers and costs incurred for providing additional third-party services to our customers. To the extent a service point is located a distance from the respective Internet backbone providers, we may incur additional local loop charges on a recurring basis.

        Customer support costs consist primarily of employee compensation costs for employees engaged in connecting customers to our network, installing customer equipment into service point facilities, and

17

servicing customers through our network operations center. In addition, facilities costs associated with the network operations center are included in customer support costs.

        Product development costs consist principally of compensation and other personnel costs, consultant fees and prototype costs related to the design, development and testing of our proprietary technology, enhancement of our network management software and development of internal systems. Costs associated with internal use software are capitalized when the software enters the application development stage until implementation of the software has been completed. All other product development costs are expensed as incurred.

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

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

        Since inception, in connection with the grant of certain stock options to employees, we recorded deferred stock compensation totaling $25.0 million, representing the difference between the deemed fair value of our common stock on the date options were granted and the exercise price. In connection with our acquisition of VPNX, we recorded deferred stock compensation totaling $5.1 million related to unvested options we assumed. These amounts are included as a component of stockholders' equity and are being amortized over the vesting period of the individual grants, generally four years, using an accelerated method as described in Financial Accounting Standards Board Interpretations No. 28. We recorded amortization of deferred stock compensation in the amount of $7.6 million, $10.7 million and $4.2 million for the years ended December 31, 1999, 2000 and 2001, respectively. At December 31, 2001, we had a total of $4.4 million remaining to be amortized over the corresponding vesting periods of the stock options.

        The revenue and income potential of our business and market is unproven, and our limited operating history makes it difficult to evaluate its prospects. We have only been in existence since 1996, and our services are only offered in limited regions. We have incurred net losses in each quarterly and annual period since our inception, and as of December 31, 2001, our accumulated deficit was $724.1 million.

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

					Year Ended December 31,
					1999		2000		2001
Revenues					100	%	100	%	100	%
Costs and expenses:
	Direct cost of network				143	%	90	%	84	%
	Customer support				46	%	29	%	18	%
	Product development				31	%	17	%	10	%
	Sales and marketing				140	%	51	%	32	%
	General and administrative				59	%	47	%	38	%
	Depreciation and amortization				38	%	30	%	41	%
	Amortization of goodwill and other intangible assets				0	%	78	%	33	%
	Amortization of deferred stock compensation				60	%	15	%	4	%
	Restructuring costs				0	%	0	%	55	%
	Impairment of goodwill and other intangible assets				0	%	0	%	167	%
	In-process research and development				0	%	26	%	0	%
		Total operating costs and expenses			517	%	383	%	482	%
Loss from operations					(417	)%	(283	)%	(382	)%
	Other income (expense):
				Interest income (expense), net	18	%	17	%	(1	)%
		Loss on Investment			0	%	0	%	(23	)%
			Loss on sales and retirements of property and equipment		0	%	0	%	(2	)%
				Total other income (expense)	18	%	17	%	(26	)%
Net loss					(399	)%	(266	)%	(408	)%

Years Ended December 31, 2001 and 2000

        Revenues.    Revenues for the year ended December 31, 2001, increased by 69% to $117.4 million, up from $69.6 million, for the year ended December 31, 2000. The increase during 2001 was primarily driven by increased connectivity service revenues, accounting for 70% of the increase, which reflects a full year of operations at the 17 service points that were opened during 2000, 6 additional service points deployed during 2001 and an increase in our overall customer base across all 35 service points. Of the remaining 30% of the increase, 10% can be attributable to collocation services and the remaining 20% of the revenue increase stems from revenues generated from our other products and services, including facilities charges, CDN services, and collocation services, as well as contract termination revenues collected from customers that discontinued service during the year. We expect revenues to continue to increase during 2002 and the composition of that increase to be consistent with the revenue increase experienced during 2001.

        Direct Cost of Network.    Direct cost of network increased 58% to $98.9 million from $62.5 million during the years ended December 31, 2001 and 2000, respectively. The increase of $36.4 million recognized during 2001 reflects increased costs relating to our service point facility costs for providing collocation services to our customers, representing 49% of the increase and our connections to the Internet backbone providers, representing 43% of the increase. Both collocation facility costs and

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connectivity costs vary dependent on customer demands and pricing variables and are expected to increase during 2002 due to additions of new customers, however, we expect that the increase will be at a rate less than overall revenue growth.

        Customer Support.    Customer support costs increased 6% to $21.5 million from $20.3 million during the years ended December 31, 2001 and 2000, respectively. The increase of $1.2 million was primarily driven by increases in compensation and facility costs which increased costs 14% and 6% during the current year, respectively, offset by consultant, travel and entertainment and other costs which decreased current year costs 8%, 5%, and 1%, respectively. Customer support costs are expected to increase at levels consistent with the prior year as a result of expected increases in our customer base and increases in product and service offerings.

        Product Development.    Product development costs increased 3% to $12.2 million from $11.9 million during the years ended December 31, 2001 and 2000, respectively. The increase of $0.3 million reflects increases in facilities and compensation costs which increased costs 9% and 1%, respectively, offset by decreases in consultant and other costs which reduced costs by 5% and 2%, respectively. We anticipate future product development costs to remain consistent with those noted during the current period.

        Sales and Marketing.    Sales and marketing costs increased 8% to $38.2 million up from $35.4 million during the years ended December 31, 2001 and 2000, respectively. The current period increase can be primarily attributed to a marketing and advertising campaign launched, conducted and terminated during 2001. Sales and marketing expenses should remain consistent with the current period or trend lower in future periods as planned marketing and advertising efforts are focused on defined customer markets and have been designed to be carried out at a lower cost than the campaign conducted during 2001.

        General and Administrative.    General and administrative costs increased 35% to $44.5 million up from $33.0 million during the years ended December 31, 2001 and 2000, respectively. The increase of $11.5 million was primarily driven by increased tax, facilities, and bad debt expenses which increased costs by 12%, 11% and 10%, respectively. Other costs, net of certain cost reductions, increased current period costs 2%. We anticipate general and administrative costs will trend downward during 2002 as a result of cost savings measures taken during the current period.

        Depreciation and Amortization.    Depreciation and amortization increased 137% to $48.6 million up from $20.5 million during the years ended December 31, 2001 and 2000, respectively. The increase is primarily attributable to increased depreciation and amortization expense relating to network and service point assets, representing 78% of the increase. The increase in depreciation and amortization is due to the deployment of 17 service points during 2000 resulting in a full year of depreciation during 2001. Depreciation and amortization is expected to remain consistent going forward as network assets that become technologically obsolete or reach the end of their estimated useful lives will be replaced with newer assets. Our current plans do not require the deployment of significant additional capital assets during 2002.

        Other Income (Expense).    Other income (expense) consists of interest income, interest and financing expense, investment losses and other non-operating expenses. Other income (expense), net, decreased from other income of $11.5 million for the year ended December 31, 2000 to other expense, of $30.3 million for the year ended December 31, 2001. This decrease was primarily due to losses incurred on our investments in 360 Networks and Aventail of $14.5 million and $4.8 million, respectively, and the provision we recorded on a note receivable of $6.0 million. We expect other expenses to decrease going forward as we do not hold investments or notes receivable similar to those that generated losses during the current year.

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Years Ended December 31, 2000 and 1999

        Revenues.    Revenues for the year ended December 31, 2000, increased by 457% to $69.6 million, up from $12.5 million for the year ended December 31, 1999. The increase in Internet connectivity revenues was attributable to the increased sales at our existing service points and the opening of 17 additional service points during 2000, resulting in a total of 29 operational service points at December 31, 2000, as compared to 12 service points at December 31, 1999.

        Direct Cost of Network.    Direct cost of network increased 251% to $62.5 million, up from $17.8 million during the years ended December 31, 2000 and 1999, respectively. The increase of $44.7 million recognized during 2000 reflects increased costs relating to our connections to the Internet backbone providers, representing 80% of the increase, and increased costs relating to our service point facility costs for providing collocation services to our customers, representing 15% of the increase. Both connectivity and facilities costs vary dependent on customer demands and pricing variables.

        Customer Support.    Customer support costs increased 250% to $20.3 million from $5.8 million during the years ended December 31, 2000 and 1999, respectively. The increase of $14.5 million was primarily driven by increases in compensation, representing 68% of the increase, consulting expenses, representing, 10% of the increase, and facility costs, representing 9% of the increase.

        Product Development.    Product development costs increased 205% to $11.9 million from $3.9 million during the years ended December 31, 2000 and 1999, respectively. The increase of $8.0 million reflects increases in compensation, representing 73% of the increase, and consultants and contract labor, representing 12% of the increase.

        Sales and Marketing.    Sales and marketing costs increased 102% to $35.4 million up from $17.5 million during the years ended December 31, 2000 and 1999, respectively. The increase of $17.9 million reflects increases in compensation, representing 75% of the increase, and marketing and advertising costs, representing 6% of the increase.

        General and Administrative.    General and administrative costs increased 352% to $33.0 million up from $7.3 million during the years ended December 31, 2000 and 1999, respectively. The increase of $25.7 million reflects increases in compensation, representing 35% of the increase, professional fees, representing 17% of the increase, and facility costs, representing 16% of the increase. Increases in bad debt expense represent 6% of the increase in general and administrative costs.

        Depreciation and Amortization.    Depreciation and amortization increased 327% to $20.5 million up from $4.8 million during the years ended December 31, 2000 and 1999, respectively. The increase of $15.7 million is primarily attributable to increased depreciation and amortization expense relating to the deployment of network and service point assets, representing 83% of the increase.

        Other Income (Expense).    Other income (expense) consists of interest income, interest and financing expense and other non-operating expenses. Total other income (expense) increased from other income, net of $2.3 million for the year ended December 31, 1999, to other income, net of $11.5 million for the year ended December 31, 2000. The increase of $9.2 million was primarily due to interest income earned on the proceeds from our private equity financings and our initial and follow-on public offerings.

Provision for Income Taxes

        We have incurred operating losses from inception through December 31, 2001. We have recorded a valuation allowance for the full amount of our net deferred tax assets, due to the uncertainty of our ability to realize those assets in future periods.

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        As of December 31, 2001, we had net operating loss carry forwards of approximately $343.0 million, capital loss carry forwards of approximately $13.0 million and tax credit carry forwards of approximately $1.0 million. Due to limitations imposed by provisions of the Internal Revenue Code upon certain substantial changes in our ownership, approximately $158.0 million of the aggregate net operating loss and capital loss carry forwards and $1.0 million of the tax credit carry forwards will not be utilized. Loss carry forwards of approximately $198.0 million are available to reduce future taxable income and expire at various dates beginning in 2006, and the amount that could be utilized annually in the future to offset taxable income will be limited.

Liquidity and Capital Resources

Cash Flow for the Years Ended December 31, 2001, 2000 and 1999

Net Cash Used in Operating Activities

        Net cash used in operating activities was $123.0 million for the year ended December 31, 2001 and was primarily due to the loss from continuing operations (adjusted for non-cash items) of $153.5 million, a decrease in accounts payable of $8.5 million, a decrease in deferred revenue of $2.2 million and a decrease in accrued liabilities of $3.1 million. These uses of cash were partially offset by decreases in receivables of $0.7 million and accrued restructuring costs of $39.3 million. The decreases in accounts payable and accrued liabilities are a result of our efforts to streamline operations during 2001, resulting in lower monthly operating costs in the final quarter of 2001. The accounts receivable decrease is largely a result of improved collections during 2001. Days sales outstanding was 62 days at December 31, 2000 and reached 65 days during the first half of 2001, ending 2001 at 45 days. The decrease in prepaid expenses is due to our focus on cash flow during 2001 and a related reduction in prepayment activities.

        Net cash used in operating activities was $95.1 million for the year ended December 31, 2000 and was primarily due to the loss from continuing operations (adjusted for non-cash items) of $80.0 million, an increase in accounts receivable of $17.3 million, an increase in prepaid expenses and other assets of $7.4 million and a decrease in accounts payable of $5.3 million. These uses of cash were partially offset by a $4.0 million increase in deferred revenue and a $10.9 million increase in accrued liabilities. The increase in accounts receivable was primarily related to the overall growth in the business during 2000 as total revenue for the year increased by $57.1 million compared to 1999, an increase of 456%. The increase in accounts payable, prepaid expense and accrued liabilities was a result of significant growth in operating expenses as we deployed more service points and expanded into new geographical markets.

        Net cash used in operating activities was $33.8 million for the year ended December 31, 1999 and was primarily due to the loss from continuing operations (adjusted for non-cash items) of $36.8 million, a increase in accounts receivable of $3.5 million, a increase in prepaid expenses and other assets of $1.8 million, an increase in accounts payable of $6.0 million and an increase in accrued liabilities of $2.5 million. During 1999, we were expanding the business to reach new geographic markets. As a result, receivables, prepaid expenses and other assets, accounts payable and accrued liabilities increased as we added new customers and the operating expenses related to expansion increased.

Net Cash Provided by (Used In) Investing Activities

        Net cash provided by investing activities was $12.3 million for the year ended December 31, 2001 and was primarily from proceeds of $62.0 million received on the redemption or maturity of investments and $6.1 million received from restricted cash related to a real estate settlement of a corporate office facility. As part of the settlement, the lessor was paid from a restricted cash deposit. Cash provided from investing activities was offset by $32.1 million used for purchases of property and equipment and $22.7 million used to purchase investments. The purchases of property and equipment primarily represent leasehold improvements and infrastructure purchases for our collocation facilities

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that were not financed through lease facilities. The majority of the cash paid for purchases of property and equipment occurred during the first two quarters of 2001 to complete certain collocation facilities under construction during 2000. In connection with the restructuring plan adopted by management during February 2001, capital spending for new collocation facilities was significantly reduced.

        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 cash investment of $2.8 million to acquire 51% of the common stock of the newly formed entity, Internap Japan. The investment in the joint venture is being accounted for as an equity-method investment under Accounting Principles Board Opinion No. 18 "The Equity Method of Accounting for Investments in Common Stock." Subsequent to December 31, 2001, the joint venture authorized a second capital call, and we invested an additional $1.3 million into the partnership in proportion to our ownership interest. We expect this additional capital contribution to fund the partnership through the remainder of 2002.

        Net cash used in investing activities was $106.2 million for the year ended December 31, 2000 and was primarily related to $161.1 million used to purchase investments, $57.7 million used to purchase property and equipment, $12.2 million used in the purchase of CO Space, Inc. and VPNX.com during 2000 (net of cash acquired) and $8.5 million used to support restricted cash balances required in certain real estate transactions. The use of cash was partially offset by $132.8 million redemption of investments. Note that the purchase of property and equipment represents leasehold improvements and infrastructure purchases for our collocation facilities that were not financed through lease facilities.

        During 2000, pursuant to an investment agreement among Internap, Ledcor Limited Partnership, Worldwide Fiber Holdings Ltd. and 360networks, Inc., we purchased 374,182 shares of 360networks Class A Non-Voting Stock at $5.00 per share and 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 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.

        Also during 2000, pursuant to an investment agreement, we purchased 588,236 shares of Aventail Corporation Series D preferred stock at $10.20 per share for a total cash investment of $6.0 million. Because 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 second quarter of 2001, we concluded based on available information, specifically Aventail's most recent round of financing, that our investment in Aventail had experienced a decline in value that was other than temporary. As a result during June 2001, we recognized a $4.8 million loss on investment when we reduced its recorded basis to $1.2 million, which remains its estimated value as of December 30, 2001.

        Additionally, we entered into a joint marketing agreement with Aventail which, among other things, granted us limited exclusive rights to sell Aventail's managed extranet service and granted Aventail specified rights to sell our services. In return, we committed to either sell Aventail services or pay Aventail, or a combination of both, which would result in Aventail's receipt of $3.0 million over a two-year period.

        Net cash used in investing activities was $68.0 million for the year ended December 31, 1999 and was primarily related to $65.2 million used to purchase investments and $12.9 million used to purchase property and equipment. The use of cash was partially offset by $10.0 million received on the redemption or maturity of investments.

Net Cash Provided by (Used In) Financing Activities:

        Since our inception, we have financed our operations primarily through the issuance of our equity securities, capital leases and bank loans. As of December 31, 2001 we have raised an aggregate of approximately $499.6 million, net of offering expenses, through the sale of our equity securities.

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        Net cash provided by financing activities for the year ended December 31, 2001 was $72.1 million, primarily related to a $95.6 million issuance of Series A convertible preferred stock (net of $5.4 million in issuance costs) and $2.2 million proceeds from the issuance of common stock and the exercise of stock options. Net cash provided by financing activities was offset by $23.4 million in payments on capital leases and $2.3 million paid on a note payable. Net proceeds from financing activities were primarily used to fund operating losses during 2001 and, to a lesser extent, for purchases of property and equipment.

        On September 14, 2001, we completed a $101.5 million private placement of units at a per unit price of $1.60 per unit and issued an aggregate of 63,429,976 units, with each unit consisting of ¹/20 of a share of Series A convertible preferred stock and a warrant to purchase ¹/4 of a share of common stock, resulting in the issuance of 3,171,499 shares of Series A convertible preferred stock and 17,113,606 warrants to purchase equivalent shares of common stock at an exercise price of $1.48256 per share, which are exercisable for a period of five years. The aggregate amount of common stock issuable upon conversion of the Series A convertible preferred stock and the exercise of the warrants is 85,568,119 shares at September 30, 2001.

        Holders of Series A convertible preferred stock shall be entitled to the number of votes equal to the number of shares of common stock into which the shares of Series A convertible preferred stock could be converted. Each share of Series A convertible preferred stock is initially convertible into 21.58428 shares of common stock subject to adjustments for certain dilutive events. Each share of Series A convertible preferred stock may be converted at any time at the option of the holder. Shares of Series A convertible preferred stock automatically convert to common stock on the earlier of September 14, 2004, a date more than six months after issuance on which the common stock has traded in excess of $8.00 for a period of 45 consecutive trading days or upon the affirmative vote of 60% of the outstanding shares of Series A convertible preferred stock.

        Upon the liquidation, dissolution, merger or other event in which existing stockholders own less than 50% of the post-event voting power holders of Series A convertible preferred stock are entitled to be paid out of existing assets an amount equal to $32.00 per share prior to distributions to holders of common stock. Upon completion of distribution to holders of Series A convertible preferred stock, remaining assets will be distributed ratably between holders of Series A convertible preferred stock and holders of common stock until holders of Series A convertible preferred stock have received an amount equal to three times the original issue price.

        We received net proceeds of $95.6 million from the issuance of the Series A convertible preferred stock and allocated $86.3 million to the Series A convertible preferred stock and $9,321,000 to the warrants to purchase shares of common stock based upon their relative fair values on the date of issuance (September 14, 2001) pursuant to Accounting Principles Board Opinion No. 14 "Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants." The fair value used to allocate proceeds to the Series A convertible preferred stock was based upon a valuation that among other considerations was based upon the closing price of the common stock on the date of closing, on an as converted basis, and liquidation preferences. The fair value used to allocate proceeds to the warrants to purchase common stock was based on a valuation using the Black Scholes model and the following assumptions: exercise price $1.48256; no dividends; term of 5 years; risk free rate of 3.92%; and volatility of 80%.

        We paid $23.4 million under capital lease agreements, primarily to Cisco Systems Capital. Capital equipment leases have been used since inception to finance the majority of our networking equipment located in our service points other than leasehold improvements related to our collocation facilities. Approximately $60.5 million of networking equipment has been purchased under capital leases from inception through December 31, 2001.

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        Net cash provided from financing activities for the year ended December 31, 2000 was $148.3 million, primarily from the issuance of $145.2 million of common stock, $8.5 million drawn under a revolving line of credit and $6.3 million in proceeds from the exercise of common stock options and warrants partially offset by $12.4 million in payments on capital lease and note payable obligations.

        On April 6, 2000, 8,625,000 shares of our common stock were sold in a public offering at a price of $43.50 per share. Of these shares, 3,450,000 were sold by us and 5,175,000 shares were sold by selling stockholders. We did not receive any of the proceeds from the sale of shares of common stock by the selling stockholders. Our proceeds from the offering were $142.9 million, net of underwriting discounts and commissions of $7.1 million.

        Net cash provided from financing activities for the year ended December 31, 1999 was $256.7 million, primarily related to $221.6 received from the issuance of common stock (net of issuance costs), $32.0 million received from the exercise of warrants to purchase preferred stock, $4.2 million received from an equipment note and $1.1 million in proceeds from a stockholder loan offset primarily by a $1.1 million repayment of the stockholder loan and $2.2 million used for capital lease payments.

        During October 1999, we sold 19,000,000 shares of our common stock at an initial public offering price of $10.00 per share resulting in net proceeds of $176.7 million. Also during October 1999, in connection with our initial public offering, the underwriters exercised their over allotment option, resulting in the sale of an additional 2,850,000 shares of our common stock at $10.00 per share for additional net proceeds of $26.5 million. Upon the closing of our initial public offering, all shares of outstanding preferred stock converted into 98,953,050 shares of common stock.

        Concurrent with the closing of our initial public offering on October 4, 1999, we sold 2,150,537 shares of common stock to Inktomi Corporation for $9.30 per share, resulting in proceeds of $19.0 million. In conjunction with this investment, we issued a warrant to Inktomi to purchase 1,075,268 shares of our common stock at an exercise price of $13.95 per share. On November 24, 1999, Inktomi exercised 50% of these warrants through a cashless exercise, resulting in the issuance of 397,250 shares of our common stock to Inktomi. The unexcercised warrants under this grant expired during 2001.

Liquidity

        We have experienced significant net operating losses since inception. During fiscal 2001, we incurred net losses of $479.2 million and used $123.0 million of cash in our operating activities. Management expects operating losses and negative cash flows will continue through December 31, 2002. We have decreased the size of our workforce by 313 employees, or 40% as compared to the number of employees at December 31, 2000, and terminated certain real estate leases and commitments in order to control costs. Our plans indicate our existing cash and investments are adequate to fund our operations through December 31, 2002. However, our capital requirements depend on several factors, including the rate of market acceptance of our services, the ability to expand and retain our customer base and other factors. If we fail to realize our planned revenues or costs, management believes it has the ability to curtail capital spending and reduce expenses to ensure cash and investments will be sufficient to meet our cash requirements through December 31, 2002. If, however, our cash 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. We cannot assure you such financing will be available on acceptable terms, if at all.

        Our cash requirements through the end of 2002 are primarily to fund operations, restructuring outlays, payments to service capital leases and capital expenses.

        With a slowdown in the macroeconomic environment during 2001, we have been focused on significantly reducing the cost structure of the business while maintaining a continued focus on growing

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revenue. On February 28, 2001 and September 24, 2001, we announced two restructurings of the business. Under the restructuring programs, management made decisions to exit certain non-strategic real estate lease and license arrangements, consolidate and exit redundant network connections and to streamline the operating cost structure. The total charges include restructuring costs of $71.6 million and a charge for asset impairment of $196.0 million. We expect to complete the majority of our restructuring activities during 2002, although certain remaining restructured real estate and network obligations represent long-term contractual obligations related to real estate obligations that extend through 2015.

        Subject to timely and successful implementation, we expect the cash savings from our restructuring plan to yield cash savings of approximately $30.7 million annually. Through December 31, 2001, approximately $17.6 million in annualized cost savings have been realized, primarily through employee terminations and the elimination of a corporate office lease obligation. In addition to the cost savings contemplated in the restructuring plan, management has been focused on reducing our cost structure through a number of other cost saving initiatives including the renegotiation of certain vendor agreements and optimization of our network resources. The combination of cash savings from the restructuring program and other cost saving initiatives has yielded annualized cash savings of approximately $70.0 million since the first quarter of 2001.

        Based on savings from our restructuring program and other forecasted cash savings that we believe our cash and short term investments will be sufficient to meet our cash requirements through December 31, 2002. If we fail to realize our planned revenues or costs, management believes it has the ability to curtail capital spending and reduce expenses to ensure cash and investments will be sufficient to meet our cash requirements through December 31, 2002.

        However, because market demand continues to be uncertain and because we are currently implementing initiatives to reduce costs, it is difficult to estimate our ongoing cash requirements. Also, our cost reduction initiatives may have unanticipated adverse effects on our business. Our ability to meet our cash requirements during 2002 also depends on our ability to decrease cash losses from continuing operations throughout the year. A portion of our planned operating cash improvement is expected to come from an increase in revenues and cash collections from customers.

Commitments and Other Obligations

        We have commitments and other obligations that are contractual in nature and will represent a use of cash in the future unless there are modifications to the terms of those agreements. The amounts in the table below captioned "Network commitments" primarily represents purchase commitments made to our largest bandwidth vendors and, to a lesser extent, contractual payments to license collocation space used for resale to customers. Our ability to improve cash used in operations in the future would be negatively impacted if we did not grow our business at a rate that would allow us to offset the service commitments with corresponding revenue growth.

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        The following table summarizes our credit obligations and future contractual commitments (in thousands):

		Payment due by period
		Total		Less than 1 year		1 to 3 years		4 to 5 years		After five years
Line of credit		$	10,000	$	10,000	$	—	$	—	$	—
Notes Payable			2,992		2,038		954		—		—
Capital Lease Obligations			37,944		22,450		10,424		299		4,771
Operating leases commitments			133,615		14,730		21,991		14,767		82,127
Network commitments			129,470		51,582		74,615		2,222		1,051
	Total	$	314,021	$	100,800	$	107,984	$	17,288	$	87,949

        Note that the table above summarizes our most significant contractual commitments but does not represent all uses of cash that will occur in the normal course of business. For example, the summary above does not include cash used for working capital purposes, restructuring expenses or future capital purchases that would be in addition to the amounts above. See "Financial Statements" and "Consolidated Balance Sheets." Also note that the line of credit and notes payable agreements contain covenants that could accelerate the payment schedule in the event of a default.

Credit Facilities

        At December 31, 2001 we had a revolving line of credit of $10.0 million and had drawn all available amounts under the facility. After December 31, 2001, the line was renewed and allows us to borrow an additional $5.0 million, up to $15.0 million in aggregate. The renewed facility expires on December 31, 2002. Our ability to maintain the drawn amount under the line of credit at current levels and have access to the additional $5.0 million depends on a number of factors including the level of eligible receivable balances and liquidity. The facility allows advances equal to the greater of 80% of eligible accounts receivable or 25% of cash and short-term investments, whichever is greater. The facility also contains financial covenants that require us to grow revenues, limit the cash losses, and require minimum levels of liquidity and tangible net worth as defined in the agreement. The lender also has the ability to demand repayment in the event, in their view, there has been a material adverse change in our business. At December 31, 2001, we were in compliance with the financial covenants. Payments are interest only with the full principal due at maturity unless the facility is renewed.

Preferred Stock

        As discussed under the description of financing activities, we received net proceeds of $95.6 million during 2001 from the sale of preferred stock. Among other things, the preferred stock purchase agreement establishes restrictions on the amount of new debt that we can incur without specific preferred stockholder approval. If we should, in the future, decide to obtain additional debt to improve our liquidity, there can be no assurance that preferred stockholder approval could be obtained.

Lease facilities

        Since our inception, we have financed the purchase of network routing equipment using capital leases. The present value of these the capital lease payments are $37.9 million at December 31, 2001, with $22.4 million to be paid during 2002. We have fully utilized available funds under our lease facilities. We are currently in negotiations to make additional credit available under a master lease agreement with an equipment vendor. While we expect the credit facility to increase to accommodate expected network equipment purchases, there can be no assurance that this will occur. See "Liquidity—Commitments and Other Obligations" for a summary of lease obligations.

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Recent Accounting Pronouncements

        During June 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 do not anticipate that our adoption of SFAS No. 141 will materially impact our financial position, results from operations or cash flows.

        During June 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 is subject to periodic testing for impairment. The adoption SFAS No. 142 will have a positive impact on our results of operations totaling $22.6 million and $13.2 million for the years ended December 31, 2002 and 2003 compared to previously existing accounting guidance due to the cessation of amortization of goodwill. Furthermore, as existing goodwill will no longer be amortized, but will be subject to impairment tests at least annually. We do not anticipate that our adoption of SFAS No. 142 will materially impact our cash flows.

        During June of 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 143 "Accounting for Asset Retirement Obligations" (SFAS No. 143), which is effective for fiscal years beginning after June 15, 2001. SFAS No. 143 requires that obligations associated with the retirement of a tangible long-lived asset to be recorded as a liability when those obligations are incurred, with the amount of the liability initially measured at fair value. Upon initially recognizing a liability for an asset retirement obligation, an entity must capitalize the cost by recognizing an increase in the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement, results of operations and cash flows. We do not anticipate that our adoption of SFAS No. 143 will materially impact our financial position, results from operations or cash flows.

        During August of 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS No. 144), which is effective for fiscal years beginning after December 15, 2001. SFAS No. 144 develops one accounting model, based on the model in SFAS No. 121, for long-lived assets that are to be disposed of by sale, as well as addresses the principal implementation issues. SFAS No. 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. That requirement eliminates APB 30's requirement that discontinued operations be measured at net realizable value or that entities include under "discontinued operations" in the financial statements amounts for operating losses that have not yet occurred. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. We do not anticipate that our adoption of SFAS No. 144 will materially impact our financial position, results from operations or cash flows.

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ITEM 7A. 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. This strategic investment is inherently risky, in part because the market for the products or services being offered or developed by Aventail has not been proven and may never materialize. Because of risk associated with this investment, we could lose our entire initial investment in Aventail. Furthermore we have invested $2.8 million in a Japan based joint venture with NTT-ME Corporation, Internap Japan. This investment is accounted for using the equity-method and to date we have recognized $1.2 million in equity-method losses, representing our proportionate share of the aggregate joint venture losses. Furthermore, the joint venture investment is subject to foreign currency exchange rate risk. In addition, the market for services being offered by Internap Japan has not been proven and may never materialize.

        The remaining portion of our investment portfolio, with a fair value of $18.8 million as of December 31, 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 December 31, 2001, our cash equivalents mature within three months and our short-term investments generally mature in less than one year. Therefore, as of December 31, 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 United States 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.

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RISK FACTORS

        We Have a History of Losses, 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 $49.9 million, $185.5 million and $479.2 million for the years ended December 31, 1999, 2000 and 2001, respectively. As of December 31, 2001, our accumulated deficit was $724.1 million. We expect to incur net losses and negative cash flows from operations on a quarterly and annual basis for up to 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 December 31, 2000 through December 31, 2001, have varied between (0.4)% and 32.8%, and total operating costs and expenses, as a percentage of revenues, have fluctuated between 183.9% and 1,040.7%. Fluctuations in our quarterly operating results depend on a number of factors. Some of these factors are industry and economic 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.

        Pricing Pressure Could Decrease Our Market Share and Threaten the Profitability of Our Business Model.    We face competition from competitors along several fronts (more fully described below), including price competition. Increased price competition and other related competitive pressures could erode our market share, and significant price deflation could threaten the profitability of our business model. 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. Because we rely on

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Internet backbone providers in delivering our services and have agreed with some of these providers to purchase their services without regard to the amount we resell to our customers, we may not be able to offset the effects of competitive 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 the Internet connectivity industry is likely to encounter further 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.

        If We Are Unable to Continue to Receive Services from Our Backbone Providers, or Receive Their Services on a Cost-Effective Basis, We May Not Be Able to Provide Our Internet Connectivity Services on Profitable Terms.    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 or on otherwise favorable terms, 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 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 (a Worldcom company) 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 and other Internet infrastructure providers and manufacturers. 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, intelligent data services

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that use connections to more than one backbone and other technologies or use alternative delivery methods including the cable television infrastructure, direct broadcast satellites, wireless cable and wireless local loop.

        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 May Require Additional Cash in the 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 requires cash for ongoing capital and operations expenditures. On September 14, 2001, we closed a private placement of units, each unit consisting of ¹/20 of a share of Series A preferred stock and a warrant to purchase ¹/4 of a share of common stock and raised in aggregate $101 million. Upon conversion or exercise of the outstanding shares of Series A preferred stock and warrants, we will be obligated to issue 85,568,119 shares of common stock. We expect to meet our cash requirements through December 31, 2002 with existing cash, cash equivalents, short-term investments and cash flows from sales of our services. If, however, our cash requirements vary materially from those currently planned, or if we fail to generate sufficient cash flow from the sales of our services, management believes it has the ability to curtail capital spending and reduce expenses to ensure our cash and investments will be sufficient to meet our cash requirements through December 31, 2002. We may, however, require additional financing sooner than anticipated. In that event, we might not be able to obtain equity or debt financing on acceptable terms, if at all. Also, future borrowing instruments, such as credit facilities and lease agreements, will likely contain covenants restricting our ability to incur further indebtedness and will likely require us to pledge assets as security for borrowings thereunder.

        Given our recent efforts to reduce our capital and operations expenditures, we do not currently contemplate any expansion of our business in the immediate future. Any such expansion would require significant capital in addition to the $101 million raised in our recent financing, and we may be unable to obtain additional financing.

        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 or human caused disasters, 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;

32

•

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.

        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.

        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 35 operational service points and 534 full-time employees as of December 31, 2001. In addition, we had $69.6 million in revenues for the year ended December 31, 2000, compared to $117.4 million in revenues for the year ended December 31, 2001. Furthermore, we currently offer our services in Europe and Japan, through our

33

joint venture, Internap Japan. We also resell certain products and services of Akamai Technologies, Inc., Cisco Systems, Inc. and others. 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 nine 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.

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        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. 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 our limited source of suppliers fails 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 stockholders;



•

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.

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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 Its 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 and when there is significant pricing pressure across the Internet connectivity industry. 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

36

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 attack or "acts of God." Even if we take precautions, the occurrence of a natural disaster, attack 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, 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 or other attack 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.

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        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.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

        The index to our consolidated financial statements, financial schedules, and the Report of the Independent Accountants appears in Part IV of this Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

        None.

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PART III

        Certain information required by Part III is omitted from this report on Form 10-K since we will file a definitive proxy statement for our annual meeting of stockholders, to be held on May 14, 2002, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, not later than 120 days after the end of the fiscal year covered by this report, and certain information included in the proxy statement is incorporated herein by reference.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

(a)

Executive Officers

Please refer to the section entitled "Executive Officers" in Part I, Item 1 hereof.

(b)

Directors

        Information required by Part III, Item 10(b), is included in our proxy statement and is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION.

        Information required by Part III, Item 11, is included in our proxy statement and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

        Information required by Part III, Item 12, is included in our proxy statement and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

        Information required by Part III, Item 13, is included in our proxy statement and is incorporated herein by reference.

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PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a)(1) Financial Statements.

        The following consolidated financial statements and the Report of the Independent Accountants are incorporated by reference to pages F-1 through F-34 of this Form 10-K:

        The consolidated balance sheets for the years ended December 31, 2000 and 2001, and the consolidated statements of operations, statements of stockholders' equity and comprehensive loss and cash flows for each of the years in the three year period ended December 31, 2001, together with the notes thereto.

(a)(2) Financial Statement Schedule.

        The Report of Independent Accountants on Financial Statement Schedule is incorporated by reference to page S-1 of this report on Form 10-K. The Valuation and Qualifying Accounts and Reserves is incorporated by reference to page S-2 of this report on Form 10-K.

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(a)(3) Index to Exhibits.

Exhibit Number		Description
2.1	*	Agreement and Plan of Merger.
3.1		Certificate of Incorporation.
3.2		Bylaws.
10.1	**	Form of Indemnification Agreement between the Registrant and each of its Directors and certain of its Officers.
10.2	**•	Amended and Restated Internap Network Services Corporation 1999 Non-Employee Directors' Stock Option Plan.
10.3	**•	Form of Amended and Restated Internap Network Services Corporation 1999 Employee Stock Purchase Plan.
10.4	**•	Amended and Restated Internap Network Services Corporation 1999 Employee Stock Purchase Plan.
10.5	**•	Amended and Restated Internap Network Services Corporation 1999 Stock Option/Stock Issuance Plan.
10.6	+•	Amended and Restated Internap Network Services Corporation 1999 Equity Incentive Plan (Exhibit 10.7).
10.7	**•	Form of 1999 Equity Incentive Plan Stock Option Agreement (Exhibit 10.8).
10.8	+	Lease Agreement, dated June 1, 1996, between Registrant and Sixth & Virginia Properties, as amended by Lease Modification No. 1, dated May 1, 1998, as amended by Lease Modification No. 2 dated September 1, 1998, as amended by Lease Modification No. 3, dated December 20, 1999 (Exhibit 10.10).
10.9	**	Form of Employee Confidentiality, Nonraiding and Noncompetition Agreement used between Registrant and its Executive Officers (Exhibit 10.11).
10.10	+	Amended and Restated Investor Rights Agreement, dated October 4, 1999 (Exhibit 10.17).
10.11	**	Amended and Restated Loan and Security Agreement, dated June 30, 1999, between Registrant and Silicon Valley Bank (Exhibit 10.19).
10.12	+	Master Agreement to Lease Equipment, dated January 20, 1998 between Registrant and Cisco Systems Capital Corporation, as amended on November 17, 1999 (Exhibit 10.20).
10.13	+•	Letter Agreement dated September 7, 1999 between Richard K. Cotton and Registrant (Exhibit 10.25).
10.14	**	Master Loan and Security Agreement, dated August 23, 1999 between Registrant and Finova Capital Corporation (Exhibit 10.26).
10.15	**	Common Stock and Warrant Purchase Agreement, dated September 17, 1999, between Registrant and Inktomi Corporation (Exhibit 10.27).
10.16	+	Warrant, dated December 22, 1999, issued to S.L. Partners, Inc (Exhibit 10.28).
10.17	+	Form of Warrant issued to Paul Canniff, David Cornfield, Robert J. Lunday, Jr., Dan Newell, Richard Saada, Robert D. Shurtleff, Jr. and Todd Warren (Exhibit 10.29).
10.18	+	Letter Agreement, dated March 10, 2000, among Morgan Stanley Venture Investors III, L.P., The Morgan Stanley Venture Partners Entrepreneur Fund, L.P., Morgan Stanley Venture Partners III,  L.P. and Internap Network Services Corporation.
10.19	*	Unit Purchase Agreement, dated July 20, 2001, between Registrant and certain purchasers.
10.20	*	Escrow Agreement, dated July 20, 2001, between Registrant and certain purchasers.
10.21	*	Form of Warrant.
10.22		Letter agreement, dated December 23, 2001, between Registrant and Michael Vent.

41

10.23	Letter agreement, dated December 12, 2001, between Registrant and Alan Norman.
21.1	List of Subsidiaries.
23.1	Consent of PricewaterhouseCoopers LLP, Independent Accountants.

*

Incorporated by reference to designated appendix included with the Company's definitive proxy statement on Schedule 14A, filed on August 10, 2001.

**

Incorporated by reference to designated exhibit included with the Company's Registration Statement on Form S-1, File No. 333-84035.

+

Incorporated by reference to designated exhibit included with the Company's Registration Statement on Form S-1, File No. 333-95503.

•

Management contract or compensatory plan.

(b) Reports on Form 8-K:

        No reports were filed on Form 8-K during the last quarter of the period covered by this report.

(c) Exhibits. See (a) (3) above.

(d) Financial Statement Schedule. See (a) (2) above.

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SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	INTERNAP NETWORK SERVICES CORPORATION
Date: March 28, 2002	By	/s/  JOHN M. SCANLON John M. Scanlon Chief Financial Officer and Vice President of Finance and Administration

        KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Eugene Eidenberg and John M. Scanlon, and each of them, acting individually, as his or her attorney-in-fact, each with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

        Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

Signature	Title	Date
/s/  EUGENE EIDENBERG Eugene Eidenberg	Chairman and Chief Executive Officer (Principal Executive Officer)	March 28, 2002
/s/  JOHN M. SCANLON John M. Scanlon	Chief Financial Officer and Vice President of Finance and Administration (Principal Accounting Officer)	March 28, 2002
/s/  ANTHONY C. NAUGHTIN Anthony C. Naughtin	Director	March 28, 2002
/s/  WILLIAM J. HARDING William J. Harding	Director	March 28, 2002

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/s/  FREDRIC W. HARMAN Fredric W. Harman	Director	March 28, 2002
/s/  KEVIN L. OBER Kevin L. Ober	Director	March 28, 2002
/s/  ROBERT D. SHURTLEFF, JR. Robert D. Shurtleff, Jr.	Director	March 28, 2002

44

Internap Network Services Corporation

Index to Financial Statements

	Page
Report of Independent Accountants	F-2
Consolidated Balance Sheets	F-3
Consolidated Statements of Operations	F-4
Consolidated Statement of Stockholders' Equity and Comprehensive Loss	F-5
Consolidated Statements of Cash Flows	F-6
Notes to Consolidated Financial Statements	F-7

F-1

Report of Independent Accountants

To the Board of Directors and Stockholders
of Internap Network Services Corporation

        In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders' equity and comprehensive loss and of cash flows present fairly, in all material respects, the financial position of Internap Network Services Corporation at December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
Seattle, Washington
March 26, 2002

F-2

INTERNAP NETWORK SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)

				December 31,
				2000			2001
ASSETS
Current assets:
	Cash and cash equivalents			$	102,160		$	63,551
	Short-term investments				51,805			18,755
	Accounts receivable, net of allowance of $1,370 and $1,183, respectively				20,291			14,749
	Prepaid expenses and other assets				3,303			2,981
		Total current assets			177,559			100,036
Property and equipment, net					152,153			139,589
Restricted cash					8,515			2,432
Investments					29,090			2,794
Notes receivable, net of allowance of $0 and $6,000 respectively					6,000			—
Goodwill and other intangible assets, net of accumulated amortization of $54,334 and $32,116, respectively					268,959			36,218
Deposits and other assets, net					7,834			3,908
		Total assets		$	650,110		$	284,977
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable			$	26,846		$	13,058
	Accrued liabilities				18,483			16,727
	Deferred revenue				3,491			2,747
	Notes payable, current portion				2,320			2,038
	Line of credit				10,000			10,000
	Capital lease obligations, current portion				18,132			22,450
	Restructuring liability, current portion				—			16,498
		Total current liabilities			79,272			83,518
Deferred revenue					11,239			9,755
Notes payable, less current portion					2,989			954
Capital lease obligations, less current portion					24,657			15,494
Restructuring liability, less current portion					—			22,773
		Total liabilities			118,157			132,494
Commitments and contingencies (Note 13)
Series A convertible preferred stock, $0.001 par value, 3,500 shares designated; no shares and 3,171 shares issued and outstanding, respectively with a liquidation preference of $0 and $101,487 respectively					—			86,314
Stockholders' equity:
	Common stock, no par value and $0.001 par value, 500,000 and 600,000 shares authorized, and 148,779 and 151,294 shares issued and outstanding, respectively				—			151
	Additional paid in capital				786,183			794,459
	Deferred stock compensation				(11,715	)		(4,371	)
	Accumulated deficit				(244,915	)		(724,077	)
	Accumulated other comprehensive income				2,400			7
		Total stockholders' equity			531,953			66,169
			Total liabilities and stockholders' equity	$	650,110		$	284,977

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

F-3

INTERNAP NETWORK SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

			Twelve-month period ended December 31,
			1999			2000			2001
Revenues			$	12,520		$	69,613		$	117,404
Costs and expenses:
	Direct cost of network			17,848			62,465			98,915
	Customer support			5,796			20,320			21,480
	Product development			3,876			11,924			12,233
	Sales and marketing			17,519			35,390			38,151
	General and administrative			7,335			32,962			44,491
	Depreciation and amortization			4,808			20,522			48,550
	Amortization of goodwill and other intangible assets			—			54,334			38,116
	Amortization of deferred stock compensation			7,569			10,651			4,217
	Restructuring costs			—			—			64,096
	Impairment of goodwill and other intangible assets			—			—			195,986
	In-process research and development			—			18,000			—
		Total operating costs and expenses		64,751			266,568			566,235
Loss from operations				(52,231	)		(196,955	)		(448,831	)
Other income (expense):
	Interest income (expense), net			2,314			11,498			(1,272	)
	Loss on investment			—			—			(26,345	)
	Loss on sales and retirements of property and equipment			—			—			(2,714	)
		Total other income (expense)		2,314			11,498			(30,331	)
Net loss			$	(49,917	)	$	(185,457	)	$	(479,162	)
Basic and diluted net loss per share			$	(1.31	)	$	(1.30	)	$	(3.19	)
Weighted average shares used in computing basic and diluted net loss per share				37,994			142,451			150,328

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

F-4

INTERNAP NETWORK SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
From January 1, 1999 to December 31, 2001
(In thousands)

	Convertible Preferred Stock
						Common Stock
										Additional Paid-In Capital			Common Stock			Deferred Stock Compensation			Accumulated Deficit			Accumulated Other Comprehensive Income
	Shares		Par Value			Shares	Par Value																		Total			Comprehensive Loss
Balances, January 1, 1999	39,291		$	39		6,673	$	7		$	9,553		$	—		$	(494	)	$	(9,541	)	$	—		$	(436	)	$	—
Issuances of Series C preferred stock, net of costs of proceeds	59,260			60		—		—			31,850			—			—			—			—			31,910			—
Issuance of common stock, net of costs of proceeds	—			—		24,000		24			220,616			—			—			—			—			220,640			—
Exercise of warrants to purchase Series B preferred stock	402			—		—		—			120			—			—			—			—			120			—
Exercise of employee stock options	—			—		2,065		2			76			—			—			—			—			78			—
Deferred compensation related to grants of stock options	—			—		—		—			24,303			—			(24,303	)		—			—			—			—
Amortization of deferred stock compensation	—			—		—		—			—			—			7,569			—			—			7,569			—
Value ascribed to standby credit facility warrants	—			—		—		—			536			—			—			—			—			536			—
Conversion of preferred stock to common stock	(98,953	)		(99	)	98,953		99			—			—			—			—			—			—			—
Cashless exercise of warrants to purchase common stock	—			—		398		—			—			—			—			—			—			—			—
Elimination of par value of common stock	—			—		—		(132	)		(287,054	)		287,186			—			—			—			—			—
Net loss	—			—		—		—			—			—			—			(49,917	)		—			(49,917	)		—
Balances, December 31, 1999	—			—		132,089		—			—			287,186			(17,228	)		(59,458	)		—			210,500			—
Issuance of common stock, net of costs of proceeds	—			—		3,450		—			—			141,953			—			—			—			141,953			—
Amortization of deferred stock compensation	—			—		—		—			—			—			10,651			—			—			10,651			—
Exercise of employee stock options	—			—		3,686		—			—			5,895			—			—			—			5,895			—
Issuance of Employee Stock Purchase Plan shares	—			—		350		—			—			3,237			—			—			—			3,237			—
Exercise of warrants to purchase common stock	—			—		296		—			—			443			—			—			—			443			—
Purchase of CO Space	—			—		6,881		—			—			254,951			—			—			—			254,951			—
Purchase of VPNX.com	—			—		2,027		—			—			92,232			(5,138	)		—			—			87,094			—
Issuance of warrants to purchase common stock	—			—		—		—			—			286			—			—			—			286			—
Comprehensive loss:
Net loss	—			—		—		—			—			—			—			(185,457	)		—			(185,457	)		(185,457	)
Unrealized gain on investments	—			—		—		—			—			—			—			—			2,400			2,400			2,400
Comprehensive loss, December 31, 2000	—			—		—		—			—			—			—			—			—			—			(183,057	)
Balances, December 31, 2000	—			—		148,779		—			—			786,183			(11,715	)		(244,915	)		2,400			531,953
Amortization of deferred stock compensation	—			—		—		—			—			(1,893	)		6,110			—			—			4,217			—
Reversal of deferred stock compensation for terminated employees	—			—		—		—			—			(1,234	)		1,234			—			—			—			—
Sale of stock through the Employee Stock Purchase Plan	—			—		1,292		—			—			1,745			—			—			—			1,745			—
Exercise of employee stock options	—			—		1,223		—			—			440			—			—			—			440			—
Issuance of Common Stock warrants in conjunction with Series A financing	—			—		—		—			—			9,321			—			—			—			9,321			—
Issuance of a warrants to purchase shares of common stock to non-employees	—			—		—		—			—			48			—			—			—			48			—
Establishment of par value of common stock	—			—		—		151			794,459			(794,610	)		—			—			—			—			—
Comprehensive loss:
Net loss	—			—		—		—			—			—			—			(479,162	)		—			(479,162	)		(479,162	)
Unrealized loss on investments	—			—		—		—			—			—			—			—			(16,883	)		(16,883	)		(16,883	)
Realized loss on investments	—			—		—		—			—			—			—			—			14,490			14,490			14,490
Comprehensive loss, December 31, 2000	—			—		—		—			—			—			—			—			—			—		$	(481,555	)
Balances, December 31, 2001	—		$	—		151,294	$	151		$	794,459		$	—		$	(4,371	)	$	(724,077	)	$	7		$	66,169

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

F-5

INTERNAP NETWORK SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

			Year Ended December 31,
			1999			2000			2001
Cash flows from operating activities:
Net loss			$	(49,917	)	$	(185,457	)	$	(479,162	)
Adjustments to reconcile net loss to net cash used in operating activities:
	Depreciation and amortization			4,808			74,856			86,666
	Impairment of goodwill and other intangible assets			—			—			195,986
	Loss on disposal of assets			—			—			2,714
	Loss on disposal of assets related to restructuring			—			—			4,714
	Non-cash interest and financing expense			553			—			—
	Provision for doubtful accounts			212			1,643			4,798
	Provision notes receivable			—			—			6,000
	Loss on write-down of investment			—			—			4,824
	Loss on sale of investment security			—			—			14,490
	Loss on equity-method investment			—			—			1,216
	Non-cash expense related to warrants issued			—			286			48
	Non-cash compensation expense			7,569			10,651			4,217
	Acquired in-process research and development			—			18,000			—
Changes in operating assets and liabilities, net of acquisitions:
	Accounts receivable			(3,531	)		(17,294	)		744
	Prepaid expenses and other assets			(1,762	)		(7,380	)		4,248
	Accounts payable			6,016			(5,293	)		(8,477	)
	Deferred revenue			(262	)		3,963			(2,228	)
	Accrued restructuring			—			—			39,271
	Accrued liabilities			2,496			10,921			(3,117	)
		Net cash used in operating activities		(33,818	)		(95,104	)		(123,048	)
Cash flows from investing activities:
	Purchases of property and equipment			(12,905	)		(57,698	)		(32,094	)
	Sales of property and equipment			—			—			1,880
	Acquisitions, net of cash acquired			—			(12,173	)		—
	Collection of full recourse notes assumed for outstanding common stock			—			642			—
	Purchase of investments			(65,214	)		(161,080	)		(22,729	)
	Investment in equity-method investee			—			—			(2,833	)
	Redemption of investments			9,995			132,838			61,985
	Restriction of cash related to obtaining lease lines and letters of credit			—			(8,515	)		6,083
	Payments for patents and trademarks			104			(207	)		—
		Net cash (used in) provided by investing activities		(68,020	)		(106,193	)		12,292
Cash flows from financing activities:
	Proceeds from the issuance of Series A convertible preferred stock, net of issuance costs			—			—			95,635
	Proceeds from stockholder loan			1,100			—			—
	Repayment of stockholder loan			(1,100	)		—			—
	Proceeds from equipment financing note payable			4,237			—			—
	Principal payments on equipment financing note payable			(355	)		(1,442	)		(2,317	)
	Proceeds from line of credit			900			8,475			—
	Principal payments on line of credit			(25	)		—			—
	Principal payments on capital lease obligations			(2,186	)		(11,005	)		(23,356	)
	Proceeds from equipment leaseback financing			428			717			—
	Proceeds from exercise of warrants			—			443			—
	Proceeds from exercise of stock options			78			5,895			440
	Proceeds from issuance of and exercise of warrants to purchase preferred stock, net of issuance costs			32,030			—			—
	Proceeds from issuance of common stock, net of issuance costs			221,640			145,190			1,745
		Net cash provided by (used in) financing activities		256,747			148,273			72,147
Net increase (decrease) in cash and cash equivalents				154,909			(53,024	)		(38,609	)
Cash and cash equivalents at beginning of period				275			155,184			102,160
Cash and cash equivalents at end of period			$	155,184		$	102,160		$	63,551
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized			$	413		$	2,851		$	5,235
Purchase of property and equipment financed with capital leases			$	15,857		$	35,054		$	18,511
Change in accounts payable attributable to purchases of property and equipment			$	196		$	13,556		$	(5,311	)
Non-cash cost of issuing Series A convertible preferred stock			$	—		$	—		$	500
Conversion of preferred stock to common stock			$	99			—			—
Accrued private placement fee			$	1,000			—			—
Value ascribed to warrants			$	536			—			—

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

F-6

1. Description of the Company

        Internap Network Services Corporation 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 many 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 December 31, 2001, we provided high performance Internet connectivity services to 974 customers located throughout the United States.

        We offer our high performance Internet connectivity services at dedicated line speeds of 1.5 million bits per second to 1,000 million bits per second to customers desiring a superior level of Internet performance through the utilization of our service points, which are highly redundant network infrastructure facilities coupled with patented routing technology. Service points maintain high-speed dedicated connections to major global Internet networks, commonly referred to as backbones. As of December 31, 2001, we operate 35 service points which are located in metropolitan areas within the United States, one in London, one in Amsterdam, and one in Japan operated by our joint venture with NTT-ME Corporation of Japan.

        Internap Network Services Corporation was originally incorporated in the State of Washington as a limited liability company during May 1996. Internap was re-incorporated in the State of Washington during October 1997 as a C corporation without changing its ownership. The Articles of Incorporation were amended during January and October 1999 to change the amount of authorized common and preferred stock. On September 17, 2001, Internap changed the state of its incorporation from Washington to Delaware with the approval of its stockholders. We accomplished the reincorporation by merging Internap Network Services Corporation with and into our newly formed, wholly owned Delaware subsidiary, Internap Delaware, Inc. Upon consummation of the merger, stockholders of Internap Network Services Corporation became stockholders of Internap Delaware, Inc. and Internap Delaware's name was changed to Internap Network Services Corporation. As a result of the reincorportion, the amount of authorized common and preferred stock changed to 600,000,000 and 200,000,000, respectively, and par value of $0.001 was established.

        During December 1999, we formed a wholly owned subsidiary in the United Kingdom, Internap Network Services U.K. Limited, and during June 2000, we formed a wholly owned subsidiary in the Netherlands, Internap Network Services B.V. The consolidated financial statements of the Internap Network Services Corporation include all activity of these subsidiaries since their dates of incorporation forward. Foreign exchange gains and losses have not been material to date.

        During December 1999, a 100% stock dividend was declared on Internap's common stock and paid during January 2000. All share amounts in the consolidated financial statements have been restated to reflect the dividend.

        We have a limited operating history and our operations are subject to certain risks and uncertainties frequently encountered by rapidly evolving markets. These risks include the failure to develop or supply technology or services, the ability to obtain adequate financing, the ability to manage rapid growth or expansion, competition within the industry and technology trends.

        We have experienced significant net operating losses since inception. During fiscal 2001, we incurred net losses of $479.2 million and used $123.0 million of cash in our operating activities. Management expects operating losses and negative cash flows will continue through December 31, 2002. We have decreased the size of our workforce by 313 employees, or 40% as compared to the number of employees at December 31, 2000, and terminated certain real estate leases and

F-7

commitments in order to control costs. Our plans indicate our existing cash and investments are adequate to fund our operations through December 31, 2002. However, our capital requirements depend on several factors, including the rate of market acceptance of our services, the ability to expand and retain our customer base and other factors. If we fail to realize our planned revenues or costs, management believes it has the ability to curtail capital spending and reduce expenses to ensure cash and investments will be sufficient to meet our cash requirements through December 31, 2002. If, however, our cash 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. We cannot assure you such financing will be available on acceptable terms, if at all.

2. Summary of Significant Accounting Policies and Basis of Presentation

Accounting Principles

        The consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. The consolidated financial statements include the accounts of Internap Network Services Corporation and all majority owned subsidiaries. Significant inter-company transactions have been eliminated in consolidation.

Estimates and Assumptions

        The consolidated financial statements of Internap Network Services Corporation have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, doubtful accounts, investments, intangible assets, income taxes, restructuring costs, long-term service contracts, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.

Cash and Cash Equivalents

        We consider all highly liquid investments purchased with an original or remaining maturity of three months or less at the date of purchase and money market mutual funds to be cash equivalents. We invest our cash and cash equivalents with major financial institutions and may, at times, exceed federally insured limits. We believe that the risk of loss is minimal. To date, we have not experienced any losses related to cash and cash equivalents.

        At December 31, 2001 and 2000, we had placed approximately $2.4 million and $8.5 million, respectively, in restricted cash accounts to collateralize letters of credit with financial institutions. These amounts are reported separately in non-current assets.

Investments

        Our investments are comprised of U.S. Treasury, Government Agency, and corporate debt and equity securities.

        We classify our marketable securities for which there is a determinable fair value as available-for-sale in accordance with the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Available-for-sale securities are reported at fair value with the related unrealized gains and losses included in other

F-8

comprehensive income. The fair values of investments are determined based on quoted market prices for those securities. The cost of securities sold is based on the specific identification method. Realized gains and losses and declines in value of securities judged to be other than temporary are recorded as a component of losses on investments.

        We account for investments without readily determinable fair values at historical cost, as determined by our initial investment. The recorded value of cost basis investments is periodically reviewed to determine the propriety of the recorded basis. When a decline in the value that is judged to be other than temporary has occurred based on available data, the cost basis is reduced and an investment loss is recorded.

        We account for investments that provide us with the ability to exercise significant influence, but not control, over an investee using the equity method of accounting. Significant influence, but not control, is generally deemed to exist if Internap has an ownership interest in the voting stock of the investee of between 20% and 50%, although other factors, such as minority interest protections, are considered in determining whether the equity method of accounting is appropriate. As of December 31, 2001, we have a single investment that qualifies for equity method accounting, our joint venture with NTT-ME Corporation of Japan. We record our proportional share of the losses of our investee one month in arrears. We record our investment in our equity-method investee on the consolidated balance sheets as a component of non-current investments and our share of the investee's losses as loss on investment on the consolidated statements of operations.

Accounts Receivable and Concentration of Credit Risk

        We extend trade credit terms to our customers based upon credit analysis performed by management. Further credit reviews are performed on a periodic basis as deemed necessary. Generally, collateral is not required on accounts receivable, however, advance deposits are collected for accounts considered credit risks. An allowance is made for customer accounts for which collection has become doubtful. The allowance is maintained until such time as collection becomes probable.

Fair Value of Financial Instruments

        Our short-term financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, notes payable, capital lease obligations, and the line of credit are carried at cost. The cost of our short-term financial instruments approximate fair value due to their relatively short maturities. The carrying value of our long-term financial instruments, including notes payable and capital lease obligations, approximate fair value as the interest rates approximate current market rates of similar debt obligations.

Property and Equipment

        Property and equipment are carried at original acquisition cost less accumulated depreciation and amortization. Depreciation and amortization are calculated on a straight-line basis over the lesser of the estimated useful lives of the assets or the duration of the underlying lease obligation or commitment. Estimated useful lives used for network equipment are three years, furniture, equipment and software are three to seven years, and leasehold improvements are the shorter of seven years or the duration of the lease. Lease obligations and commitment durations range from 24 months for certain networking equipment to 180 months for certain leasehold improvements. Additions and improvements that increase the value or extend the life of an asset are capitalized. Maintenance and repairs are expensed as incurred. Gains or losses from asset disposals are charged to operations.

F-9

Costs of Computer Software Developed or Obtained for Internal Use

        In accordance with Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," we capitalize certain direct costs incurred developing internal use software. During 1999, 2000 and 2001, we capitalized approximately $0.2 million, $1.3 million and $3.0 million, respectively, of internal software development costs.

Goodwill and Other Intangible Assets

        Goodwill and other intangible assets are reported at cost less accumulated amortization. Amortization is calculated using the straight-line method over the economic useful lives of the assets, generally estimated to be three years.

Valuation of Long-Lived Assets

        Management periodically evaluates the carrying value of its long-lived assets, including, but not limited to, property and equipment, patents and trademarks and goodwill and other intangible assets pursuant to the guidance provided by Financial Accounting Standards Board No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). The carrying value of a long-lived asset is considered impaired when the undiscounted cash flow from such asset is separately identifiable and is estimated to be less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of would be determined in a similar manner, except that fair values would be reduced by the cost of disposal. Losses due to impairment of long-lived assets are recorded during the period in which the impairment is identified.

Income Taxes

        We account for income taxes under the liability method. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We provide a valuation allowance to reduce our deferred tax assets to their estimated realizable value.

Stock-Based Compensation

        Employee stock options are accounted for under the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 ("APB 25") "Accounting for Stock Issued to Employees" and related interpretations.

Revenue Recognition

        We recognize 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. We review the creditworthiness of our customers routinely. If we determine that collection of service revenues is uncertain, we do not recognize revenue until cash has been collected. Customers are billed for services as of 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 deferred and amortized over the estimated life of the customer relationship in accordance with the Securities and

F-10

Exchange Commission Staff Accounting Bulletin No. 101 as the installation service is integral to our 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.

Product Development Costs

        Product development costs are primarily related to network engineering costs associated with changes to the functionality of the Internap's proprietary services and network architecture. Such costs that do not qualify for capitalization are expensed as incurred. Research and development costs are expensed as incurred. Included in product development costs are research and development costs which for the years ended December 31, 1999, 2000 and 2001 totaled approximately $3.1 million, $7.7 million, and $6.3 million, respectively.

Advertising Costs

        We expense all advertising costs as they are incurred. Advertising costs for 1999, 2000 and 2001 were $1.8 million, $2.9 million, and $4.5 million, respectively.

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. The Company has excluded all outstanding convertible preferred stock, warrants to purchase convertible preferred stock, 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.

        The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share data):

			Year Ended December 31,
			1999			2000			2001
Net loss			$	(49,917	)	$	(185,457	)	$	(479,162	)
Basic and diluted:
	Weighted average shares of common stock outstanding used in computing basic and diluted net loss per share			37,994			142,451			150,328
	Basic and diluted net loss per share		$	(1.31	)	$	(1.30	)	$	(3.19	)
	Antidilutive securities not included in diluted net loss per share calculation:
		Convertible preferred stock		—			—			68,455
		Options to purchase common stock		15,441			24,159			25,732
		Warrants to purchase common and Series B convertible preferred stock		1,924			1,646			18,259
		Unvested shares of common stock subject to repurchase		54			100			—
				17,419			25,905			112,446

Segment Information

        The Company uses the management approach for determining which, if any, of its products, locations, customers or management structures constitute a reportable business segment. The management approach designates the internal organization that is used by management for making

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operating decisions and assessing performance as the source of the Company's reportable segments. Management uses one measurement of profitability and does not disaggregate its business for internal reporting and therefore operates in a single business segment. Through December 31, 2001, long-lived assets and revenues located outside the United States are not significant.

Recent Accounting Pronouncements

        During June 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 do not anticipate that our adoption of SFAS No. 141 will materially impact our financial position, results of operations or cash flows.

        During June 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 is subject to periodic testing for impairment. The adoption SFAS No. 142 will have a positive impact on our results of operations totaling $22.6 million and $13.2 million for the years ended December 31, 2002 and 2003 compared to previously existing accounting guidance due to the cessation of amortization of goodwill. Furthermore, as existing goodwill will no longer be amortized, however, goodwill will be subject to tests for impairment on at least an annual basis. We do not anticipate that our adoption of SFAS No. 142 will materially impact our cash flows.

        During June of 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 143 "Accounting for Asset Retirement Obligations" (SFAS No. 143), which is effective for fiscal years beginning after June 15, 2001. SFAS No. 143 requires that obligations associated with the retirement of a tangible long-lived asset to be recorded as a liability when those obligations are incurred, with the amount of the liability initially measured at fair value. Upon initially recognizing a liability for an asset retirement obligation, an entity must capitalize the cost by recognizing an increase in the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement, results of operations and cash flows. We do not anticipate that our adoption of SFAS No. 143 will materially impact our financial position, results of operations or cash flows.

        During August of 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS No. 144), which is effective for fiscal years beginning after December 15, 2001. SFAS No. 144 develops one accounting model, based on the model in SFAS No. 121, for long-lived assets that are to be disposed of by sale, as well as addresses the principal implementation issues. SFAS No. 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. That requirement eliminates APB 30's requirement that discontinued operations

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be measured at net realizable value or that entities include under "discontinued operations" in the financial statements amounts for operating losses that have not yet occurred. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. We do not anticipate that our adoption of SFAS No. 144 will materially impact our financial position, results of operations or cash flows

Reclassifications

        Certain reclassifications have been made to prior year balances to conform to the current year presentation. These reclassifications had no impact on previously reported net loss, stockholders' equity or cash flows.

3. Impairment and Restructuring Costs

        On February 28, 2001 and September 24, 2001, we announced two restructurings of our business. Under the restructuring programs, management decided to exit certain non-strategic real estate lease and license arrangements, consolidate and exit redundant network connections and streamline the operating cost structure. The total charges include restructuring costs of $71.6 million and a charge for asset impairment of $196.0 million. We expect to complete the majority of these restructuring activities during 2002, although certain remaining restructured real estate and network obligations represent long term contractual obligations that extend beyond 2002.

        During the first quarter of 2001, management and the board of directors approved a restructuring plan that included ceasing development of the executed but undeveloped leases and the termination of core collocation development personnel. Through the third quarter of 2001, the macroeconomic slowdown continued and management further reduced revenue projections for the business. As a result, on September 4, 2001, management approved a restructuring plan that reflected decisions to further reduce the cost structure and improve the operating efficiency of the business.

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        The following table displays the activity and balances for restructuring and asset impairment activity for 2001 (in millions):

			Charge			Cash Reductions			Non-cash Write-downs			Non-cash Plan Adjustments			December 31, 2001 Reserve
Restructuring costs
	Real estate obligations		$	60.0	(a)	$	(14.7	)(a)	$	(3.7	)	$	(7.0	)	$	34.6
	Employee separations			3.3			(3.2	)		—			—			0.1
	Network infrastructure obligations			6.3			(1.9	)		(1.0	)		(0.7	)		2.7
	Other			2.0			(0.1	)		—			—			1.9
		Total restructuring costs		71.6			(19.9	)		(4.7	)		(7.7	)		39.3
Asset impairments
	Goodwill			176.1			—			(176.1	)		—			—
	Assembled workforce			1.5			—			(1.5	)		—			—
	Trade name and trademarks			2.2			—			(2.2	)		—			—
	Completed real estate leases			14.8			—			(14.8	)		—			—
	Customer relationships			1.4			—			(1.4	)		—			—
		Total asset impairments		196.0			—			(196.0	)		—			—
		Total	$	267.6		$	(19.9	)	$	(200.7	)	$	(7.7	)	$	39.3

(a)

Includes the use of $6.0 million in restricted cash related to payment of a lease deposit on our corporate office space.

        Of the $71.6 million recorded during 2001 as restructuring reserves, approximately $50.7 million related to the direct cost of network, $1.1 million related to customer support, $0.3 million related to product development, $1.5 million related to sales and marketing and $18.0 million related to general and administrative costs.

Real Estate Obligations

        The restructuring plan requires us to abandon certain real estate leases and properties not in use and, based on the restructuring plan, will not be utilized by us in the future. Also included in real estate obligations is abandonment of certain collocation license obligations. Accordingly, we recorded restructuring costs of $60.0 million, which are estimates of losses in excess of sublease revenues or termination fees to be incurred on these real estate obligations over the remaining lease terms, expiring through 2015. This cost was determined based upon our estimate of anticipated sublease rates and time to sublease the facility. Should rental rates decrease in these markets or if it takes longer than expected to sublease these properties, actual loss could exceed this estimate.

        During the fourth quarter 2001, we reduced our restructuring liability by $7.0 million. This reduction was due to favorable settlements to terminate the leases on 3 unbuilt colocation properties and renegotiation of an obligation on terms favorable to our original restructuring estimates, both of which occurred during the fourth quarter of 2001.

Employee Separations

        During 2001, 313 employees were involuntarily terminated. Employee separations occurred in all Internap departments. The majority of the costs related to the termination of employees were paid during 2001.

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Network Infrastructure Obligations

        The changes to our network infrastructure require that we decommission certain network ports we do not currently use and will not use in the future per the restructuring plan. These costs have been accrued as components of the restructuring charge because they represent amounts to be incurred under contractual obligations in existence at the time the restructuring plan was initiated that will continue in the future with no economic benefit, or penalties to be incurred to cancel the related contractual obligations.

Asset Impairments

        On June 20, 2000, we completed the acquisition of CO Space, which was accounted for under the purchase method of accounting. The purchase price was allocated to net tangible assets and identifiable intangible assets and goodwill.

        On February 28, 2001, management and the board of directors approved a restructuring plan that included ceasing development of the executed but undeveloped leases and the termination of core collocation development personnel. Consequently, financial projections for the business were lowered and, pursuant to the guidance provided by Financial Accounting Standards Board 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 $79.5 million based upon a discounted future cash flow analysis. As estimated fair value of the collocation assets was less than their recorded amounts, we recorded an impairment charge of approximately $196.0 million.

4. Business Combinations

        On June 20, 2000, we completed our acquisition of CO Space, Inc. ("CO Space"). CO Space provides collocation, or data center, space to customers who wish to collocate certain computer server and telecommunications equipment with a third party provider. We have integrated the CO Space service into our primary service offerings. The acquisition was recorded using the purchase method of accounting under Accounting Principle Board Opinion No. 16 ("APB 16"). The aggregate purchase price of the acquired company, plus related charges, was approximately $270.9 million and was comprised of our common stock, cash, acquisition costs and options to purchase common stock. The Company issued approximately 6,881,000 shares of common stock and assumed options to purchase CO Space common stock that were subsequently converted into options to purchase approximately 322,000 shares of our common stock to effect the transaction. Results of operations of CO Space have been included in our financial results since the closing date of the transaction.

F-15

        Supplemental disclosure of cash flow information for CO Space is as follows (in thousands):

Cash acquired		$	3,488
Accounts receivable			546
Property and equipment, net			36,715
Full recourse notes receivable for outstanding common stock			642
Other tangible assets			1,887
Tangible assets acquired			43,278
Customer relationships			1,800
Completed real estate leases			19,300
Trade name and trademarks			2,800
Workforce in place			2,000
Goodwill			229,160
Intangible assets acquired			255,060
	Total assets acquired	$	298,338
Cash paid		$	7,200
Acquisition expenses incurred			12,383
Accounts payable assumed			11,305
Accrued liabilities assumed			1,517
Deferred revenue assumed			8,992
Notes and capital leases assumed			1,990
Value of stock and options issued			254,951
	Total cash paid, liabilities assumed, common stock issued and options assumed	$	298,338

        On July 31, 2000, we completed our acquisition of VPNX.com, Inc., formerly Switchsoft Systems, Inc. ("VPNX"). The acquisition was recorded using the purchase method of accounting under APB 16. The aggregate purchase price of the acquired company, plus related charges, was approximately $87.4 million and was comprised of our common stock, cash, acquisition costs and assumed options to purchase common stock. We issued approximately 2,027,000 shares of common stock and assumed options to purchase VPNX common stock that were subsequently converted into options to purchase approximately 268,000 shares of the our common stock to effect the transaction. Results of operations of VPNX have been included in our financial results since the closing date of the transaction.

F-16

        Supplemental disclosure of cash flow information for VPNX is as follows (in thousands):

Cash acquired		$	3,070
Property and equipment			834
Other tangible assets			798
Tangible assets acquired			4,702
Developed technology			2,600
Acquired in-process research and development			18,000
Covenants not to compete			14,100
Workforce in place			1,000
Goodwill			50,199
Intangible assets acquired			85,899
	Total assets acquired	$	90,601
Acquisition expenses incurred		$	329
Accrued liabilities assumed			655
Deferred revenue assumed			1,751
Notes and capital leases assumed			772
Value of stock and options issued			92,232
Deferred stock compensation			(5,138	)
	Total liabilities assumed, common stock issued and options assumed	$	90,601

        In accordance with APB 16, all identifiable assets were assigned a portion of the purchase price of the acquired companies on the basis of their respective fair values. Identifiable intangible assets and goodwill are included in "Goodwill and other intangible assets, net" on the accompanying consolidated balance sheets and are amortized over their average estimated useful lives of three years. Intangible assets were identified and valued by considering our intended use of acquired assets, and analysis of data concerning products, technologies, markets, historical financial performance and underlying assumptions of future performance. The economic and competitive environments in which we and the acquired companies operate were also considered in the valuation analysis. The amount allocated to acquired in-process research and development is related to technology acquired from VPNX that was expensed immediately subsequent to the closing of the acquisition since the technology had not completed the preliminary stages of development, had not commenced application development and did not have alternative future uses. Furthermore, the technologies associated with the acquired in-process research and development do not have a proven market and are sufficiently complex so that the probability of completion of a marketable service or product cannot be determined. The fair value of the acquired in-process research and development was determined using the income approach, which estimates the expected cash flows from projects once commercially viable, and discounts expected future cash flows to present value. The percentage of completion for each project was determined based upon time and costs incurred on the project in addition to the relative complexity. The percentage of completion varied by individual project and ranged from 25% to 70%. The discount rate of 35% was used in the present value calculation was derived from an analysis of weighted average costs of capital, weighted average returns on assets, and venture capital rates of returns adjusted for the specific risks associated with the in-process research and development acquired. This analysis resulted in an allocation of $18.0 million to acquired in-process research and development expense. The development of the acquired technologies remains a significant risk as the nature of the efforts to develop the acquired technologies into commercially viable services consists primarily of planning, designing, and testing activities necessary to determine that the products can meet customer expectations.

F-17

        The pro forma consolidated financial information for the years ended December 31, 1999 and 2000, determined as if the acquisitions of CO Space and VPNX had occurred at the beginning of each of the years ended December 31, 1999 and 2000, would have resulted in revenues of approximately $16.6 million and $72.0 million, net loss of approximately $172.7 million and $241.2 million and basic and diluted loss per share of approximately $3.68 and $1.64, respectively. This unaudited pro forma information is presented for illustrative purposes only and is not necessarily indicative of the results of operations in future periods or results that would have been achieved had we, CO Space and VPNX been combined during the specified periods.

5. Investments

        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 cash investment of $2.8 million to acquire 51% of the common stock of the newly formed entity, Internap Japan. We are unable to assert control over the joint venture's operational and financial policies and practices required to account for the joint venture as a subsidiary whose assets, liabilities, 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 significant influence over the joint venture and, therefore, account for our joint venture investment using the equity-method of accounting pursuant to 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 year ended December 31, 2001, we recognized our proportional share of Internap Japan's losses totaling $1.2 million, resulting in a net investment balance of $1.6 million. Our investment in Internap Japan is reflected as a component of long-term investments and losses are reflected as a component of loss on investments.

        Subsequent to year-end, the joint venture authorized a capital call in which we invested an additional $1.3 million and maintained our 51% ownership interest.

        Summarized balance sheet and results of operations of our equity-method investee, shown one month in arrears, are as follows (in thousands):

	As of December 31, 2001
Current assets	$	3,296
Total Assets		4,201
Current liabilities		814
Total liabilities		814

	For the period ended December 31, 2001
Revenues	$	14
Net loss from continuing operations	$	(2,365	)
Net loss	$	(2,365	)

        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 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.

F-18

        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. Because 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 second quarter of 2001, we concluded based on available information, specifically Aventail's most recent round of financing, that our investment in Aventail had experienced a decline in value that was other than temporary. As a result during June 2001, we recognized a $4.8 million loss on investment when we reduced its recorded basis to $1.2 million, which remains its estimated value as of December 30, 2001.

        Investments consisted of the following (in thousands):

December 31, 2001

	Cost Basis		Unrealized Gain		Unrealized Loss		Recorded Value
U.S. Government and Government Agency Debt Securities	$	6,210	$	3	$	—	$	6,213
Corporate Debt Securities		12,538		4		—		12,542
Equity-method investments		1,618		—		—		1,618
Cost Basis Investments		1,176		—		—		1,176
	$	21,542	$	7	$	—	$	21,549

December 31, 2000

	Cost Basis		Unrealized Gain		Unrealized Loss			Recorded Value
U.S. Government and Government Agency Debt Securities	$	18,330	$	12	$	—		$	18,342
Corporate Debt Securities		37,443		29		(2	)		37,470
Equity Securities		16,722		2,900		(539	)		19,083
Cost Basis Investments		6,000		—		—			6,000
	$	78,495	$	2,941	$	(541	)	$	80,895

        The following table summarizes the contractual maturities of available-for-sale debt securities as of December 31, 2001:

	Cost Basis		Recorded Value
Less than one year	$	16,548	$	16,554
Greater than one year		2,200		2,201
	$	18,748	$	18,755

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6. Property and Equipment:

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

	December 31,
	2000			2001
Network equipment	$	32,777		$	39,187
Network equipment under capital lease		52,637			60,528
Furniture, equipment and software		24,066			34,921
Furniture, equipment and software under capital lease		4,414			3,609
Leasehold improvements		65,622			71,851
		179,516			210,096
Less: Accumulated depreciation and amortization ($15,294 and $32,438 related to capital leases at December 31, 2000 and 2001, respectively)		(27,363	)		(70,507	)
Property and equipment, net	$	152,153		$	139,589

Assets under capital leases are pledged as collateral for the underlying lease agreements. Assets not under lease are pledged as collateral under our line of credit facility.

7. Note Receivable

        During August 2000, we lent a private network company $6.0 million in exchange for a convertible promissory note bearing interest at the prime rate plus 3% and initially maturing during May 2001. In two separate amendments executed during 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 upon the completion of a transaction in which there is a change in control of borrower or in which the borrower sells substantially all its assets.

        Subsequent to the February 2001 amendment, we performed an updated analysis of the collection risk associated with this note receivable. The results of our analysis indicated that there was substantial doubt that the borrower would be able to repay the $6.0 million obligation to us at the time of maturity. Therefore, we have recorded a provision of $6.0 million as an allowance against our note receivable. The impact of the provision is reflected as a component of loss on investments. As of December 31, 2001, the $6.0 million loan was outstanding and recorded at the outstanding balance as a note receivable offset in full by a $6.0 million allowance for doubtful collection.

        During 2002, we entered into negotiations with the borrower to settle the amounts due to us in advance of the stated May 2004 maturity. As a result of the negotiations, we agreed to release the borrower of its liability to us under the note in exchange for a cash payment for outstanding accounts receivable and the note receivable and equity in the company, for which the estimated fair value is zero. During January of 2002 we have recognized an investment gain of $0.4 million with respect to the settlement of the note receivable.

F-20

8. Accrued Liabilities:

        Accrued liabilities consist of the following (in thousands):

	December 31,
	2000		2001
Network commitments	$	—	$	6,609
Compensation payable		6,241		2,722
Property and equipment purchases		6,403		2,227
Taxes		310		2,120
Other		3,061		2,004
Insurance payable		1,286		747
Acquisition costs		1,182		298
	$	18,483	$	16,727

9. Line of Credit and Notes Payable:

        During June 1999, we entered into a line of credit agreement with a financial institution allowing aggregate borrowings of up to $3.0 million for the purchase of equipment and working capital. This line of credit was amended during December 2000 to extend the maturity of the line to June 30, 2001 and increased the allowable aggregate borrowings up to $10.0 million as limited by certain borrowing base requirements which include maintaining certain levels of revenues, customer turnover ratios and tangible net worth. During 2001, the line was amended to extend the maturity of the line to December 31, 2001. The line requires monthly interest only payments at prime plus 1.0% (4.75% at December 31, 2001). Events of default for the line, as amended, include failure to maintain certain financial covenants or a material adverse change in our financial position. A material adverse change is defined as a material impairment in the perfection or priority of the bank's collateral or a material impairment of the prospect of repayment of the line. As of December 31, 2001 we had drawn all amounts available amounts under the facility. During February 2002, the line was renewed and allows us to borrow an additional $5.0 million, up to $15.0 million in aggregate. The renewed facility expires on December 31, 2002. Our ability to maintain the drawn amount under the line of credit at current levels and have access to the additional $5.0 million depends on a number of factors including the level of eligible receivable balances and liquidity. The facility allows advances equal to the greater of 80% of eligible accounts receivable or 25% of cash and short-term investments, whichever is greater. The facility also contains financial covenants that require us to grow revenues, limit the cash losses, and require minimum levels of liquidity and tangible net worth as defined in the agreement. The lender also has the ability to demand repayment in the event, in their view, there has been a material adverse change in our business. At December 31, 2001, we were in compliance with the financial covenants. Payments are interest only with the full principal due at maturity unless the facility is renewed.

        During August 1999, we entered into an equipment financing arrangement with a finance company, which allows borrowings of up to $5.0 million for the purchase of property and equipment. The equipment financing arrangement includes sublimits of $3.5 million for equipment costs and $1.5 million for the acquisition of software and other service point and facility costs. Loans under the $3.5 million sublimit require monthly principal and interest payments over a term of 48 months. This facility bears interest at 7.5% plus an index rate based on the yield of 4-year U.S. Treasury Notes. Loans under the $1.5 million sublimit require monthly principal and interest payments over a term of 36 months. This facility bears interest at 7.9% plus an index rate based on the yield of 3-year U.S. Treasury Notes. Borrowings under each sublimit were completed prior to May 1, 2000 in accordance with the facility terms and the aggregate balance outstanding under this facility totaled $3.4 million and

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$2.0 million as of December 31, 2000 and 2001 respectively. The weighted average interest rate for all borrowings under this facility was approximately 13% as of December 31, 2001.

        As part of our acquisition of CO Space on June 20, 2000, we assumed an equipment financing agreement with a financial institution, which provided up to $2.0 million through the commitment termination date of June 30, 2000 for the purchase of equipment. The financing agreement was signed on July 29, 1999, has a 42 month term, and bears interest at 3.25% over the yield of a 42-month U.S. Treasury Note on the day of funding. There are two loan schedules under the Equipment Financing Agreement with interest rates of 8.99% and 9.12%. The financing agreement calls for equal monthly principal and interest payments over the term of the Equipment Financing Agreement with a final payment of 8.5% of the original loan amount. As of December 31, 2000 and 2001, we had outstanding borrowings of approximately $1.4 million and $0.9 million, respectively under this Equipment Financing Agreement.

        On July 31, 2000, we assumed a senior loan and security agreement in connection with the acquisition of VPNX. The agreement provided up to $2.0 through the commitment termination date of August 31, 2000 for the purchase of equipment and requires 36 equal monthly payments of principal and interest. The interest rates on the existing notes range from 6.59% to 8.03%, and each note has a final payment of 15% of the original balance. This final payment may be extended for an additional 12 months at a monthly rate of 1.67%. Outstanding borrowings at December 31, 2000 and 2001 were $0.6 million and $0.1 million.

        Maturities of notes payable at December 31, 2001 are as follows:

		Years Ending December 31,
2002		$	2,038
2003			937
2004			17
2005 and beyond			—
	Total maturities and principal payments		2,992
Less: current portion			(2,038	)
Notes payable, less current portion		$	954

10. Capital Leases:

        Internap leases a significant portion of its property and equipment which are classified as capital leases. Interest on equipment and furniture leases range from 2.3% to 21.5%, expire through 2015 and generally include an option allowing us to purchase the leased equipment or furniture at the end of the lease term for fair market value.

        During January 1998, we entered into a Master Agreement to Lease Equipment with one of our equipment vendors. Individual leases under the Master Agreement to Lease Equipment terms ranging from 24 to 39 months. Since inception we have leased approximately $60.9 million under the agreement and we are currently in negotiations to obtain additional availability under the facility.

F-22

        Future minimum capital lease payments together with the present value of the minimum lease payments are as follows (in thousands):

		Years Ending December 31,
2002		$	23,038
2003			12,339
2004			1,824
2005			1,209
2006			1,209
Beyond 2006			10,681
	Total minimum lease payments		50,300
Less: amount representing interest			(12,356	)
Present value of minimum lease payments			37,944
Less: current portion			(22,450	)
Capital lease obligations, less current portion		$	15,494

11. Income Taxes:

        As of December 31, 2001, we have net operating loss carryforwards, capital loss carryforwards and tax credit carryforwards of approximately $343.0 million, $13.0 million and $1.0 million, respectively. The net operating loss and tax credit carryforwards expire during 2012 through 2021. The capital loss carryforwards expire in 2006. Utilization of net operating losses, capital losses and tax credits are subject to the limitations imposed by Section 382 of the Internal Revenue Code. Due to substantial changes in ownership, we will be precluded from utilizing approximately $158.0 million of our net operating and capital losses and all of our tax credit carryforwards. We have placed a valuation allowance against our deferred tax assets in excess of deferred tax liabilities due to the uncertainty surrounding the realization of such excess tax assets. Management periodically evaluates the recoverability of the deferred tax asset and the level of the valuation allowance. At such time as it is determined that it is more likely than not that the deferred tax assets are realizable, the valuation allowance will be reduced.

F-23

        Internap's deferred tax assets and liabilities are as follows (in thousands):

	December 31,
	2000			2001
Deferred income tax assets:
Net operating loss carryforwards	$	90,733		$	75,253
Capital loss carryforwards		—			5,510
Investments		—			1,824
Restructuring costs		—			15,305
Allowance for doubtful accounts		521			393
Deferred revenue		—			5,294
Accrued compensation		1,179			149
Property and equipment		2,095			6,990
Other		991			261
		95,519			110,979
Deferred income tax liabilities:
Amortization of discounts on investments		(2,134	)		(44	)
Purchased intangibles		(14,163	)		(3,710	)
Property and equipment		(368	)		—
		(16,665	)		(3,754	)
		78,854			107,225
Valuation allowance		(78,854	)		(107,225	)
Net deferred tax assets	$	—		$	—

        The following is a reconciliation of the income tax benefit to the amount calculated based on the statutory federal rate of 34% and the estimated state apportioned rate, net of the federal tax benefit, as follows:

	Year Ended December 31,
	1999		2000		2001
Federal income tax benefit at statutory rates	(34	)%	(34	)%	(34	)%
State income tax benefit at statutory rates	(4	)%	(4	)%	(4	)%
Foreign operating losses at statutory rates	—		—		1	%
Amortization and write-down of goodwill	—		10	%	16	%
In-process research and development expense	—		4	%	—
Stock compensation expense	—		2	%	—
Future utilization of losses precluded by Section 382	—		—		11	%
Other	—		(3	)%	(1	)%
Change in valuation allowance	38	%	25	%	11	%
Effective tax rate	—	%	—	%	—	%

12. Employee Retirement Plan:

        Internap sponsors a defined contribution retirement savings plan that qualifies under Section 401(k) of the Internal Revenue Code. The 401(k) plan covers all employees who have attained 21 years of age. Plan participants may elect to have up to 15% of their pre-tax compensation contributed to the plan, subject to certain guidelines issued by the Internal Revenue Service. Beginning January 1, 2000, Internap matches the employees contributions to the Plan up to 3% of the employees'

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annual compensation. During 2000 and 2001, the Internap contributed $0.7 million and $1.0 million of participant matching to the plan, respectively. No contributions were made during 1999.

13. Commitments, Contingencies, Concentrations of Risk, and Litigation:

Operating Leases

        Internap has entered into leasing arrangements relating to office and service point rental space which are classified as operating. Future minimum lease payments on non-cancelable operating leases are as follows at December 31, 2001 (in thousands):

	Years Ending December 31,
2002	$	14,730
2003		12,832
2004		9,159
2005		8,005
2006		6,762
Thereafter		82,127
	$	133,615

        Rent expense was approximately $3.4 million, $16.1 million and $14.3 million for the years ended December 31, 1999, 2000 and 2001, respectively.

Service Commitments

        We have entered into service commitment contracts with Internet backbone service providers to provide interconnection services and collocation providers to provide space for customers. Minimum payments under these service commitments are as follows at December 31, 2000 (in thousands):

	Years Ending December 31,
2002	$	48,582
2003		54,074
2004		20,541
2005		1,590
2006		632
Beyond 2006		1,051
	$	126,470

Concentrations of Risk

        We participate in a highly volatile industry that is characterized by strong competition for market share. Internap and others in the industry encounter aggressive pricing practices, evolving customer demands and continual technological developments. Our operating results could be negatively affected should we not be able to adequately address pricing strategies, customers demands, and technological advancements.

        We are dependent on other companies to supply various key components of our network 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. For some components, we may only use a single supplier. Additional sources of these services and products may

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not be available in the future on satisfactory terms, if at all. Furthermore, we purchase these services and products pursuant to purchase orders placed from time to time. 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 our operating results. If our limited source of suppliers fails 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. Any failure to obtain required products or services from third party suppliers on a timely basis and at an acceptable cost could adversely impact our operating results.

Litigation

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

14. Stockholders' Equity:

        During January and October 1999, our articles of incorporation were amended to change the authorized amount of common and preferred stock. As a result of the January 1999 amendment, the number of shares of common stock authorized was increased to 100,000,000 from 70,000,000. During July 1999, the Board of Directors increased the authorized shares of common stock to 300,000,000. As a result of the October 1999 amendment, the authorized shares of common stock were increased to 500,000,000 shares and par value was eliminated. During December 1999, a 100% share dividend, accounted for as a stock split, was declared on the Company's common stock to be distributed during January 2000.

        During September 2001, Internap changed the state of its incorporation from Washington to Delaware with the approval of its stockholders. We accomplished the reincorporation by merging Internap Network Services Corporation with and into our newly formed, wholly owned Delaware subsidiary, Internap Delaware, Inc. Upon consummation of the merger, shareholders of Internap Network Services Corporation became stockholders of Internap Delaware, Inc. and Internap Delaware's name was changed to Internap Network Services Corporation.

        As part of the reincorporation, we increased the number of authorized shares of our common stock from 500,000,000 shares to 600,000,000 shares and the number of our preferred stock from 10,000,000 shares to 200,000,000 shares. We designated 3,500,000 of the 200,000,000 authorized shares of preferred stock as "Series A Preferred Stock." We also changed the par values of our common stock and preferred stock from no par to $0.001 per share.

        Accordingly, the disclosures in the financial statements and related notes have been adjusted to reflect the September 2001 Certificate of Incorporation and the stock dividend for all periods presented.

Convertible Preferred Stock

        During February 1999, Internap sold 59,259,260 shares of Series C preferred stock at a price of $.54 per share, resulting in gross proceeds of approximately $32.0 million, prior to deducting issuance costs. In addition, during 1999 several warrant holders exercised warrants to purchase 402,008 shares of Series B preferred stock, resulting in net proceeds to us of $120,000. Upon the closing of our initial public offering on October 4, 1999, all shares of all classes of preferred stock then outstanding

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converted into 98,953,050 shares of common stock. No preferred stock was outstanding as of December 31, 1999 or 2000.

        On September 14, 2001, we completed a $101.5 million private placement of units at a per unit price of $1.60 per unit and issued an aggregate of 63,429,976 units, with each unit consisting of ¹/20 of a share of Series A convertible preferred stock and a warrant to purchase ¹/4 of a share of common stock, resulting in the issuance of 3,171,499 shares of Series A convertible preferred stock and 17,113,606 warrants to purchase equivalent shares of common stock at an exercise price of $1.48256 per share, which are exercisable for a period of five years. The aggregate amount of common stock issuable upon conversion of the Series A convertible preferred stock and the exercise of the warrants is 85,568,119 shares at September 30, 2001.

        Holders of Series A convertible preferred stock shall be entitled to the number of votes equal to the number of shares of common stock into which the shares of Series A convertible preferred stock could be converted. Each share of Series A convertible preferred stock is currently convertible into 21.58428 shares of common stock subject to adjustments for certain dilutive events. Each share of Series A convertible preferred stock may be converted at any time at the option of the holder. Shares of Series A convertible preferred stock automatically convert to common stock on the earlier of September 14, 2004, a date more than six months after issuance on which the common stock has traded in excess of $8.00 for a period of 45 consecutive trading days or upon the affirmative vote of 60% of the outstanding shares of Series A convertible preferred stock.

        Upon the liquidation, dissolution, merger or event in which existing stockholders own less than 50% of the post-event voting power holders of Series A convertible preferred stock are entitled to be paid out of existing assets an amount equal to $32.00 per share prior to distributions to holders of common stock. Upon completion of distribution to holders of Series A convertible preferred stock, remaining assets will be distributed ratably between holders of Series A convertible preferred stock and holders of common stock until holders of Series A convertible preferred stock have received an amount equal to three times the original issue price.

        We received net proceeds of $95.6 million from the issuance of the Series A convertible preferred stock and allocated $86.3 million to the Series A convertible preferred stock and $9.3 million to the warrants to purchase shares of common stock based upon their relative fair values on the date of issuance (September 14, 2001) pursuant to Accounting Principles Board Opinion No. 14 "Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants." The fair value used to allocate proceeds to the Series A convertible preferred stock was based upon a valuation that among other considerations was based upon the closing price of the common stock on the date of closing, on an as converted basis, and liquidation preferences. The fair value used to allocate proceeds to the warrants to purchase common stock was based on a valuation using the Black Scholes model and the following assumptions: exercise price $1.48256; no dividends; term of 5 years; risk free rate of 3.92%; and volatility of 80%.

Common Stock

        On September 29, 1999, we sold 19,000,000 shares of our common stock in an initial public offering at a price of $10.00 per share for net proceeds of $176.7 million. On October 1, 1999, the underwriters exercised their over-allotment option, resulting in the sale of an additional 2,850,000 shares of common stock at $10.00 per share for additional net proceeds of $26.5 million.

        On April 6, 2000, 8,625,000 shares of our common stock were sold in a public offering at a price of $43.50 per share. Of these shares, 3,450,000 were sold by Internap and 5,175,000 shares were sold by selling stockholders. We did not receive any of the proceeds from the sale of shares of common stock by the selling stockholders. The proceeds we received from the offering were $142.9 million, net of underwriting discounts and commissions of $7.1 million.

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Warrants to Purchase Series B Preferred Stock and Common Stock

        During 1997 and 1998, we issued warrants to purchase up to 1,821,520 shares of our then Series B preferred stock at $.30 per share in conjunction with its various financings during these periods. The warrants to purchase the Series B preferred stock converted to warrants to purchase common stock upon the closing of our initial public offering.

        Concurrent with the closing of our 1999 initial public offering, we sold 2,150,537 shares of common stock to Inktomi Corporation for $9.30 per share, resulting in proceeds of $19.0 million, net of a private placement fee of $1.0 million. In conjunction with this investment, we issued a warrant to purchase 1,075,268 shares of common stock at an exercise price of $13.95 per share. The warrant has a two-year term and includes demand and piggyback registration rights. The agreement also prohibited Inktomi from acquiring additional shares of the Company's common stock for a period of two years. On November 24, 1999, Inktomi exercised 50% of these warrants through a cashless exercise, resulting in the issuance of 397,250 shares of common stock to Inktomi. The unexercised portion of the warrant expired during 2001.

        On August 2, 2000, we issued a warrant to purchase 20,000 shares of common stock at an exercise price of $26.88 to an executive recruiting firm. The fair value of these warrants on the date of issuance was estimated to be approximately $286,000 based upon the Black-Scholes option pricing model and was charged to expense.

        On April 4, 2001, we issued a warrant to purchase 35,000 shares of common stock at an exercise price of $1.156 to a consultant. The fair value of these warrants on the date of issuance was estimated to be approximately $22,000 based upon the Black-Scholes option pricing model and was charged to expense.

        On July 23, 2001, we issued a warrant to purchase 22,222 shares of common stock at an exercise price of $2.16 to a consultant. The fair value of these warrants on the date of issuance was estimated to be approximately $26,000 based upon the Black-Scholes option pricing model and was charged to expense.

        On September 14, 2001, in conjunction with our Series A convertible preferred stock financing, we issued warrants to purchase up to 17,113,606 shares of common stock at $1.48256 per share for a period of five years. The value allocated to these warrants was estimated to be approximately $9.3 million based upon the Black-Scholes option pricing model.

        Outstanding warrants to purchase shares of common stock at December 31, 2001, are as follows (shares in thousands):

Year of Expiration	Weighted Average Exercise Price		Shares
2002	$	0.30	932
2003		2.16	22
2004		8.38	191
2005		—	—
2006		1.48	17,114
			18,259

Comprehensive Loss

        For the twelve-month period ended December 31, 2001 and 2000, comprehensive loss was $481.5 million and $183.1 million, respectively. The difference between net loss and comprehensive loss

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of ($2.4 million) and $2.4 million for the periods ended December 31, 2001 and 2000, respectively, is due to net unrealized gains and losses on available-for-sale securities.

15. Stock-Based Compensation Plans:

        During March 1998, our Board of Directors adopted the 1998 Stock Options/Stock Issuance Plan (the "1998 Plan"), which provides for the issuance of incentive stock options and non-qualified options to eligible individuals responsible for Internap's management, growth and financial success. Shares of common stock reserved for the 1998 Plan during March 1998 totaled 8,070,000 and were increased to 10,070,000 during January 1999. As of December 31, 2001 there were 3,839,000 options outstanding and 650,000 options available for grant pursuant to the 1998 Plan.

        During June 1999, our Board of Directors adopted the 1999 Equity Incentive Plan (the "1999 Plan") which provides for the issuance of incentive stock options and nonqualified stock options to eligible individuals responsible for Internap's management, growth and financial success. As of December 31, 1999, 13,000,000 shares of common stock were reserved for the 1999 Plan. Upon the first nine anniversaries of the adoption date of the 1999 Plan, the number of shares reserved for issuance under the 1999 Plan will automatically be increased by 3.5% of the total shares of common stock then outstanding or, if less, by 6,500,000 shares. Accordingly on June 19, 2000 and June 19, 2001, the number of shares reserved for the grant of stock options under the 1999 Plan was increased by 4,831,738 and 5,263,537 shares, respectively. The terms of the 1999 Plan are the same as the 1998 Plan with respect to incentive stock options treatment and vesting. As of December 31, 2001, there were 15,862,000 options outstanding and 6,307,000 options available for grant pursuant to the 1999 Plan.

        During May 2000, we adopted the 2000 Non-Officer Equity Incentive Plan (the "2000 Plan"). The 2000 Plan initially authorized the issuance of 1,000,000 shares of Internap's common stock. On July 18, 2000, our board of directors increased the shares reserved under the 2000 Plan to 4,500,000. Under the 2000 Plan, we may grant stock options only to Internap employees who are not officers or directors. Options granted under the 2000 Plan are not intended to qualify as incentive stock options under the Internal Revenue Code. Otherwise, options granted under the 2000 Plan generally will be subject to the same terms and conditions as options granted under the 1999 Plan. As of December 31, 2001, there were 4,342,000 options outstanding and 152,000 options available for grant pursuant to the 2000 Plan.

        During July 1999, we adopted the 1999 Non-Employee Directors' Stock Option Plan (the "Director Plan"). The Director Plan provides for the grant of non-qualified stock options to non-employee directors. A total of 1,000,000 shares of Internap's common stock have been reserved for issuance under the Director Plan. Under the terms of the Director Plan, 480,000 fully vested options were granted to existing directors on the effective date of our initial public offering with an exercise price of $10.00 per share. Subsequent to the our initial public offering, initial grants, which are fully vested as of the date of the grant, of 80,000 shares of Internap's common stock are to be made under the Director Plan to all non-employee directors on the date such person is first elected or appointed as a non-employee director. On the day after each of our annual stockholder meetings, starting with the annual meeting in 2000, each non-employee director will automatically be granted a fully vested and exercisable option for 20,000 shares, provided such person has been a non-employee director for at least the prior six months. The options are exercisable as long as the non-employee director continues to serve as a director, employee or consultant of Internap or any of its affiliates. As of December 31, 2001, there were 500,000 options outstanding and 340,000 options available for grant pursuant to the Director Plan.

        In connection with the acquisition of CO Space, we assumed the CO Space, Inc. 1999 Stock Incentive Plan (the "CO Space Plan"). After applying the acquisition conversion ratio, the CO Space plan authorizes the issuance of up to 1,346,840 options to purchase shares of Internap's common stock.

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As of December 31, 2001 there were 1,027,000 options outstanding and 105,000 options available for grant pursuant to the CO Space Plan.

        In connection with the acquisition of VPNX, we assumed the Switchsoft Systems, Inc. Founders 1996 Stock Option Plan and the Switchsoft Systems, Inc. 1997 Stock Option Plan (the "VPNX Plans"). After applying the acquisition conversion ratio, the VPNX Plans authorize the issuance of up to 307,417 options to purchase shares of Internap's common stock. As of December 31, 2001, there were 162,000 options outstanding and 61,000 options available for grant pursuant to the VPNX Plans.

        Incentive stock options may be issued only to Internap employees and have a maximum term of 10 years from the date of grant. The exercise price for incentive stock options may not be less than 100% of the estimated fair market value of the common stock at the time of the grant. In the case of options granted to holders of more than 10% of the voting power of Internap, the exercise price may not be less than 110% of the estimated fair market value of the common stock at the time of grant, and the term of the option may not exceed five years. Options become exercisable in whole or in part from time to time as determined by the Board of Directors at the date of grant, which will administer the Plan. Both incentive stock options and non-qualified options generally vest over four years.

        We have elected to account for stock-based compensation using the intrinsic value method prescribed in APB 25. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair value of Internap's common stock at the date of grant over the exercise price to be paid to acquire the stock.

        On May 4, 2001, we allowed employees to cancel certain outstanding stock option grants to purchase 8.9 million shares of common stock. On that date we agreed to grant to the same employees options to purchase 8.9 million shares of common stock to be granted six months plus one day after the cancellation, or November 5, 2001, provided, however, that (i) the exercise price of the future grant would be the fair value of our common stock on the date of grant, the participating employees also cancel all options granted six months prior to the May 4, 2001 cancellation date, (ii) the participating employees do not receive any additional grants of options prior to the November 5, 2001 grant date, and (iii) the participating employees are common law employees of Internap on the date of grant. Since Internap accounts for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, 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.

F-30

        Option activity for 1999, 2000, and 2001 under all of our stock option plans is as follows (shares in thousands):

	Shares		Weighted Average Exercise Price
Balance, December 31, 1998	6,823		$	0.05
Granted	11,135		$	5.82
Exercised	(2,065	)	$	0.04
Cancelled	(412	)	$	3.92
Balance, December 31, 1999	15,481		$	4.10
Granted	12,894		$	39.44
Assumed from acquisitions	590		$	5.53
Exercised	(3,686	)	$	1.60
Cancelled	(1,120	)	$	36.88
Balance, December 31, 2000	24,159		$	21.71
Granted	16,729		$	1.40
Exercised	(1,223	)	$	0.36
Cancelled	(13,933	)	$	31.69
Balance, December 31, 2001	25,732		$	4.21

        The following table summarizes information about options outstanding at December 31, 2001 (shares in thousands):

	Options Outstanding		(Options Exercisable Excluding Options Which Shares Would Be Subject to the Company's Right of Repurchase)
Exercise Prices	Number of Shares	Weighted Average Remaining Contractual Life (in years)	Number of Shares	Weighted Average Exercise Prices
$  0.03 – $    0.40	2,791	6.86	1,679	$	0.14
$  0.85 – $    0.96	11,360	9.82	2,989	$	0.96
$  0.98 – $    2.00	4,821	8.46	2,116	$	1.93
$  2.15 – $    4.00	3,324	8.38	1,594	$	3.26
$  4.13 – $    6.69	1,194	8.16	493	$	5.66
$  6.94 – $  25.63	477	8.05	357	$	10.51
$26.31 – $  30.00	272	8.33	116	$	28.47
$30.31 – $  34.50	957	8.54	407	$	32.66
$37.06 – $  69.88	482	8.18	215	$	45.97
$72.13 – $105.91	54	8.12	25	$	81.34
$  0.03 – $105.91	25,732	8.85	9,991	$	4.75

        During 1999, options to purchase 6,823,498 and 9,854,000 shares of Internap's common stock, with a weighted-average exercise price of $0.05 and $3.09 per share and a weighted-average option fair value of $0.12 and $3.69 per share, were granted, respectively, with an exercise price below the estimated market value at the date of grant. With the exception of options assumed in conjunction with the Co Space and VPNX acquisitions, the exercise price of options granted during 2000 equaled the fair value of the underlying shares at the date of grant. The weighted average grant date fair value of options granted during 2000 and 2001 was approximately $363.9 million and $16.8 million or $28.22 and $1.00 per share, respectively.

F-31

        During July 1999, we adopted the 1999 Employee Stock Purchase Plan (the "ESPP"). The ESPP provides a means by which employees may purchase Internap common stock through payroll deductions. The purchase plan is implemented by offering rights to eligible employees. Under the purchase plan, management may specify offerings with a duration of not more than 27 months, and may specify shorter purchase periods within each offering. The first offering began on September 29, 1999 and terminated on September 30, 2002. Purchase dates occur each March 31 and September 30. Employees who participate in an offering under the purchase plan may have up to 15% of their earnings withheld. The amount withheld is then used to purchase shares of the common stock on specified dates determined by the board of directors. The price of common stock purchased under the purchase plan is equal to 85% of the lower of the fair market value of the common stock at the commencement date of each offering period or the relevant purchase date. Employees may end their participation in an offering at any time during the offering except during the 15 day period immediately prior to a purchase date. Employees' participation in all offerings ends automatically on termination of their employment with Internap or one of its subsidiaries. A total of 3,000,000 shares of common stock have been reserved for issuance pursuant to the ESPP. Upon the first nine anniversaries of the adoption date of the ESPP, the number of shares reserved for issuance under the ESPP will automatically be increased by 2% of the total number of shares of common stock then outstanding or, if less, by 3,000,000 shares. Accordingly, on July 24, 2000 and July 23, 2001, pursuant to the terms of the ESPP, the number of shares reserved for the grant of stock options under the ESPP was increased by 1,500,000 shares on each date. The purchase plan is intended to qualify as an employee stock purchase plan within the meaning of Section 423 of the Code.

        We have adopted the disclosure only provisions of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation." Pro forma information regarding the net loss is required by SFAS No. 123, and has been determined as if we had accounted for its employee stock options (including ESPP participation) under the fair value method. The fair value of options granted in 1999 prior to Internap's initial public offering was estimated at the date of grant using the minimum value method allowed for non-public companies assuming no expected dividends and the following weighted-average assumptions: risk-free interest rate of 6.75%; volatility of 0%; and an expected life of 5 years. The fair value of options granted in 1999, 2000, and 2001 (including ESPP participation) subsequent to Internap's initial public offering was estimated at the date of grant using the Black-Scholes option pricing model assuming no expected dividends and the following weighted average assumptions:

	Year Ended December 31,
	1999		2000		2001
Risk free interest rate	6.75	%	6.00	%	4.5	%
Volatility	80	%	100	%	100	%
Expected life (excluding ESPP)	5 years		4 years		4 years
ESPP expected life	1 year		1 year		1 year

        For purposes of the pro forma disclosures, the estimated fair value of options is amortized to expense over the options' vesting periods. If we had accounted for compensation expense related to stock options (including ESPP participation) under the fair value method prescribed by SFAS No. 123, the net loss and the basic and diluted net loss per share for the years ended December 31, 1999, 2000, and 2001 would have been approximately $60.4 million, $317.6 million and $442.1 million and $1.59, $2.23, and $2.94, respectively.

Deferred Stock Compensation

        During 1998, we issued stock options to certain employees under the 1998 and 1999 Plans with exercise prices below the deemed fair value of Internap's common stock at the date of grant. In

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accordance with the requirements of APB 25, we recorded deferred stock compensation for the difference between the exercise price of the stock options and the deemed fair value of the common stock at the date of grant. Additionally, in connection with the acquisition of VPNX, we recorded deferred stock compensation related to the unvested options assumed, totaling $5.1 million.

        Deferred stock compensation is amortized to expense over the period during which the options or common stock subject to repurchase vest, generally four years, using an accelerated method as described in Financial Accounting Standards Board Interpretation No. 28.

        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 year ended December 31, 2001, we reduced our deferred stock compensation, which would have been amortized to future expense, by $1.2 million. and we reduced our amortization to expense of deferred stock compensation by $1.9 million to record the benefit of previously recognized expense on unvested options.

        As of December 31, 2001, we have recorded deferred stock compensation related to options granted during 1998 and 1999 in the total amount of $28.9 million, of which $7.6 million, $10.7 million, and $4.2 million has been amortized to expense during 1999, 2000, and 2001, respectively. The weighted average exercise price of the 6,823,498 options granted in 1998 to purchase common stock was $.05 and the weighted average fair value per share was $.15 during 1998. The weighted average exercise price of the 11,134,500 options granted in 1999 to purchase common stock was $5.82 and the weighted average fair value per share was $7.98.

16. Subsequent Events

        On January 9, 2002, pursuant to a business reorganization, we reduced our employee force by 70 positions. The total cost of severance packages offered under this reduction was approximately $1.0 million.

17. Unaudited Quarterly Results:

        The following table sets forth certain unaudited quarterly results of operations for the Company for the years ended December 31, 2000 and 2001. In the opinion of management, this information has been prepared on the same basis as the audited financial statements and all necessary adjustments, consisting of only normal recurring adjustments, have been included in the amounts stated below to present fairly, in all material respects, the quarterly information when read in conjunction with the audited financial statements and notes thereto included elsewhere in this annual report on Form 10-K.

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The quarterly operating results below are not necessarily indicative of those of future periods (in thousands).

		March 31, 2000			June 30, 2000			September 30, 2000			December 31, 2000			March 31, 2001			June 30, 2001			September 30, 2001			December 31, 2001
Revenues		$	8,891		$	13,647		$	20,220		$	26,855		$	28,440		$	29,285		$	29,163		$	30,516
Costs and expenses:
Direct cost of network			9,950			12,667			17,041			22,807			23,208			26,594			24,637			24,476
Customer support			3,456			4,505			5,675			6,684			6,723			5,990			4,789			3,978
Product development			1,560			1,844			4,033			4,487			3,785			3,415			2,760			2,273
Sales and marketing			7,547			7,705			8,881			11,257			14,253			9,866			7,496			6,536
General and administrative			3,865			5,456			10,515			13,126			15,154			12,352			9,820			7,165
Depreciation and amortization			2,603			3,467			4,954			9,498			10,473			12,192			13,468			12,417
	Amortization of goodwill and other intangible assets		—			2,157			26,183			25,994			19,828			6,972			5,658			5,658
	Amortization of deferred stock compensation		3,074			2,550			2,625			2,402			2,209			109			814			1,085
	Restructuring costs		—			—			—			—			4,342			—			67,211			(7,457	)
	Impairment of goodwill and other intangible assets		—			—			—			—			195,986			—			—			—
	In-process research and development development		—			—			18,000			—			—			—			—			—
Total operating costs and expenses			32,055			40,351			97,907			96,255			295,961			77,490			136,653			56,131
Loss from operations			(23,164	)		(26,704	)		(77,687	)		(69,400	)		(267,521	)		(48,205	)		(107,490	)		(25,615	)
Other income (expense:
	Interest income (expense), net		2,541			3,907			2,875			2,175			702			(750	)		(861	)		(363	)
	Loss on investments		—			—			—			—			—			(19,314	)		(6,428	)		(603	)
	Other		—			—			—			—			—			—			—			(2,714	)
Total other income			2,541			3,907			2,875			2,175			702			(20,064	)		(7,289	)		(3,680	)
Net Income		$	(20,623	)	$	(22,797	)	$	(74,812	)	$	(67,225	)	$	(266,819	)	$	(68,269	)	$	(114,779	)	$	(29,295	)
Basic and Diluted net loss per share		$	(0.16	)	$	(0.16	)	$	(0.51	)	$	(0.45	)	$	(1.79	)	$	(0.45	)	$	(0.76	)	$	(0.19	)
Weighted average shares used in computing basic and diluted net loss per share			132,526			138,193			146,794			148,381			149,115			150,251			150,541			151,221

F-34

CONSENT OF INDEPENDENT ACCOUNTANTS

        We hereby consent to the incorporation by reference in the Registration Statements on Forms S-3 (Nos. 333-70870 and 333-47288) of Internap Network Services Corporation and incorporation by reference in the Registration Statements on Forms S-8 (Nos. 333-89369, 333-37400, 333-40430, 333-42974, and 333-43996) of Internap Network Services Corporation of our report dated March 26, 2002 relating to the consolidated financial statements, which appears in Internap Network Services Corporation's Annual Report on Form 10-K for the year ended December 31, 2001. We also consent to the incorporation by reference of our report dated March 26, 2002 relating to the financial statement schedule, which appears in such Annual Report on Form 10-K.

PricewaterhouseCoopers LLP

Seattle, Washington
March 26, 2002

Report of Independent
Accountants on Financial Statement Schedule

To the Board of Directors and Stockholders
of Internap Network Services Corporation

        Our audits of the consolidated financial statements of Internap Network Services Corporation included in this Form 10-K also included an audit of the financial statement schedule appearing on page S-2 of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

PricewaterhouseCoopers LLP
Seattle, Washington
March 26, 2002

S-1

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (IN THOUSANDS)

		Balance at Beginning of Fiscal Period		Charges to Costs and Expenses		Charges to Other Accounts		Deductions		Balance at end of Fiscal Period
Year ended December 31, 1999
	Allowance for doubtful accounts	$	65	$	212	$	—	$	71	$	206
	Tax valuation allowance		2,646		—		16,180		—		18,826
Year ended December 31, 2000
	Allowance for doubtful accounts		206		1,643		—		479		1,370
	Tax valuation allowance		18,826		—		60,028		—		78,854
Year ended December 31, 2001
	Allowance for doubtful accounts		1,370		4,798		—		4,985		1,183
	Tax valuation allowance		78,854		—		28,371		—		107,225

S-2

QuickLinks

TABLE OF CONTENTS
PART I

ITEM 1. BUSINESS.
ITEM 2. PROPERTIES.
ITEM 3. LEGAL PROCEEDINGS.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.

ITEM 6. SELECTED FINANCIAL DATA.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

RISK FACTORS

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

SIGNATURES
Internap Network Services Corporation Index to Financial Statements
Report of Independent Accountants
INTERNAP NETWORK SERVICES CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands)
INTERNAP NETWORK SERVICES CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
INTERNAP NETWORK SERVICES CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS From January 1, 1999 to December 31, 2001 (In thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSENT OF INDEPENDENT ACCOUNTANTS
Report of Independent Accountants on Financial Statement Schedule
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (IN THOUSANDS)

EX-3.1

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EXHIBIT 3.1

CERTIFICATE OF INCORPORATION
OF
INTERNAP DELAWARE, INC.

        The undersigned, a natural person (the "Sole Incorporator"), for purposes of organizing a corporation to conduct the business and promote the purposes hereinafter stated, under the provisions and subject to the requirements of the law of the State of Delaware hereby certifies that:

I.

        The name of this Corporation (hereinafter called the "Corporation") is INTERNAP DELAWARE, INC.

II.

        The address of the registered office of the Corporation in the State of Delaware is 1209 Orange Street, City of Wilmington, County of New Castle, and the name of the registered agent of the Corporation at such address is the Corporation Trust Center.

III.

        The purpose of this Corporation is to engage in any lawful activity or activity for which a corporation may be organized under the General Corporation Law of the State of Delaware.

IV.

        A.    This Corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the Corporation is authorized to issue is 800,000,000 shares of stock. Such shares shall be divided into two classes as follows:

(i)  600,000,000 shares of common stock ("Common Stock"), each having a par value of one-tenth of one cent ($0.001).

(ii)  200,000,000 shares of preferred stock ("Preferred Stock"), each having a par value of one-tenth of one cent ($0.001).

        B.    The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized, by a filing a certificate (a "Preferred Stock Designation") pursuant to Delaware General Corporation Law ("DGCL"), to fix or alter from time to time the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions of any wholly unissued series of Preferred Stock, and to establish from time to time the number of shares constituting any such series or any of them; and to increase or decrease the number of shares of any series subsequent to the issuance of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be decreased in accordance with the foregoing sentence, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series.

        C.    3,500,000 of the authorized shares of Preferred Stock are hereby designated "Series A Preferred Stock" (the "Series A Stock").

        D.    The rights, preferences, privileges, restrictions and other matters relating to the Series A Stock are as follows:

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1.    Dividends.

(a)Series A Dividends. Holders of Series A Stock shall be entitled to receive, when, as and if declared by the Board of Directors, but only out of funds that are legally available therefor, cash dividends, at the rate of ten percent (10%) of the Original Issue Price (as hereinafter defined) per annum on each outstanding share of Series A Stock (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares). The Original Issue Price of the Series A Stock shall be $32.00 per share (the "Original Issue Price"). Such dividends shall be payable only when, as and if declared by the Board of Directors and shall be non-cumulative.

(b)Common Stock Dividends. So long as any shares of Series A Stock shall be outstanding, no dividend, whether in cash or other property, shall be declared or paid or set apart for payment in any fiscal year nor shall any other distribution be made (other than repurchases by the Corporation of unvested shares pursuant to the terms of the applicable stock purchase agreements and acquisitions of Common Stock in exercise of the Corporation's right of first refusal to repurchase such shares) on any Common Stock (other than any dividend or distribution payable solely in Common Stock), nor shall any Common Stock be redeemed, purchased or otherwise acquired, unless dividends for the entire twelve (12) months of such fiscal year, and all declared and unpaid dividends, shall have been paid in full with respect to all outstanding shares of Series A Stock in an amount per share as set forth in Section (IV)(D)(1)(a).

2.    Liquidation Rights.

        (a)General.

(i)  Upon any liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, before any distribution or payment shall be made to the holders of Common Stock, the holders of shares of Series A Stock shall be entitled to be paid out of the assets of the Corporation legally available for distribution or the consideration received in such transaction an amount per share of Series A Stock equal to the Original Issue Price of such Series A Stock plus all declared and unpaid dividends on such Series A Stock (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares after the filing date hereof) for each share of Series A Stock held by them. If, upon the occurrence of such event, the assets of the Corporation are insufficient to permit the payment of the full liquidation preference set forth in this Section (IV)(D) (2)(a)(i), then such assets (or consideration) shall be distributed ratably among the holders of shares of Series A Stock, if any, in the same proportions as the aggregate liquidation preference each such holder would otherwise be entitled to receive bears to the total liquidation preference that would otherwise be payable to all such holders, and no distribution to other stockholders of the Corporation shall be made.

(ii)  Upon the completion of the distributions contemplated pursuant to Section (IV)(D)(2)(a)(i) above, if assets (or consideration received in such transaction) remain in the Corporation, such remaining assets (or consideration) shall be distributed ratably to the holders of the Common Stock and the holders of the Series A Stock (on an as-converted basis) until such time as the holders of Series A Stock have received an amount per share of Series A Stock equal in the aggregate to three (3) times the Original Issue Price (as adjusted for stock dividends, combinations, splits, recapitalizations and the like with respect to such Series A Stock after the filing date hereof). Thereafter, the remaining assets (or consideration) legally available for distribution, if any, shall be distributed ratably to the holders of Common Stock.

(b)Distributions Other Than Cash. Whenever the distribution provided for in this Section (IV)(D)(2) shall be payable in property other than cash, the value of such distribution shall be

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the fair market value of such property as determined in good faith by the Board of Directors. Any securities shall be valued as follows:

(i)  Securities not subject to investment letter or other similar restrictions on free marketability covered by (ii) below:

(1)  If traded on a securities exchange or through the Nasdaq National Market, the value shall be deemed to be the average of the closing prices of the securities on such quotation system over the thirty (30) day period ending three (3) days prior to such distribution;

(2)  If actively traded over-the-counter, the value shall be deemed to be the average of the closing bid or sales price (whichever is applicable) over the thirty (30) day period ending three (3) days prior to such distribution; and

(3)  If there is no active public market, the value shall be the fair market value thereof, as determined in good faith by the Board of Directors.

(ii)  The method of valuation of securities subject to investment letter or other restrictions on free marketability (other than restrictions arising solely by virtue of a stockholder's status as an affiliate or former affiliate) shall be to make an approximate discount from the market value determined above in subsection (i)(1), (2) or (3) to reflect the approximate fair market value thereof, as determined by the Board of Directors.

(c)Deemed Liquidation Event. For purposes of this Section (IV)(D)(2), each of the following events shall be deemed a liquidation event:

(i)  (A) any consolidation or merger of the Corporation with or into any other corporation or other entity or person, or any other corporate reorganization, in which the stockholders of the Corporation immediately prior to such consolidation, merger or reorganization, own less than fifty percent (50%) of the Corporation's voting power immediately after such consolidation, merger or reorganization; or (B) a transaction or series of transactions in which a person or group of persons (as defined in Rule 13d-5(b)(1) of the Securities and Exchange Act of 1934, as amended (the "Exchange Act")), acquires beneficial ownership (as determined in accordance with Rule 13d-3 of the Exchange Act) of more than fifty percent (50%) of the Common Stock or voting power of the Corporation (each, an "Acquisition"), excluding, in each case,

(1)  any transaction solely to effect a holding company reorganization or to change the Corporation's domicile; or

(2)  any transaction pursuant to which the Series A Stock was first acquired from the Corporation; or

(3)  any change in ownership caused by a change in the applicable Series A Conversion Price (as defined herein); or

(ii)  a sale, lease or disposition of all or substantially all of the assets of the Corporation (an "Asset Transfer").

3.    Voting Rights.

(a)General. Except as otherwise provided herein or as required by law, the Series A Stock shall be voted together with the shares of Common Stock and not as a separate class at any annual or special meeting of stockholders of the Corporation upon the following basis: each share of Series A Stock shall be entitled to the number of votes equal to the number of shares of Common Stock into which such share of Series A Stock could be converted pursuant to the applicable provisions of Section (IV)(D)(4) hereof immediately after the close of business on the record date fixed for such meeting and shall be entitled to notice of any stockholders' meeting in accordance with the Bylaws of

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the Corporation. Such votes shall be counted together with all other shares of capital stock having general voting powers and not separately as a class or series. Fractional votes shall not be permitted and any fractional voting rights available on an as-converted basis (after aggregating all shares into which shares of Series A Stock held by each holder could be converted) shall be rounded to the nearest whole number (with one-half shares and greater being rounded upward). In all cases where the holders of shares of Series A Stock have the right to vote separately as a class or series, such holders shall be entitled to one vote for each share of Common Stock into which such holders' shares of Series A Stock are convertible pursuant to the applicable provisions of Section (IV)(D)(4) hereof.

(b)  Notwithstanding any other provision of this Section (IV)(D)(3), if the Value of voting securities of the Corporation beneficially owned on the Original Issue Date by any holder of Series A Stock is greater than fifty million dollars ($50,000,000), then those shares of Series A Stock (and any shares of Common Stock issuable upon conversion thereof) shall be non-voting in all respects to the extent they cause the Value of such holder's voting securities of the Corporation to exceed fifty million dollars ($50,000,000) until such holder has obtained the required clearances under the Hart-Scott-Rodino Antitrust Improvements Act of 1986, as amended. For purposes of this subsection (b), "Value" shall mean the sum of (i) the product obtained by multiplying the number of shares of Common Stock held by the holder on the Original Issue Date by the closing market price on such date, and (ii) the aggregate Original Issue Price of the shares of Series A Stock held by such holder.

(c)  Election of the Board of Directors.

(i)  In addition to the right to vote on all matters submitted to a vote of stockholders, including the election of directors, so long as at least shares of the Series A Stock, representing five million (5,000,000) Common Stock equivalents (as adjusted for stock dividends, combinations, splits, recapitalizations and the like with respect to such Series A Stock after the filing date hereof) remain outstanding, the holders of the Series A Stock shall have the right, as a separate voting class, to elect two (2) directors to the Board of Directors of the Corporation and to remove from office such directors or fill any vacancy caused by the resignation, death or removal of such directors. This right to elect two directors as a separate voting class may be waived in any election of directors with the written consent of holders of more than fifty percent (50%) of the shares of Series A Stock. The Board of Directors shall consist of no more than seven (7) members.

(ii)  The holders of Common Stock and Series A Stock, voting together as a single class on an as converted basis, shall be entitled to elect all remaining directors of the Board of Directors at each meeting for the election of directors and to remove from office such directors or fill any vacancy caused by the resignation, death or removal of such directors.

(d)Separate Vote of Series A Stock. So long as at least shares of Series A Stock, representing five million (5,000,000) Common Stock equivalents (as adjusted for stock dividends, combinations, splits, recapitalizations and the like with respect to such Series A Stock after the filing date hereof), remain outstanding, in addition to any other vote or consent required herein or by law, the vote of more than fifty percent (50%) (unless a greater number is otherwise required by law) of the outstanding Series A Stock shall be necessary for effecting or validating the following actions:

(i)  Any amendment, alteration, or repeal of any provision of the Certificate of Incorporation or Bylaws of the Corporation (including any filing of a Certificate of Designation) that affects adversely the voting powers, preferences, or other special rights or privileges, qualifications, limitations or restrictions of the Series A Stock;

(ii)  Any increase or decrease (other than by redemption or conversion) in the authorized number of shares of Common Stock or Preferred Stock;

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(iii)  Any authorization or any designation, whether by reclassification or otherwise, or any offer, sale or issuance of any new class or series of stock or any other securities convertible into equity securities of the Corporation ranking on parity with or senior to the Series A Stock in rights of redemption, liquidation preference, voting or dividends or any increase in the authorized or designated number of any such new class or series;

(iv)  Any redemption, repurchase (including by a tender or exchange offer made by the Corporation or any of its affiliates for all or any portion of the Common Stock), payment of dividends or other distributions with respect to Common Stock or any other junior stock of the Corporation (except for acquisitions of Common Stock by the Corporation pursuant to agreements which permit the Corporation to repurchase such shares upon termination of services to the Corporation or in exercise of the Corporation's right of first refusal upon a proposed transfer);

(v)  Any deemed liquidation event or winding up of the Corporation set forth in Section (IV)(D)(2)(c) hereof;

(vi)  Any change in the number of directors on the Corporation's Board of Directors;

(vii)  Any loans to or repayment of debts to officers or other affiliates of the Corporation, except as may be in effect prior to the Original Issue Date;

(viii)  Any issuance of a debt instrument, including any equipment leasing arrangement, in excess of five million dollars ($5,000,000);

(ix)  Any Section 305 transaction as defined in the Internal Revenue Code; or

(x)  Any increase in the number of shares subject to the Corporation's stock compensation plans.

        Notwithstanding the foregoing, any shares of Series A Stock beneficially owned by Morgan Stanley Venture Partners, Capital Ventures International, RGC International Investors, LDC or any of their affiliates, shall not be entitled to vote on, and shall not be counted for purposes of determining the percentage of votes cast, the actions set forth above in subsection 3(c)(i) and this subsection 3(d) (other than those set forth in subsections (i), (iii) and (iv) and this subsection 4(d)).

4.    Conversion.

        (a)General.

(i)Mandatory Conversion.

(1)  Subject to the Corporation's compliance with Section (IV)(D)(4)(a)(i)(2) below, each share of Series A Stock (and fraction thereof) shall be converted automatically, without any action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Issue Price by the Series A Conversion Price upon the date (the "Mandatory Conversion Date") which is the earlier of: (A) three (3) years after the Original Issue Date (as hereinafter defined); (B) a date six (6) months after the Original Issue Date on which the Common Stock price has traded above the greater of $5.00 (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like) per share or ¹/4 (one fourth) times the Original Issue Price (as adjusted for stock dividends, combinations, splits, recapitalizations and the like) for a period of forty-five (45) consecutive Trading Days (as defined below); provided however, that such shares shall be automatically converted only to the extent that the restrictions set forth in Section 5.5(a) and Section 5.5(c) of the Purchase Agreement (as hereinafter defined) are no longer applicable; or (C) upon the affirmative election of holders of at least sixty percent (60%) of the outstanding shares of Series A Stock. Upon any such automatic conversion, any

5

declared and unpaid dividends shall be paid in accordance with the provisions of Section (IV)(D)(4)(m). For purposes herein, "Original Issue Date" shall mean the date that the first share of Series A Stock is issued and "Purchase Agreement" shall mean the Unit Purchase Agreement by and between the Corporation and the Purchasers (as identified on Exhibit A thereto) dated July 20, 2001.

(2)  The automatic conversion of the Series A Stock pursuant to Section (IV)(D)(4)(a)(i) is subject to the satisfaction of the following additional conditions:

a.    the Registration Statement as defined in the Purchase Agreement shall be available to the holders on the Mandatory Conversion Date for the resale by the holders thereof of the Common Stock issuable upon conversion of the Series A Stock and the exercise of the Warrants (as defined in the Purchase Agreement);

b.    the Corporation shall have complied with or performed in all material respects its covenants and agreements set forth in the Purchase Agreement and the Warrants that are required to be complied with or performed by the Corporation on or before the Mandatory Conversion Date;

c.    the representations and warranties of the Corporation set forth in the Purchase Agreement have been, as of the date of Closing (as defined in the Purchase Agreement) (except for representations and warranties that speak as of a specific date which representations shall be true and correct as of such date), true and correct in all material respects except for any inaccuracy which does not constitute a material adverse change in the business or status of the Company provided that "material adverse effect" qualifications and other qualifications based on the word "material" contained in any representation and warranty shall be disregarded with respect to this exception on each Mandatory Conversion Date; and

d.    the Common Stock issuable upon the Mandatory Conversion of the Series A Stock and upon exercise of the Warrants shall be listed for quotation and/or trading on the Nasdaq National Market, New York Stock Exchange or American Stock Exchange and no suspension of trading in the Common Stock on such market shall have occurred and be continuing as of the Mandatory Conversion Date and the Common Stock shall continue to meet the minimum listing requirements of the market on which the Common Stock is then listed for quotation or trading.

Not more than three (3) Trading Days following the Mandatory Conversion Date, the Corporation shall deliver to each holder of Series A Stock a certificate signed by an officer of the Corporation certifying that the conditions set forth in this subparagraph 4(a)(i) have been fulfilled and specifying the actual Mandatory Conversion Date and the actual Series A Conversion Ratio and Series A Conversion Price, it being understood that the holder may rely on such certificate as though it were a representation and warranty of the Corporation made in the Purchase Agreement and, in the event of any breach thereof, shall be entitled to the same remedies as may be available to the holder in the event of a breach of any such representation or warranty.

(3)  For purposes of this Certificate, "Trading Day" shall mean (A) if the applicable security is listed or admitted for trading on the New York Stock Exchange or another national security exchange, a day on which the New York Stock Exchange or such other national security exchange is open for business or (B) if the applicable security is quoted on the Nasdaq National Market, a day on which trades may be quoted thereon or (C) if the applicable security is not so listed, admitted for trading or quoted, any day other than a Saturday or Sunday or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close.

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(ii)Voluntary Conversion. Each share of Series A Stock (or fraction thereof) may, at the option of the holder, be converted at any time into such number of fully paid and nonassessable shares of Common Stock as determined by dividing the Original Issue Price by the Series A Conversion Price.

        (b)Conversion Price and Conversion Ratio.

(i)Conversion Ratio. The conversion ratio for Series A Stock in effect at any time for conversion of the Series A Stock (the "Series A Conversion Ratio") shall be the quotient obtained by dividing the Original Issue Price by the Series A Conversion Price, calculated as provided in Section (IV)(D)(4)(b)(ii).

(ii)Conversion Price. The conversion price for Series A Stock shall initially be $1.60 (the "Series A Conversion Price"). Such initial Series A Conversion Price shall be adjusted from time to time in accordance with this Section (IV)(D)(4). All references to Series A Conversion Price herein shall mean the Series A Conversion Price as so adjusted.

(c)Adjustments for Stock Splits and Combinations. If at any time or from time to time after July 20, 2001 (the "Designation Date") the Corporation effects a subdivision of outstanding Common Stock without a corresponding subdivision of Series A Stock, the Series A Conversion Price shall be proportionately decreased. Conversely, if at any time or from time to time after the Designation Date the Corporation combines the outstanding shares of Common Stock into a smaller number of shares without a corresponding combination of Series A Stock, the Series A Conversion Price shall be proportionately increased. Any adjustment under this Section (IV)(D)(4)(c) shall become effective at the close of business on the date the applicable subdivision or combination becomes effective.

(d)Adjustments for Common Stock Dividends and Distributions. If at any time or from time to time after the Designation Date the Corporation pays a dividend or other distribution in additional shares of Common Stock, the Series A Conversion Price shall be decreased as of the time of such issuance, as provided below:

(i)  The Series A Conversion Price shall be adjusted by multiplying the Series A Conversion Price by a fraction:

(1)  the numerator of which is the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance; and

(2)  the denominator of which is the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance plus the number of shares of Common Stock issuable in payment of such dividend or distribution;

(ii)  If the Corporation fixes a record date to determine which holders of Common Stock are entitled to receive such dividend or other distribution, the Series A Conversion Price shall be fixed as of the close of business on such record date and the number of shares of Common Stock shall be calculated immediately prior to the close of business on such record date; and

(iii)  If such record date is fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Series A Conversion Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Series A Conversion Price shall be adjusted pursuant to this Section (IV)(D)(4)(d) to reflect the actual payment of such dividend or distribution.

(e)Adjustments for Reclassifications, Exchanges or Substitutions. If at any time or from time to time after the Designation Date, the Common Stock issuable upon conversion of the Series A Stock is changed into the same or a different number of shares of any class or classes of stock, whether by recapitalization, reclassification or otherwise (other than an Acquisition or Asset Transfer as defined in Section (IV)(D)(2)(c) hereto or a subdivision or combination of shares or stock dividend or a

7

reorganization, merger, consolidation or sale of assets provided for elsewhere in this Section (IV)(D)(4)), in any such event each holder of Series A Stock shall then have the right thereafter to convert such stock into the kind and amount of stock and other securities and property receivable upon such recapitalization, reclassification or other change as if this Series A Stock had been converted immediately prior to such event. Such adjustment shall be made successively whenever any event listed above shall occur.

(f)Reorganizations, Mergers or Consolidations. If at any time or from time to time after the Designation Date, there is a capital reorganization of the Common Stock or the merger or consolidation of the Corporation with or into another corporation or another entity or person (other than an Acquisition or Asset Transfer as defined in Section (IV)(D)(2)(c) hereof or a recapitalization, subdivision, combination, reclassification, exchange or substitution of shares provided for elsewhere in this Section (IV)(D)(4)), as a part of such capital reorganization, provision shall be made so that the holders of the Series A Stock shall thereafter be entitled to receive upon conversion of the Series A Stock the number of shares of stock or other securities or property to which a holder of the number of shares of Common Stock deliverable upon conversion would have been entitled on such capital reorganization assuming (i) such holder of Common Stock is not a person with which the Corporation consolidated or into which the Corporation merged or which merged into the Corporation or to which such sale or transfer was made, as the case may be (the "Constituent Person"), or an affiliate of a Constituent Person and (ii) in the case of a consolidation, merger, sale or transfer which includes an election as to the consideration to be received by the holders, such holders of Common Stock failed to exercise its rights of election, as to the kind or amount of securities, cash and other property receivable upon such consolidation, merger, sale or other transfer; (provided that if the kind or amount of securities, cash and other property receivable upon such consolidation, merger, sale or transfer is not the same for each share of Common Stock held immediately prior to such consolidation, merger, sale or transfer by other than the Constituent Person or an affiliate thereof and in respect of which such rights of election shall not have been exercised (the "Non-Electing Share"), then for purposes of this paragraph the kind and amount of securities, cash and other property receivable upon such consolidation, merger, sale or transfer for each Non-Electing Share shall be deemed to be the kind and amount so receivable per share by a plurality of the Non-Electing Shares. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section (IV)(D)(4) with respect to the rights of the holders of Series A Stock after the capital reorganization to the end that the provisions of this Section (IV)(D)(4) (including adjustment of the Series A Conversion Price and the number of shares issuable upon conversion of the Series A Stock) shall be applicable after that event and be as nearly equivalent as practicable.

(g)Extraordinary Dividend. In case the Corporation shall fix a record date for the making of a distribution to holders of Common Stock (including any such distribution made in connection with a consolidation or merger in which the Corporation is the continuing corporation) of evidences of indebtedness, assets or other property (other than dividends payable in Common Stock or rights, options or warrants referred to in, and for which an adjustment is made pursuant to, this Section (IV)(D)(4)), the Series A Conversion Price to be in effect after such record date shall be determined by multiplying the Series A Conversion Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the Current Market Price (as hereinafter defined) per share of Common Stock on such record date, less the fair market value of the portion of the assets, other property or evidence of indebtedness so to be distributed which is applicable to one share of Common Stock, and the denominator of which shall be such Current Market Price per share of Common Stock. Such fair market value shall be determined by the Board of Directors of the Corporation; provided that if the holder of Series A Stock shall object to any such determination, the holder of Series A Stock shall retain an independent appraiser reasonably satisfactory to the Corporation to determine such fair market value. Such adjustments shall be made successively whenever such a record date is fixed; and in the event that such distribution is not so made, the

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Series A Conversion Price shall again be adjusted to be the Series A Conversion Price which would then be in effect if such record date had not been fixed. The "Current Market Price" per share of Common Stock at any date shall be deemed to be the average of the last reported sale prices for the ten (10) consecutive Trading Days preceding the date in question.

(h)Adjustment to Reflect Future Market Price. In the event that the volume-weighted average trading price on the Nasdaq National Market System for the Common Stock for the five Trading Days following the tenth (10^th) Trading Day following the public announcement of the Corporation's financial results for the three months ended June 30, 2001 (which announcement shall be made on the same Trading Day as the public announcement of the sale of the Units) (the "Reset Price") is less than the then effective Series A Conversion Price, then and in such case, the then existing Series A Conversion Price shall be adjusted, as of the close of business on the date the Reset Price is determinable, to a price equal to the Reset Price.

(i)Sales of Shares Below Series A Conversion Price.

(i)  If at any time or from time to time after the Designation Date, the Corporation issues or sells, or is deemed by the express provisions of this subsection (i) to have issued or sold, Additional Shares of Common Stock (as defined in subsection (i)(vii) below), other than as a dividend or other distribution on Common Stock as provided in Sections (IV)(D)(4)(c) and (IV)(D)(4)(d) above, and other than a subdivision or combination of shares of Common Stock as provided in Section (IV)(D)(4)(c) above, for an Effective Price (as defined in subsection (i)(vii) below) less than the Series A Conversion Price, then and in each such case, the Series A Conversion Price shall be adjusted, as of the opening of business on the date of such issue or sale, to a price equal to the Effective Price at which such Additional Shares of Common Stock are so issued.

(ii)  For the purpose of making any adjustment required under this Section (IV)(D)(4)(i), the aggregate consideration received by the Corporation for any issue or sale of securities shall be: (A) to the extent it consists of cash, be computed at the net amount of cash received by the Corporation after deduction of any underwriting or similar commissions, compensation or concessions paid or allowed by the Corporation in connection with such issue or sale but without deduction of any expenses payable by the Corporation; (B) to the extent it consists of property other than cash, be computed at the fair value of that property as determined in good faith by the Board of Directors; and (C) if Additional Shares of Common Stock, Convertible Securities (as hereinafter defined) or rights or options to purchase either Additional Shares of Common Stock or Convertible Securities are issued or sold together with other stock or securities or other assets of the Corporation for a consideration which covers both, be computed as the portion of the consideration so received that may be reasonably determined in good faith by the Board of Directors to be allocable to such Additional Shares of Common Stock, Convertible Securities or rights or options (the "Aggregate Consideration").

(iii)  For the purpose of the adjustment required under this Section (IV)(D)(4)(i), if the Corporation issues or sells (A) any rights or options for the purchase of, or stock or other securities convertible into, Additional Shares of Common Stock (such convertible stock or securities being herein referred to as "Convertible Securities") or (B) rights or options for the purchase of Additional Shares of Common Stock or Convertible Securities, in each case the Corporation shall be deemed to have issued at the time of the issuance of such rights or options or Convertible Securities the maximum number of Additional Shares of Common Stock issuable upon exercise or conversion thereof and to have received as consideration for the issuance of such shares an amount equal to the total amount of the consideration, if any, received by the Corporation for the issuance of such rights or options or Convertible Securities plus: in the case of such rights or options, the minimum amounts of consideration, if any, payable to the Corporation upon the exercise of such rights or options, and, in the case of Convertible Securities, the

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minimum amounts of consideration, if any, payable to the Corporation upon the conversion thereof (other than by cancellation of liabilities or obligations evidenced by such Convertible Securities); provided that if in the case of Convertible Securities the minimum amounts of such consideration cannot be ascertained, but are a function of antidilution or similar protective clauses, the Corporation shall be deemed to have received the minimum amounts of consideration without reference to such clauses.

(iv)  If the minimum amount of consideration payable to the Corporation upon the exercise or conversion of rights, options or Convertible Securities is reduced over time or on the occurrence or non-occurrence of specified events other than by reason of antidilution adjustments for which a corresponding adjustment is made hereunder, the Effective Price shall be recalculated using the figure to which such minimum amount of consideration is reduced; provided further that if the minimum amount of consideration payable to the Corporation upon the exercise or conversion of such rights, options or Convertible Securities is subsequently increased, the Effective Price shall be again recalculated using the increased minimum amount of consideration payable to the Corporation upon the exercise or conversion of such rights, options or Convertible Securities.

(v)  No further adjustment of the Series A Conversion Price, as adjusted upon the issuance of such rights, options or Convertible Securities, shall be made as a result of the actual issuance of Additional Shares of Common Stock or the exercise of any such rights or options or the conversion of any such Convertible Securities. If any such rights or options or the conversion privilege represented by any such Convertible Securities shall expire without having been exercised, the Series A Conversion Price as adjusted upon the issuance of such rights, options or Convertible Securities shall be readjusted to the Series A Conversion Price which would have been in effect had an adjustment been made on the basis that the only Additional Shares of Common Stock so issued were the Additional Shares of Common Stock, if any, actually issued or sold on the exercise of such rights or options or rights of conversion of such Convertible Securities, and such Additional Shares of Common Stock, if any, were issued or sold for the consideration actually received by the Corporation upon such exercise, plus the consideration, if any, actually received by the Corporation for the granting of all such rights or options, whether or not exercised, plus the consideration received for issuing or selling the Convertible Securities actually converted, plus the consideration, if any, actually received by the Corporation (other than by cancellation of liabilities or obligations evidenced by such Convertible Securities) on the conversion of such Convertible Securities, provided that such readjustment shall not apply to prior conversions of Series A Stock.

(vi)  No adjustment of the Series A Conversion Price shall be made in an amount less than one cent per share, provided that any adjustments that are not required to be made by reason of this sentence shall be carried forward and shall be taken into account in any subsequent adjustment made to the Series A Conversion Price. Except as provided in Section (IV)(D)(4)(c), no adjustment of the Series A Conversion Price pursuant to this Section (IV)(D)(4)(i) shall have the effect of increasing the Series A Conversion Price above the Series A Conversion Price in effect immediately before such adjustment.

(vii)Additional Shares of Common Stock. For the purpose of making any adjustment to the Series A Conversion Price required under this Section (IV)(D)(4), "Additional Shares of Common Stock" shall mean all shares of Common Stock issued by the Corporation or deemed to be issued pursuant to this Section (IV)(D)(4), whether or not subsequently reacquired or retired by the Corporation other than: (A) shares of Common Stock issued upon conversion of the Series A Stock; (B) shares of Common Stock and/or options, warrants or other Common Stock purchase rights, and the Common Stock issued pursuant to such options, warrants or other rights (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like) issued after the Designation Date to employees, officers or directors of, or consultants or advisors to, the Corporation or any of its subsidiaries pursuant to stock purchase or stock option plans or other

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similar arrangements that are approved by the Board; (C) shares of Common Stock issued pursuant to the exercise of options, warrants or convertible securities outstanding as of the Designation Date; (D) shares of Common Stock and/or options, warrants or other Common Stock purchase rights, and the Common Stock issued pursuant to such options, warrants or other rights issued for consideration other than cash pursuant to a merger, consolidation, acquisition or similar business combination approved by the Board; and (E) shares of Common Stock issued pursuant to any equipment leasing arrangement, or debt financing from a bank or similar financial institution approved by the Board. References to Common Stock in the subsections of this clause (vii) above shall mean all shares of Common Stock issued by the Corporation or deemed to be issued pursuant to this Section (IV)(D)(4). The "Effective Price" of Additional Shares of Common Stock shall mean the quotient determined by dividing the total number of Additional Shares of Common Stock issued or sold, or deemed to have been issued or sold, by the Corporation under this Section (IV)(D)(4)(i), into the Aggregate Consideration received, or deemed to have been received, by the Corporation for such issuance or sale.

(j)Third Party Tender Offer. If at any time or from time to time after the Designation Date, a tender or exchange offer is made by a person other than the Corporation or one of its affiliates for an amount that increases the offeror's ownership of Common Stock to more than twenty-five percent (25%) of the Common Stock outstanding and shall involve the payment by such person of consideration per share of Common Stock having a fair market value (as determined by the Board of Directors and described in a resolution of the Board of Directors) that as of the last time (the "Offer Expiration Time") tenders or exchanges may be made pursuant to such tender or exchange offer (as it shall have been amended) exceeds the Current Market Price of the Common Stock on the Trading Day next succeeding the Offer Expiration Time, and in which, as of the Offer Expiration Time the Board of Directors is not recommending rejection of the offer, the Series A Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Series A Conversion Price in effect immediately prior to the Offer Expiration Time by a fraction the numerator of which shall be the number of shares of Common Stock outstanding (including any tendered or exchanges shares) at the Offer Expiration Time multiplied by the Current Market Price of the Common Stock on the Trading Day next succeeding the Offer Expiration Time and the denominator of which shall be the sum of (i) the fair market value of the aggregate consideration payable to stockholders based on the acceptance (up to a maximum specified in the terms of the tender or exchange offer) of all shares validly tendered or exchanged and not withdrawn as of the Offer Expiration Time (the shares deemed so accepted, up to any such maximum, being referred to as the "Accepted Purchased Shares") and (ii) the product of the number of shares of Common Stock outstanding (less any Accepted Purchased Shares) at the Offer Expiration Time and the Current Market Price of the Common Stock on the Trading Day next succeeding the Offer Expiration Time, such reduction to become effective immediately prior to the opening of business on the Trading Day following the Offer Expiration Time. In the event that the offeror is obligated to purchase shares pursuant to any such tender or exchange offer, but such person is permanently prevented by applicable law from effecting any such purchase or all such purchases are rescinded, the Series A Conversion Price shall again be adjusted to be the Series A Conversion Price that would be in effect if such tender or exchange offer had not been made.

(k)Certificate as to Adjustments—Notice by the Corporation. In each case of an adjustment or readjustment of the Series A Conversion Price, the Corporation, at its expense, shall compute such adjustment or readjustment in accordance with the provisions hereof and prepare a certificate showing such adjustment or readjustment, and shall mail such certificate, by first class mail, postage prepaid, to each registered holder of Series A Stock at the holder's address as shown in the Corporation's books. The certificate shall set forth such adjustment or readjustment, showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (i) the consideration received or deemed to be received by the Corporation for any Additional Shares of Common Stock issued or sold or deemed to have been issued or sold, (ii) the Series A Conversion Price at the time in effect, (iii) the

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number of Additional Shares of Common Stock and (iv) the type and amount, if any, of other property which at the time would be received upon conversion of the Series A Stock.

(l)Notices of Record Date. Upon (i) any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or (ii) any Acquisition or other capital reorganization of the Corporation, any reclassification or recapitalization of the capital stock of the Corporation, any merger or consolidation of the Corporation with or into any other corporation, Asset Transfer, or any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, the Corporation shall mail to each holder of Series A Stock at least ten (10) days prior to the record date specified therein a notice specifying (A) the date on which any such record is to be taken for the purpose of such dividend or distribution and a description of such dividend or distribution, (B) the date on which any such Acquisition, reorganization, reclassification, transfer, consolidation, merger, Asset Transfer, dissolution, liquidation or winding up is expected to become effective, and (C) the date, if any, that is to be fixed as to when the holders of record of Common Stock (or other securities) shall be entitled to exchange their shares of Common Stock (or other securities) for securities or other property deliverable upon such Acquisition, reorganization, reclassification, transfer, consolidation, merger, Asset Transfer, dissolution, liquidation or winding up.

(m)Mechanics of Conversion. Each holder of Series A Stock who desires to convert the same into shares of Common Stock pursuant to this Section (IV)(D)(4) shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or any transfer agent for the Series A Stock, and shall give written notice to the Corporation at such office that such holder elects to convert the same. Such notice shall state the number of shares of Series A Stock being converted. Thereupon, the Corporation shall promptly issue and deliver at such office to such holder a certificate or certificates for the number of shares of Common Stock to which such holder is entitled and shall promptly pay (i) in cash or, to the extent sufficient funds are not then legally available therefor, in Common Stock (at the Current Market Price), any declared and unpaid dividends on the shares of Series A Stock being converted and (ii) in cash (at the Current Market Price) the value of any fractional share of Common Stock otherwise issuable to any holder of Series A Stock. Such conversion shall be deemed to have been made at the close of business on the date of such surrender of the certificates representing the shares of Series A Stock to be converted, and the person entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder of such shares of Common Stock on such date.

(n)Partial Conversion. If some but not all of the shares of Series A Stock represented by a certificate or certificates surrendered by a holder are converted, the Corporation shall execute and deliver to or on the order of the holder, at the expense of the Corporation, a new certificate representing the shares of Series A Stock that were not converted.

(o)Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of shares of Series A Stock. In lieu of fractional shares, the Corporation shall pay cash equal to the fair market value of such Common Stock, as determined by the Board of Directors in good faith based on the earnings history, book value and prospects of the Corporation in light of market conditions generally.

(p)Notice. Any notice required by the provisions of this Section (IV)(D)(4) shall be in writing and shall be deemed effectively given: (i) upon personal delivery to the party to be notified, (ii) when sent by confirmed electronic mail or facsimile if sent during normal business hours of the recipient; if not, then on the next business day, (iii) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (iv) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with verification of receipt. All notices shall

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be addressed to each holder of record at the address of such holder appearing on the books of the Corporation.

(q)Payment of Taxes. The Corporation shall pay all taxes (other than taxes based upon income) and other governmental charges that may be imposed with respect to the issue or delivery of shares of Common Stock upon conversion of shares of Series A Stock, excluding any tax or other charge imposed in connection with any transfer involved in the issue and delivery of shares of Common Stock in a name other than that in which the shares of Series A Stock so converted were registered.

(r)No Impairment. Without the consent of the holders of then outstanding Series A Stock as required under Section (IV)(D)(3)(c), the Corporation shall not amend its Certificate of Incorporation or participate in any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or take any other voluntary action, for the purpose of avoiding or seeking to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but shall at all times in good faith assist in carrying out all such action as may be reasonably necessary or appropriate in order to protect the conversion rights of the holders of the Series A Stock against other impairment.

(s)Reservation of Common Stock. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series A Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series A Stock and, if at any time the number of authorized but unissued shares of Common Stock is insufficient to effect the conversion of all then outstanding shares of the Series A Stock, the Corporation shall immediately take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as is sufficient for such purpose.

5. No Reissuance of Stock. No share or shares of Series A Stock converted, purchased, redeemed or otherwise acquired by the Corporation may be reissued, and all such shares shall be canceled, retired and eliminated from the shares that the Corporation is authorized to issue. The Corporation may from time to time take such appropriate corporate action as may be necessary to reduce the authorized number of shares of Series A Stock accordingly.

6. Redemption. Shares of Series A Stock shall not be subject to involuntary redemption by the Corporation, in whole or in part.

7. Purchase of Series A Stock by Corporation. Nothing in this Certificate of Incorporation prevents or restricts the Corporation from offering to purchase, from time to time either in a public or private sale, all or any of the Series A Stock at such price or prices as the Corporation may determine, subject to provisions of applicable law.

8. Fractional Shares of Series A Stock. The Corporation may sell or issue, and holders of Series A Stock may hold, own or transfer, fractional shares of Series A Stock. Nothing in this Certificate of Incorporation shall prevent or restrict the application of the provisions of this Certificate to fractional shares of Series A Stock.

9. Additional Restrictions on Voluntary Conversion or Transfer and Right to Vote. In no event shall either Capital Ventures International or RGC International Investors, LDC have the right voluntarily to convert shares of Series A Stock into shares of Common Stock under Section (IV)(D)(4)(a)(ii) hereof or to dispose of any Series A Stock or to vote any shares of Series A Stock to the extent that such right to effect such voluntary conversion or disposition or to vote would result in either Capital Ventures International or any of its affiliates or RGC International Investors, LDC or any of its affiliates beneficially owning more than 4.99% of the outstanding shares of Common Stock. For purposes of this Section (IV)(D)(9), beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act and Regulation 13D-G thereunder. The restriction contained in this

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Section (IV)(D)(9) shall not in any event apply to the mandatory conversion provisions contained in Section (IV)(D)(4)(a)(i) of this Agreement and may not be altered, amended, deleted or changed in any manner whatsoever unless the holders of a majority of the outstanding shares of Common Stock and either Capital Ventures International with respect to its shares or RGC International Investors, LDC with respect to its shares shall approve, in writing, such alteration, amendment, deletion or change.

V.

        For the management of the business and for the conduct of the affairs of the Corporation, and in further definition, limitation and regulation of the powers of the Corporation, of its directors and of its stockholders or any class thereof, as the case may be, it is further provided that:

        A.    The management of the business and the conduct of the affairs of the Corporation shall be vested in its Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed as provided in Section (IV)(D)(3)(c) of this Certificate of Incorporation.

1. Board of Directors. Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, the directors shall be divided into three classes designated as Class I, Class II and Class III, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors. As of the first annual meeting of stockholders following the date upon which this Certificate of Incorporation was filed, the term of office of the Class III directors shall expire and Class III directors shall be elected for a full term of three years. As of the second annual meeting of stockholders following the date upon which this Certificate of Incorporation was filed, the term of office of the Class I directors shall expire and Class I directors shall be elected for a full term of three years. As of the third annual meeting of stockholders following the date upon which this Certificate of Incorporation was filed, the term of office of the Class II directors shall expire and Class II directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting.

        Notwithstanding the foregoing provisions of this section, each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director.

2. Removal of Directors. Neither the Board of Directors nor any individual director may be removed without cause. Subject to any limitation imposed by law, any individual director or directors may be removed with cause by the holders of a majority of the voting power of the Corporation entitled to vote at an election of directors.

3.    Vacancies.

(a)  Subject to the rights of the holders of any series of Preferred Stock, any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other causes and any newly created directorships resulting from any increase in the number of directors, shall, unless the Board of Directors determines by resolution that any such vacancies or newly created directorships shall be filled by the stockholders, except as otherwise provided by law, be filled only by the affirmative vote of a majority of the directors then in office, even though less than a quorum of the Board of Directors, and not by the stockholders. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the director for which the vacancy was created or occurred and until such director's successor shall have been elected or qualified. The stockholders may elect a director at any time to fill any vacancy not filled by the directors, subject to Section (V)(A)(4)(b) hereof.

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(b)  If at any time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole board (as constituted immediately prior to any such increase), the Delaware Court of Chancery may, upon application of stockholder or stockholders holding at least ten percent (10%) of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directions then in offices as aforesaid, which election shall be governed by Section 211 of DGCL.

        B. Bylaw Amendments.    Subject to paragraph (h) of Section 43 of the Bylaws, the Bylaws may be altered or amended or new Bylaws adopted by the affirmative vote of at least sixty-six and two-thirds percent (66²/3%) of the voting power of all the then-outstanding shares of the voting stock of the Corporation entitled to vote. The Board of Directors shall also have the power to adopt, amend or repeal the Bylaws by a resolution adopted by a majority of the directors.

        C.    The directors of the Corporation need not be elected by written ballot unless the Bylaws so provide.

        D.    No action shall be taken by the stockholders of the Corporation except at an annual meeting or special meeting of the stockholders called in accordance with the Bylaws.

        E.    Advance notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the Corporation shall be given in the manner provided in the Bylaws of the Corporation.

VI.

        A.    No stockholder of this Corporation shall have, solely by reason of being a stockholder, any preemptive or preferential right or subscription right to any stock of this Corporation or to any obligations convertible into stock of this Corporation, or to any warrant or option for the purchase thereof, except to the extent provided by resolution or resolutions of the Board of Directors establishing a series of Preferred Stock or by written agreement with this Corporation.

        B.    In any election for directors of the Corporation, a holder of shares of any class or series of stock then entitled to vote has the right to vote in person or by proxy the number of shares of stock held thereby for as many persons as there are directors to be elected. No cumulative voting for directors shall be permitted.

VII.

        A.    The liability of the directors for monetary damages shall be eliminated to the fullest extent under applicable law.

        B.    Any repeal or modification of this Article VII shall be prospective and shall not affect the rights under this Article VII in effect at the time of the alleged occurrence of any act or omission to act giving rise to liability or indemnification.

VIII.

        A.    The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner or hereafter prescribed by statute, except as provided in paragraph B. of this Article VIII, and all rights conferred upon the stockholders are granted subject to this reservation.

        B.    Notwithstanding any other provisions of this Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of

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the holders of any particular class or series of voting stock required by law, this Certificate of Incorporation or any Preferred Stock Designation, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66²/3%) of the voting power of all the then-outstanding shares of the voting stock, voting together as a single class, shall be required to alter, amend or repeal Articles V, VII and VIII of this Certificate of Incorporation.

IX.

        The name and mailing address of the Sole Incorporator is as follows:

Peggy A. Pennington
Cooley Godward LLP
5200 Carillon Point
Kirkland, WA 98033-7356

IN WITNESS WHEREOF, this Certificate has been subscribed this day of                    , 2001 by the undersigned who affirms that the statements made herein are true and correct.

INTERNAP DELAWARE, INC.
By:
	Peggy A. Pennington, Sole Incorporator

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CERTIFICATE OF MERGER

OF

INTERNAP NETWORK SERVICES CORPORATION
a Washington corporation

INTO

INTERNAP DELAWARE, INC.
a Delaware corporation

        The undersigned corporation organized and existing under and by virtue of the General Corporation Law of the state of Delaware does hereby certify that:

        1.    The name and state of incorporation of each of the constituent corporations of the merger is as follows:

Name	State of Incorporation
Internap Network Services Corporation	Washington
Internap Delaware, Inc.	Delaware

        2.    An Agreement and Plan of Merger dated as of July 25, 2001 (the "Agreement of Merger") between Internap Network Services Corporation and Internap Delaware, Inc. has been approved, adopted, certified, executed and acknowledged by each of the constituent corporations in accordance with subsection (c) of Section 252 of the General Corporation Law of the state of Delaware.

        3.    The name of the surviving corporation is Internap Delaware, Inc. Upon effectiveness of the filing of this Certificate of Merger, Internap Delaware, Inc. will change its name to Internap Network Services Corporation, as provided in Section 4 below.

        4.    The Certificate of Incorporation of Internap Delaware, Inc., a Delaware corporation, the surviving corporation, shall be the Certificate of Incorporation of the surviving corporation; provided, however, upon the effectiveness of the filing of this Certificate of Merger, Article I thereof shall be amended and restated to change the name of Internap Delaware, Inc. to be as follows: "The name of this Corporation (hereinafter called the "Corporation") is INTERNAP NETWORK SERVICES CORPORATION" and Article IV.C. thereof shall be amended and restated as follows: "3,500,000 of the authorized shares of Preferred Stock are hereby designated "Series A Convertible Preferred Stock" (the "Series A Stock")."

        5.    The executed Agreement of Merger is on file at the principal place of business of the surviving corporation. The address of the principal place of business of the surviving corporation is 601 Union Street, Suite 1000, Seattle, WA 98101.

        6.    A copy of the Agreement of Merger will be furnished by the surviving corporation, on request without cost, to any stockholder of any constituent corporation.

        7.    The authorized capital stock of Internap Network Services Corporation consists of (a) 500,000,000 shares of Common Stock and (b) 10,000,000 shares of Preferred Stock.

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IN WITNESS WHEREOF, this Certificate of Merger is hereby executed on behalf of the surviving corporation, Internap Delaware, Inc. and attested to by its officers thereunto duly authorized.

Dated as of September 17, 2001

INTERNAP DELAWARE, INC. a Delaware corporation
By:	/s/  MICHAEL VENT
	Michael Vent Chief Operating Officer
Attest:
By:	/s/  PAUL E. MCBRIDE
	Paul E. McBride Secretary

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Exhibit 3.2

BYLAWS

OF

INTERNAP DELAWARE, INC.

(A DELAWARE CORPORATION)

TABLE OF CONTENTS

			PAGE
ARTICLE I		Offices	1
	Section 1.	Registered Office	1
	Section 2.	Other Offices	1
ARTICLE II		Corporate Seal	1
	Section 3.	Corporate Seal	1
ARTICLE III		Stockholders' Meetings	1
	Section 4.	Place Of Meetings	1
	Section 5.	Annual Meetings	1
	Section 6.	Special Meetings	3
	Section 7.	Notice Of Meetings	4
	Section 8.	Quorum	4
	Section 9.	Adjournment And Notice Of Adjourned Meetings	4
	Section 10.	Voting Rights	4
	Section 11.	Joint Owners Of Stock	5
	Section 12.	List Of Stockholders	5
	Section 13.	Action Without Meeting	5
	Section 14.	Organization	5
ARTICLE IV		Directors	6
	Section 15.	Number And Term Of Office	6
	Section 16.	Powers	6
	Section 17.	Classes of Directors	6
	Section 18.	Vacancies	6
	Section 19.	Resignation	7
	Section 20.	Removal	7
	Section 21.	Meetings	7
	Section 22.	Quorum And Voting	8
	Section 23.	Action Without Meeting	8
	Section 24.	Fees And Compensation	8
	Section 25.	Committees	8
	Section 26.	Organization	9
ARTICLE V		Officers	9
	Section 27.	Officers Designated	9
	Section 28.	Tenure And Duties Of Officers	9
	Section 29.	Delegation Of Authority	11
	Section 30.	Resignations	11
	Section 31.	Removal	11
ARTICLE VI		Execution Of Corporate Instruments And Voting Of Securities Owned By The Corporation	11
	Section 32.	Execution Of Corporate Instruments	11
	Section 33.	Voting Of Securities Owned By The Corporation	11
ARTICLE VII		Shares Of Stock	12
	Section 34.	Form And Execution Of Certificates	12
	Section 35.	Lost Certificates	12
	Section 36.	Transfers	12
	Section 37.	Fixing Record Dates	12
	Section 38.	Registered Stockholders	13
ARTICLE VIII		Other Securities Of The Corporation	13
	Section 39.	Execution Of Other Securities	13

ARTICLE IX		Dividends	14
	Section 40.	Declaration Of Dividends	14
	Section 41.	Dividend Reserve	14
ARTICLE X		Fiscal Year	14
	Section 42.	Fiscal Year	14
ARTICLE XI		Indemnification	14
	Section 43.	Indemnification Of Directors, Executive Officers, Other Officers, Employees And Other Agents	14
ARTICLE XII		Notices	17
	Section 44.	Notices	17
ARTICLE XIII		Amendments	18
	Section 45.	Amendments	18
ARTICLE XIV		Loans To Officers	18
	Section 45.	Loans To Officers	18

BYLAWS
OF
INTERNAP DELAWARE, INC.

ARTICLE I

Offices

        Section 1.    Registered Office.    The registered office of the corporation in the State of Delaware shall be in the City of Wilmington, County of New Castle.

        Section 2.    Other Offices.    The corporation shall also have and maintain an office or principal place of business at such place as may be fixed by the Board of Directors, and may also have offices at such other places, both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require.

ARTICLE II

Corporate Seal

        Section 3.    Corporate Seal.    The corporate seal shall consist of a die bearing the name of the corporation and the inscription, "Corporate Seal-Delaware." Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise.

ARTICLE III

Stockholders' Meetings

        Section 4.    Place Of Meetings.    Meetings of the stockholders of the corporation shall be held at such place, either within or without the State of Delaware, as may be designated from time to time by the Board of Directors, or, if not so designated, then at the office of the corporation required to be maintained pursuant to Section 2 hereof.

        Section 5.    Annual Meetings.

(a)  The annual meeting of the stockholders of the corporation, for the purpose of election of directors and for such other business as may lawfully come before it, shall be held on such date and at such time as may be designated from time to time by the Board of Directors. Nominations of persons for election to the Board of Directors of the corporation and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders: (i) pursuant to the corporation's notice of meeting of stockholders; (ii) by or at the direction of the Board of Directors; or (iii) by any stockholder of the corporation who was a stockholder of record at the time of giving of notice provided for in the following paragraph, who is entitled to vote at the meeting and who complied with the notice procedures set forth in Section 5.

(b)  At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (c) of Section 5(a) of these Bylaws, (i) the stockholder must have given timely notice thereof in writing to the Secretary of the corporation, (ii) such other business must be a proper matter for stockholder action under the Delaware General Corporation Law ("DGCL"), (iii) if the stockholder, or the beneficial owner on whose behalf any such proposal or nomination is made, has provided the corporation with a Solicitation Notice (as defined in this Section 5(b)), such stockholder or beneficial owner must, in the case of a proposal, have delivered a proxy statement and form of proxy to holders of at least the percentage of the corporation's voting shares required under applicable law to carry any such proposal, or, in the case of a nomination or

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nominations, have delivered a proxy statement and form of proxy to holders of a percentage of the corporation's voting shares reasonably believed by such stockholder or beneficial owner to be sufficient to elect the nominee or nominees proposed to be nominated by such stockholder, and must, in either case, have included in such materials the Solicitation Notice, and (iv) if no Solicitation Notice relating thereto has been timely provided pursuant to this section, the stockholder or beneficial owner proposing such business or nomination must not have solicited a number of proxies sufficient to have required the delivery of such a Solicitation Notice under this Section 5. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the ninetieth (90^th) day nor earlier than the close of business on the one hundred twentieth (120^th) day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced more than thirty (30) days prior to or delayed by more than thirty (30) days after the anniversary of the preceding year's annual meeting, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the one hundred twentieth (120^th) day prior to such annual meeting and not later than the close of business on the later of the ninetieth (90^th) day prior to such annual meeting or the tenth (10^th) day following the day on which public announcement of the date of such meeting is first made. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth: (A) as to each person whom the stockholder proposed to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "1934 Act"), and Rule 14a-11 thereunder (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (B) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (C) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the corporation's books, and of such beneficial owner, (ii) the class and number of shares of the corporation which are owned beneficially and of record by such stockholder and such beneficial owner, and (iii) whether either such stockholder or beneficial owner intends to deliver a proxy statement and form of proxy to holders of, in the case of the proposal, at least the percentage of the corporation's voting shares required under applicable law to carry the proposal or, in the case of a nomination or nominations, a sufficient number of holders of the corporation's voting shares to elect such nominee or nominees (an affirmative statement of such intent, a "Solicitation Notice").

(c)  Notwithstanding anything in the second sentence of Section 5(b) of these Bylaws to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the corporation at least one hundred (100) days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this Section 5 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the corporation not later than the close of business on the tenth (10^th) day following the day on which such public announcement is first made by the corporation.

(d)  Only such persons who are nominated in accordance with the procedures set forth in this Section 5 shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 5. Except as otherwise provided by law, the Chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before

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the meeting was made, or proposed, as the case may be, in accordance with the procedures set forth in these Bylaws and, if any proposed nomination or business is not in compliance with these Bylaws, to declare that such defective proposal or nomination shall not be presented for stockholder action at the meeting and shall be disregarded.

(e)  Notwithstanding the foregoing provisions of this Section 5, in order to include information with respect to a stockholder proposal in the proxy statement and form of proxy for a stockholders' meeting, stockholders must provide notice as required by the regulations promulgated under the 1934 Act. Nothing in these Bylaws shall be deemed to affect any rights of stockholders to request inclusion of proposals in the corporation proxy statement pursuant to Rule 14a-8 under the 1934 Act.

(f)    For purposes of this Section 5, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the 1934 Act.

        Section 6.    Special Meetings.

(a)  Special meetings of the stockholders of the corporation may be called, for any purpose or purposes, by (i) the Chairman of the Board of Directors, (ii) the Chief Executive Officer, or (iii) the Board of Directors pursuant to a resolution adopted by a majority of the Board of Directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board of Directors for adoption).

(b)  If a special meeting is properly called by any person or persons other than the Board of Directors, the request shall be in writing, specifying the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the Chairman of the Board of Directors, the Chief Executive Officer or the Secretary of the corporation. No business may be transacted at such special meeting otherwise than specified in such notice. The Board of Directors shall determine the time and place of such special meeting, which shall be held not less than thirty-five (35) nor more than one hundred twenty (120) days after the date of the receipt of the request. Upon determination of the time and place of the meeting, the officer receiving the request shall cause notice to be given to the stockholders entitled to vote, in accordance with the provisions of Section 7 of these Bylaws. If the notice is not given within one hundred (100) days after the receipt of the request, the person or persons properly requesting the meeting may set the time and place of the meeting and give the notice. Nothing contained in this paragraph (b) shall be construed as limiting, fixing or affecting the time when a meeting of stockholders called by action of the Board of Directors may be held.

(c)  Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the corporation's notice of meeting (i) by or at the direction of the Board of Directors or (ii) by any stockholder of the corporation who is a stockholder of record at the time of giving notice provided for in these Bylaws who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 6(c). In the event the corporation calls a special meeting of stockholders for the purpose of electing one (1) or more directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the corporation's notice of meeting, if the stockholder's notice required by Section 5(b) of these Bylaws shall be delivered to the Secretary at the principal executive offices of the corporation not earlier than the close of business on the one hundred twentieth (120^th) day prior to such special meeting and not later than the close of business on the later of the ninetieth (90^th) day prior to such meeting or the tenth (10^th) day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event

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shall the public announcement of an adjournment of a special meeting commence a new time period for the giving of a stockholder's notice as described above.

        Section 7.    Notice Of Meetings.    Except as otherwise provided by law or the Certificate of Incorporation, written notice of each meeting of stockholders shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting, such notice to specify the place, date and hour and purpose or purposes of the meeting. Notice of the time, place and purpose of any meeting of stockholders may be waived in writing, signed by the person entitled to notice thereof, either before or after such meeting, and will be waived by any stockholder by his attendance thereat in person or by proxy, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Any stockholder so waiving notice of such meeting shall be bound by the proceedings of any such meeting in all respects as if due notice thereof had been given.

        Section 8.    Quorum.    At all meetings of stockholders, except where otherwise provided by statute or by the Certificate of Incorporation, or by these Bylaws, the presence, in person or by proxy duly authorized, of the holders of a majority of the outstanding shares of stock entitled to vote shall constitute a quorum for the transaction of business. In the absence of a quorum, any meeting of stockholders may be adjourned, from time to time, either by the chairman of the meeting or by vote of the holders of a majority of the shares represented thereat, but no other business shall be transacted at such meeting. The stockholders present at a duly called or convened meeting, at which a quorum is present, may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. Except as otherwise provided by statute, the Certificate of Incorporation or these Bylaws, in all matters other than the election of directors, the affirmative vote of the majority of shares present in person or represented by proxy at the meeting and entitled to vote on the subject matter shall be the act of the stockholders. Except as otherwise provided by statute, the Certificate of Incorporation or these Bylaws, directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. Where a separate vote by a class or classes or series is required, except where otherwise provided by the statute or by the Certificate of Incorporation or these Bylaws, a majority of the outstanding shares of such class or classes or series, present in person or represented by proxy, shall constitute a quorum entitled to take action with respect to that vote on that matter and, except where otherwise provided by the statute or by the Certificate of Incorporation or these Bylaws, the affirmative vote of the majority (plurality, in the case of the election of directors) of the votes cast by the holders of shares of such class or classes or series shall be the act of such class or classes or series.

        Section 9.    Adjournment And Notice Of Adjourned Meetings.    Any meeting of stockholders, whether annual or special, may be adjourned from time to time either by the chairman of the meeting or by the vote of a majority of the shares casting votes. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.

        Section 10.    Voting Rights.    For the purpose of determining those stockholders entitled to vote at any meeting of the stockholders, except as otherwise provided by law, only persons in whose names shares stand on the stock records of the corporation on the record date, as provided in Section 12 of these Bylaws, shall be entitled to vote at any meeting of stockholders. Every person entitled to vote shall have the right to do so either in person or by an agent or agents authorized by a proxy granted in

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accordance with Delaware law. An agent so appointed need not be a stockholder. No proxy shall be voted after three (3) years from its date of creation unless the proxy provides for a longer period.

        Section 11.    Joint Owners Of Stock.    If shares or other securities having voting power stand of record in the names of two (2) or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety, or otherwise, or if two (2) or more persons have the same fiduciary relationship respecting the same shares, unless the Secretary is given written notice to the contrary and is furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, their acts with respect to voting shall have the following effect: (a) if only one (1) votes, his act binds all; (b) if more than one (1) votes, the act of the majority so voting binds all; (c) if more than one (1) votes, but the vote is evenly split on any particular matter, each faction may vote the securities in question proportionally, or may apply to the Delaware Court of Chancery for relief as provided in the DGCL, Section 217(b). If the instrument filed with the Secretary shows that any such tenancy is held in unequal interests, a majority or even-split for the purpose of subsection (c) shall be a majority or even-split in interest.

        Section 12.    List Of Stockholders.    The Secretary shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at said meeting, arranged in alphabetical order, showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not specified, at the place where the meeting is to be held. The list shall be produced and kept at the time and place of meeting during the whole time thereof and may be inspected by any stockholder who is present.

        Section 13.    Action Without Meeting.

(a)  No action shall be taken by the stockholders except at an annual or special meeting of stockholders called in accordance with these Bylaws, and no action shall be taken by the stockholders by written consent.

        Section 14.    Organization.

(a)  At every meeting of stockholders, the Chairman of the Board of Directors, or, if a Chairman has not been appointed or is absent, the President, or, if the President is absent, a chairman of the meeting chosen by a majority in interest of the stockholders entitled to vote, present in person or by proxy, shall act as chairman. The Secretary, or, in his absence, an Assistant Secretary directed to do so by the President, shall act as secretary of the meeting.

(b)  The Board of Directors of the corporation shall be entitled to make such rules or regulations for the conduct of meetings of stockholders as it shall deem necessary, appropriate or convenient. Subject to such rules and regulations of the Board of Directors, if any, the chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are necessary, appropriate or convenient for the proper conduct of the meeting, including, without limitation, establishing an agenda or order of business for the meeting, rules and procedures for maintaining order at the meeting and the safety of those present, limitations on participation in such meeting to stockholders of record of the corporation and their duly authorized and constituted proxies and such other persons as the chairman shall permit, restrictions on entry to the meeting after the time fixed for the commencement thereof, limitations on the time allotted to questions or comments by participants and regulation of the opening and closing of the polls for balloting on matters which are to be voted on by ballot. Unless and to the extent determined by the Board of Directors or the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with rules of parliamentary procedure.

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ARTICLE IV

DIRECTORS

        Section 15.    Number And Term Of Office.    The authorized number of directors of the corporation shall be not less than five (5) nor more than nine (9), the specific number to be set by resolution of the Board of Directors. Directors need not be stockholders unless so required by the Certificate of Incorporation. If for any cause, the directors shall not have been elected at an annual meeting, they may be elected as soon thereafter as convenient at a special meeting of the stockholders called for that purpose in the manner provided in these Bylaws.

        Section 16.    Powers.    The powers of the corporation shall be exercised, its business conducted and its property controlled by the Board of Directors, except as may be otherwise provided by statute or by the Certificate of Incorporation.

        Section 17.    Classes of Directors.    Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, the directors shall be divided into three classes designated as Class I, Class II and Class III, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors. At the first annual meeting of stockholders following the adoption and filing of the Certificate of Incorporation providing for a classified Board of Directors, the term of office of the Class III directors shall expire and Class III directors shall be elected for a full term of three years. At the second annual meeting of stockholders following the adoption and filing of the Certificate of Incorporation providing for a classified Board of Directors, the term of office of the Class I directors shall expire and Class I directors shall be elected for a full term of three years. At the third annual meeting of stockholders following the adoption and filing of the Certificate of Incorporation providing for a classified Board of Directors, the term of office of the Class II directors shall expire and Class II directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting.

        Notwithstanding the foregoing provisions of this section, each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director

        Section 18.    Vacancies.

(a)  Unless otherwise provided in the Certificate of Incorporation, any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other causes and any newly created directorships resulting from any increase in the number of directors shall, unless the Board of Directors determines by resolution that any such vacancies or newly created directorships shall be filled by stockholders, be filled only by the affirmative vote of a majority of the directors then in office, even though less than a quorum of the Board of Directors. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the director for which the vacancy was created or occurred and until such director's successor shall have been elected and qualified. A vacancy in the Board of Directors shall be deemed to exist under this Section 18 in the case of the death, removal or resignation of any director.

(b)  If at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole board (as constituted immediately prior to any such increase), the Delaware Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent (10%) of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill

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any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in offices as aforesaid, which election shall be governed by Section 211 of the DGCL.

        Section 19.    Resignation.    Any director may resign at any time by delivering his written resignation to the Secretary, such resignation to specify whether it will be effective at a particular time, upon receipt by the Secretary or at the pleasure of the Board of Directors. If no such specification is made, it shall be deemed effective at the pleasure of the Board of Directors. When one (1) or more directors shall resign from the Board of Directors, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each Director so chosen shall hold office for the unexpired portion of the term of the Director whose place shall be vacated and until his successor shall have been duly elected and qualified.

        Section 20.    Removal.

(a)  Neither the Board of Directors nor any individual director may be removed without cause.

(b)  Subject to any limitation imposed by law, any individual director or directors may be removed with cause by the affirmative vote of a majority of the voting power of the corporation entitled to vote at an election of directors.

        Section 21.    Meetings.

(a)Annual Meetings. The annual meeting of the Board of Directors shall be held immediately before or after the annual meeting of stockholders and at the place where such meeting is held. No notice of an annual meeting of the Board of Directors shall be necessary and such meeting shall be held for the purpose of electing officers and transacting such other business as may lawfully come before it.

(b)Regular Meetings. Unless otherwise restricted by the Certificate of Incorporation, regular meetings of the Board of Directors may be held at any time or date and at any place within or without the State of Delaware which has been designated by the Board of Directors and publicized among all directors. No formal notice shall be required for regular meetings of the Board of Directors.

(c)Special Meetings. Unless otherwise restricted by the Certificate of Incorporation, special meetings of the Board of Directors or any committee designated by the Board may be held at any time and place within or without the State of Delaware whenever called by the Chairman of the Board, the President or any director.

(d)Telephone Meetings. Any member of the Board of Directors, or of any committee thereof, may participate in a meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting by such means shall constitute presence in person at such meeting.

(e)Notice of Meetings. Notice of the time and place of all meetings of the Board of Directors shall be orally or in writing, by telephone, including a voice messaging system or other system or technology designed to record and communicate messages, facsimile, telegraph or telex, or by electronic mail or other electronic means, during normal business hours, at least twenty-four (24) hours before the date and time of the meeting, or sent in writing to each director by first class mail, charges prepaid, at least three (3) days before the date of the meeting. Notice of any meeting may be waived in writing at any time before or after the meeting and will be waived by any director by attendance thereat, except when the director attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened.

(f)Waiver of Notice. The transaction of all business at any meeting of the Board of Directors, or any committee thereof, however called or noticed, or wherever held, shall be as valid as though had at

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a meeting duly held after regular call and notice, if a quorum be present and if, either before or after the meeting, each of the directors not present shall sign a written waiver of notice. All such waivers shall be filed with the corporate records or made a part of the minutes of the meeting.

        Section 22.    Quorum And Voting.

(a)  Unless the Certificate of Incorporation requires a greater number and except with respect to indemnification questions arising under Section 43 hereof, for which a quorum shall be one-third (¹/3) of the exact number of directors fixed from time to time in accordance with the Certificate of Incorporation, a quorum of the Board of Directors shall consist of a majority of the exact number of directors fixed from time to time by the Board of Directors in accordance with the Certificate of Incorporation; provided, however, at any meeting whether a quorum be present or otherwise, a majority of the directors present may adjourn from time to time until the time fixed for the next regular meeting of the Board of Directors, without notice other than by announcement at the meeting.

(b)  At each meeting of the Board of Directors at which a quorum is present, all questions and business shall be determined by the affirmative vote of a majority of the directors present, unless a different vote be required by law, the Certificate of Incorporation or these Bylaws.

        Section 23.    Action Without Meeting.    Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board of Directors or committee, as the case may be, consent thereto in writing, and such writing or writings are filed with the minutes of proceedings of the Board of Directors or committee.

        Section 24.    Fees And Compensation.    Directors shall be entitled to such compensation for their services as may be approved by the Board of Directors, including, if so approved, by resolution of the Board of Directors, a fixed sum and expenses of attendance, if any, for attendance at each regular or special meeting of the Board of Directors and at any meeting of a committee of the Board of Directors. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise and receiving compensation therefor.

        Section 25.    Committees.

(a)Executive Committee. The Board of Directors may appoint an Executive Committee to consist of one (1) or more members of the Board of Directors. The Executive Committee, to the extent permitted by law and provided in the resolution of the Board of Directors shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to (i) approving or adopting, or recommending to the stockholders, any action or matter expressly required by the DGCL to be submitted to stockholders for approval, or (ii) adopting, amending or repealing any bylaw of the corporation.

(b)Other Committees. The Board of Directors may, from time to time, appoint such other committees as may be permitted by law. Such other committees appointed by the Board of Directors shall consist of one (1) or more members of the Board of Directors and shall have such powers and perform such duties as may be prescribed by the resolution or resolutions creating such committees, but in no event shall any such committee have the powers denied to the Executive Committee in these Bylaws.

(c)Term. Each member of a committee of the Board of Directors shall serve a term on the committee coexistent with such member's term on the Board of Directors. The Board of Directors, subject to any requirements of any outstanding series of preferred Stock and the provisions of

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subsections (a) or (b) of this Bylaw, may at any time increase or decrease the number of members of a committee or terminate the existence of a committee. The membership of a committee member shall terminate on the date of his death or voluntary resignation from the committee or from the Board of Directors. The Board of Directors may at any time for any reason remove any individual committee member and the Board of Directors may fill any committee vacancy created by death, resignation, removal or increase in the number of members of the committee. The Board of Directors may designate one (1) or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee, and, in addition, in the absence or disqualification of any member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member.

(d)Meetings. Unless the Board of Directors shall otherwise provide, regular meetings of the Executive Committee or any other committee appointed pursuant to this Section 25 shall be held at such times and places as are determined by the Board of Directors, or by any such committee, and when notice thereof has been given to each member of such committee, no further notice of such regular meetings need be given thereafter. Special meetings of any such committee may be held at any place which has been determined from time to time by such committee, and may be called by any director who is a member of such committee, upon written notice to the members of such committee of the time and place of such special meeting given in the manner provided for the giving of written notice to members of the Board of Directors of the time and place of special meetings of the Board of Directors. Notice of any special meeting of any committee may be waived in writing at any time before or after the meeting and will be waived by any director by attendance thereat, except when the director attends such special meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. A majority of the authorized number of members of any such committee shall constitute a quorum for the transaction of business, and the act of a majority of those present at any meeting at which a quorum is present shall be the act of such committee.

        Section 26.    Organization.    At every meeting of the directors, the Chairman of the Board of Directors, or, if a Chairman has not been appointed or is absent, the President (if a director), or if the President is absent, the most senior Vice President (if a director), or, in the absence of any such person, a chairman of the meeting chosen by a majority of the directors present, shall preside over the meeting. The Secretary, or in his absence, any Assistant Secretary directed to do so by the President, shall act as secretary of the meeting.

ARTICLE V

Officers

        Section 27.    Officers Designated.    The officers of the corporation shall include, if and when designated by the Board of Directors, a Chief Executive Officer, a President, one or more Vice Presidents (the number thereof to be determined by the Board of Directors), a Secretary, a Chief Financial Officer and a Treasurer, each of whom shall be elected by the Board of Directors. The Board of Directors may also appoint one (1) or more Assistant Secretaries, Assistant Treasurers, Assistant Controllers and such other officers and agents with such powers and duties as it shall deem necessary. The Board of Directors may assign such additional titles to one (1) or more of the officers as it shall deem appropriate. Any one (1) person may hold any number of offices of the corporation at any one time unless specifically prohibited therefrom by law. The salaries and other compensation of the officers of the corporation shall be fixed by or in the manner designated by the Board of Directors.

        Section 28.    Tenure And Duties Of Officers.

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(a)General. All officers shall hold office at the pleasure of the Board of Directors and until their successors shall have been duly elected and qualified, unless sooner removed. Any officer elected or appointed by the Board of Directors may be removed at any time by the Board of Directors. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors.

(b)Duties of Chief Executive Officer. The Chief Executive Officer shall be the chief executive officer of the corporation and, subject to the direction and control of the Board, shall supervise and control all of the assets, business, and affairs of the corporation. The Chief Executive Officer shall vote the shares owned by the corporation in other corporations, domestic or foreign, unless otherwise prescribed by resolution of the Board. In general, the Chief Executive Officer shall perform all duties incident to the office of Chief Executive Officer and such other duties as may be prescribed by the Board from time to time.

        The Chief Executive Officer shall, unless a Chairperson of the Board of Directors has been appointed and is present, preside at all meetings of the shareholders and the Board of Directors.

(c)Duties of President. The President shall report to the Chief Executive Officer. In the absence of the Chief Executive Officer or his inability to act, the President, if any, shall perform all the duties of the Chief Executive Officer and when so acting shall have all the powers of, and be subject to all the restrictions upon, the Chief Executive Officer; provided that no such President shall assume the authority to preside as Chairperson of meetings of the Board unless such President is a member of the Board. In general, the President shall perform all duties incident to the office of President and such other duties as may be prescribed by the Board from time to time.

(d)Duties of Vice Presidents. In the absence of the President or his inability to act, the Vice Presidents, if any, in order of their rank as fixed by the Board of Directors or, if not ranked a Vice President designated by the Board shall perform all the duties of the President and when so acting shall have all the powers of, and be subject to all the restrictions upon, the President; provided that no such Vice President shall assume the authority to preside as Chairperson of meetings of the Board unless such Vice President is a member of the Board. The Vice Presidents shall have such other powers and perform such other duties as from time to time may be respectively prescribed for them by the Board, these Bylaws or the President.

(e)Duties of Secretary. The Secretary shall attend all meetings of the shareholders and of the Board of Directors and shall record all acts and proceedings thereof in the minute book of the Corporation. The Secretary shall give notice in conformity with these Bylaws of all meetings of the shareholders and of all meetings of the Board of Directors and any committee thereof requiring notice. The Secretary shall perform all other duties given him in these Bylaws and other duties commonly incident to his office and shall also perform such other duties and have such other powers, as the Board of Directors shall designate from time to time. The President may direct any Assistant Secretary to assume and perform the duties of the Secretary in the absence or disability of the Secretary, and each Assistant Secretary shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time.

(f)Duties of Chief Financial Officer. The Chief Financial Officer shall keep or cause to be kept the books of account of the Corporation in a thorough and proper manner and shall render statements of the financial affairs of the Corporation in such form and as often as required by the Board of Directors or the President. The Chief Financial Officer, subject to the order of the Board of Directors, shall have the custody of all funds and securities of the Corporation. The Chief Financial Officer shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. The President may direct the Treasurer or any Assistant Treasurer, or the Controller or any Assistant

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Controller to assume and perform the duties of the Chief Financial Officer in the absence or disability of the Chief Financial Officer, and each Treasurer and Assistant Treasurer and each Controller and Assistant Controller shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time.

(g)Duties of Treasurer. Subject to the direction and control of the Board of Directors, the Treasurer shall have charge and custody of and be responsible for all funds and securities of the Corporation; and, at the expiration of his term of office, he shall turn over to his successor all property of the Corporation in his possession.

        Section 29.    Delegation Of Authority.    The Board of Directors may from time to time delegate the powers or duties of any officer to any other officer or agent, notwithstanding any provision hereof.

        Section 30.    Resignations.    Any officer may resign at any time by giving written notice to the Board of Directors or to the President or to the Secretary. Any such resignation shall be effective when received by the person or persons to whom such notice is given, unless a later time is specified therein, in which event the resignation shall become effective at such later time. Unless otherwise specified in such notice, the acceptance of any such resignation shall not be necessary to make it effective. Any resignation shall be without prejudice to the rights, if any, of the corporation under any contract with the resigning officer.

        Section 31.    Removal.    Any officer may be removed from office at any time, either with or without cause, by the affirmative vote of a majority of the directors in office at the time, or by the unanimous written consent of the directors in office at the time, or by any committee or superior officers upon whom such power of removal may have been conferred by the Board of Directors.

ARTICLE VI

EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES OWNED BY THE CORPORATION

        Section 32.    Execution Of Corporate Instruments.    The Board of Directors may, in its discretion, determine the method and designate the signatory officer or officers, or other person or persons, to execute on behalf of the corporation any corporate instrument or document, or to sign on behalf of the corporation the corporate name without limitation, or to enter into contracts on behalf of the corporation, except where otherwise provided by law or these Bylaws, and such execution or signature shall be binding upon the corporation.

        All checks and drafts drawn on banks or other depositaries on funds to the credit of the corporation or in special accounts of the corporation shall be signed by such person or persons as the Board of Directors shall authorize so to do.

        Unless authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount.

        Section 33.    Voting Of Securities Owned By The Corporation.    All stock and other securities of other corporations owned or held by the corporation for itself, or for other parties in any capacity, shall be voted, and all proxies with respect thereto shall be executed, by the person authorized so to do by resolution of the Board of Directors, or, in the absence of such authorization, by the Chairman of the Board of Directors, the Chief Executive Officer, the President or any Vice President.

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ARTICLE VII

SHARES OF STOCK

        Section 34.    Form And Execution Of Certificates.    Certificates for the shares of stock of the corporation shall be in such form as is consistent with the Certificate of Incorporation and applicable law. Every holder of stock in the corporation shall be entitled to have a certificate signed by or in the name of the corporation by the Chairman of the Board of Directors, or the Chief Executive Officer, the President or any Vice President and by the Treasurer or Assistant Treasurer or the Secretary or Assistant Secretary, certifying the number of shares owned by him in the corporation. Any or all of the signatures on the certificate may be facsimiles. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. Each certificate shall state upon the face or back thereof, in full or in summary, all of the powers, designations, preferences, and rights, and the limitations or restrictions of the shares authorized to be issued or shall, except as otherwise required by law, set forth on the face or back a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional, or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Within a reasonable time after the issuance or transfer of uncertificated stock, the corporation shall send to the registered owner thereof a written notice containing the information required to be set forth or stated on certificates pursuant to this section or otherwise required by law or with respect to this section a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Except as otherwise expressly provided by law, the rights and obligations of the holders of certificates representing stock of the same class and series shall be identical.

        Section 35.    Lost Certificates.    A new certificate or certificates shall be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. The corporation may require, as a condition precedent to the issuance of a new certificate or certificates, the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to agree to indemnify the corporation in such manner as it shall require or to give the corporation a surety bond in such form and amount as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed.

        Section 36.    Transfers.

(a)  Transfers of record of shares of stock of the corporation shall be made only upon its books by the holders thereof, in person or by attorney duly authorized, and upon the surrender of a properly endorsed certificate or certificates for a like number of shares.

(b)  The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one (1) or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one (1) or more classes owned by such stockholders in any manner not prohibited by the DGCL.

        Section 37.    Fixing Record Dates.

(a)  In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date upon which the resolution fixing the record

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date is adopted by the Board of Directors, and which record date shall, subject to applicable law, not be more than sixty (60) nor less than ten (10) days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.

(b)  In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty (60) days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.

        Section 38.    Registered Stockholders.    The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware.

ARTICLE VIII

OTHER SECURITIES OF THE CORPORATION

        Section 39.    Execution Of Other Securities.    All bonds, debentures and other corporate securities of the corporation, other than stock certificates (covered in Section 34), may be signed by the Chairman of the Board of Directors, the Chief Executive Officer, the President or any Vice President, or such other person as may be authorized by the Board of Directors, and the corporate seal impressed thereon or a facsimile of such seal imprinted thereon and attested by the signature of the Secretary or an Assistant Secretary, or the Chief Financial Officer or Treasurer or an Assistant Treasurer; provided, however, that where any such bond, debenture or other corporate security shall be authenticated by the manual signature, or where permissible facsimile signature, of a trustee under an indenture pursuant to which such bond, debenture or other corporate security shall be issued, the signatures of the persons signing and attesting the corporate seal on such bond, debenture or other corporate security may be the imprinted facsimile of the signatures of such persons. Interest coupons appertaining to any such bond, debenture or other corporate security, authenticated by a trustee as aforesaid, shall be signed by the Treasurer or an Assistant Treasurer of the corporation or such other person as may be authorized by the Board of Directors, or bear imprinted thereon the facsimile signature of such person. In case any officer who shall have signed or attested any bond, debenture or other corporate security, or whose facsimile signature shall appear thereon or on any such interest coupon, shall have ceased to be such officer before the bond, debenture or other corporate security so signed or attested shall have been delivered, such bond, debenture or other corporate security nevertheless may be adopted by the corporation and issued and delivered as though the person who signed the same or whose facsimile signature shall have been used thereon had not ceased to be such officer of the corporation.

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ARTICLE IX

DIVIDENDS

        Section 40.    Declaration Of Dividends.    Dividends upon the capital stock of the corporation, subject to the provisions of the Certificate of Incorporation and applicable law, if any, may be declared by the Board of Directors pursuant to law at any regular or special meeting. Dividends may be paid in cash, in property or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation and applicable law.

        Section 41.    Dividend Reserve.    Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the Board of Directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the Board of Directors shall think conducive to the interests of the corporation, and the Board of Directors may modify or abolish any such reserve in the manner in which it was created.

ARTICLE X

Fiscal Year

        Section 42.    Fiscal Year.    The fiscal year of the corporation shall be fixed by resolution of the Board of Directors.

ARTICLE XI

Indemnification

        Section 43.    Indemnification Of Directors, Executive Officers, Other Officers, Employees And Other Agents.

(a)Directors and Officers. The corporation shall indemnify its directors and officers to the fullest extent not prohibited by the DGCL or any other applicable law; provided, however, that the corporation may modify the extent of such indemnification by individual contracts with its directors and officers; and, provided, further, that the corporation shall not be required to indemnify any director or officer in connection with any proceeding (or part thereof) initiated by such person unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was authorized by the Board of Directors of the corporation, (iii) such indemnification is provided by the corporation, in its sole discretion, pursuant to the powers vested in the corporation under the DGCL or any other applicable law or (iv) such indemnification is required to be made under subsection (d).

(b)Employees and Other Agents. The corporation shall have power to indemnify its employees and other agents as set forth in the DGCL or any other applicable law. The Board of Directors shall have the power to delegate the determination of whether indemnification shall be given to any such person or other persons as the Board of Directors shall determine.

(c)Expenses. The corporation shall advance to any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director or officer, of the corporation, or is or was serving at the request of the corporation as a director or executive officer of another corporation, partnership, joint venture, trust or other enterprise, prior to the final disposition of the proceeding, promptly following request therefor, all expenses incurred by any director or officer in connection with such proceeding upon receipt of an undertaking by or on behalf of such person to repay said amounts if it should be determined ultimately that such person is not entitled to be indemnified under this Section 43 or otherwise.

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        Notwithstanding the foregoing, unless otherwise determined pursuant to paragraph (e) of this Section 43, no advance shall be made by the corporation to an officer of the corporation (except by reason of the fact that such officer is or was a director of the corporation in which event this paragraph shall not apply) in any action, suit or proceeding, whether civil, criminal, administrative or investigative, if a determination is reasonably and promptly made (i) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to the proceeding, or (ii) if such quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, that the facts known to the decision-making party at the time such determination is made demonstrate clearly and convincingly that such person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of the corporation.

(d)Enforcement. Without the necessity of entering into an express contract, all rights to indemnification and advances to directors and officers under this Bylaw shall be deemed to be contractual rights and be effective to the same extent and as if provided for in a contract between the corporation and the director or officer. Any right to indemnification or advances granted by this Section 43 to a director or officer shall be enforceable by or on behalf of the person holding such right in any court of competent jurisdiction if (i) the claim for indemnification or advances is denied, in whole or in part, or (ii) no disposition of such claim is made within ninety (90) days of request therefor. The claimant in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting his claim. In connection with any claim for indemnification, the corporation shall be entitled to raise as a defense to any such action that the claimant has not met the standards of conduct that make it permissible under the DGCL or any other applicable law for the corporation to indemnify the claimant for the amount claimed. In connection with any claim by an officer of the corporation (except in any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such executive officer is or was a director of the corporation) for advances, the corporation shall be entitled to raise a defense as to any such action clear and convincing evidence that such person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of the corporation, or with respect to any criminal action or proceeding that such person acted without reasonable cause to believe that his conduct was lawful. Neither the failure of the corporation (including its Board of Directors, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he has met the applicable standard of conduct set forth in the DGCL or any other applicable law, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that claimant has not met the applicable standard of conduct. In any suit brought by a director or officer to enforce a right to indemnification or to an advancement of expenses hereunder, the burden of proving that the director or officer is not entitled to be indemnified, or to such advancement of expenses, under this Article XI or otherwise shall be on the corporation.

(e)Non-Exclusivity of Rights. The rights conferred on any person by this Bylaw shall not be exclusive of any other right which such person may have or hereafter acquire under any applicable statute, provision of the Certificate of Incorporation, Bylaws, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding office. The corporation is specifically authorized to enter into individual contracts with any or all of its directors, officers, employees or agents respecting indemnification and advances, to the fullest extent not prohibited by the Delaware General Corporation Law, or by any other applicable law.

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(f)Survival of Rights. The rights conferred on any person by this Bylaw shall continue as to a person who has ceased to be a director, officer, employee or other agent and shall inure to the benefit of the heirs, executors and administrators of such a person.

(g)Insurance. To the fullest extent permitted by the DGCL or any other applicable law, the corporation, upon approval by the Board of Directors, may purchase insurance on behalf of any person required or permitted to be indemnified pursuant to this Section 43.

(h)Amendments. Any repeal or modification of this Section 43 shall only be prospective and shall not affect the rights under this Bylaw in effect at the time of the alleged occurrence of any action or omission to act that is the cause of any proceeding against any agent of the corporation.

(i)Saving Clause. If this Bylaw or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify each director and officer to the full extent not prohibited by any applicable portion of this Section 43 that shall not have been invalidated, or by any other applicable law. If this Section 43 shall be invalid due to the application of the indemnification provisions of another jurisdiction, then the corporation shall indemnify each director and officer to the full extent under any other applicable law.

(j)Certain Definitions. For the purposes of this Bylaw, the following definitions shall apply:

(1)  The term "proceeding" shall be broadly construed and shall include, without limitation, the investigation, preparation, prosecution, defense, settlement, arbitration and appeal of, and the giving of testimony in, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative.

(2)  The term "expenses" shall be broadly construed and shall include, without limitation, court costs, attorneys' fees, witness fees, fines, amounts paid in settlement or judgment and any other costs and expenses of any nature or kind incurred in connection with any proceeding.

(3)  The term the "corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Section 43 with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued.

(4)  References to a "director," "executive officer," "officer," "employee," or "agent" of the corporation shall include, without limitation, situations where such person is serving at the request of the corporation as, respectively, a director, executive officer, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise.

(5)  References to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this Section 43.

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ARTICLE XII

NOTICES

        Section 44.    Notices.

(a)Notice To Stockholders. Whenever, under any provisions of these Bylaws, notice is required to be given to any stockholder, it shall be given in writing, timely and duly deposited in the United States mail, postage prepaid, and addressed to his last known post office address as shown by the stock record of the corporation or its transfer agent.

(b)Notice To Directors. Any notice required to be given to any director may be given by the method stated in subsection (a), or by overnight delivery service, facsimile, telex or telegram, except that such notice other than one which is delivered personally shall be sent to such address as such director shall have filed in writing with the Secretary, or, in the absence of such filing, to the last known post office address of such director.

(c)Affidavit Of Mailing. An affidavit of mailing, executed by a duly authorized and competent employee of the corporation or its transfer agent appointed with respect to the class of stock affected, specifying the name and address or the names and addresses of the stockholder or stockholders, or director or directors, to whom any such notice or notices was or were given, and the time and method of giving the same, shall in the absence of fraud, be prima facie evidence of the facts therein contained.

(d)Time Notices Deemed Given. All notices given by mail or by overnight delivery service, as above provided, shall be deemed to have been given as at the time of mailing, and all notices given by facsimile, telex or telegram shall be deemed to have been given as of the sending time recorded at time of transmission.

(e)Methods of Notice. It shall not be necessary that the same method of giving notice be employed in respect of all directors, but one permissible method may be employed in respect of any one or more, and any other permissible method or methods may be employed in respect of any other or others.

(f)Failure To Receive Notice. The period or limitation of time within which any stockholder may exercise any option or right, or enjoy any privilege or benefit, or be required to act, or within which any director may exercise any power or right, or enjoy any privilege, pursuant to any notice sent him in the manner above provided, shall not be affected or extended in any manner by the failure of such stockholder or such director to receive such notice.

(g)Notice To Person With Whom Communication Is Unlawful. Whenever notice is required to be given, under any provision of law or of the Certificate of Incorporation or Bylaws of the corporation, to any person with whom communication is unlawful, the giving of such notice to such person shall not be required and there shall be no duty to apply to any governmental authority or agency for a license or permit to give such notice to such person. Any action or meeting which shall be taken or held without notice to any such person with whom communication is unlawful shall have the same force and effect as if such notice had been duly given. In the event that the action taken by the corporation is such as to require the filing of a certificate under any provision of the DGCL, the certificate shall state, if such is the fact and if notice is required, that notice was given to all persons entitled to receive notice except such persons with whom communication is unlawful.

(h)Notice To Person With Undeliverable Address. Whenever notice is required to be given, under any provision of law or the Certificate of Incorporation or Bylaws of the corporation, to any stockholder to whom (i) notice of two consecutive annual meetings, and all notices of meetings or of the taking of action by written consent without a meeting to such person during the period between such two consecutive annual meetings, or (ii) all, and at least two, payments (if sent by first class mail) of dividends or interest on securities during a twelve-month period, have been mailed addressed to

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such person at his address as shown on the records of the corporation and have been returned undeliverable, the giving of such notice to such person shall not be required. Any action or meeting which shall be taken or held without notice to such person shall have the same force and effect as if such notice had been duly given. If any such person shall deliver to the corporation a written notice setting forth his then current address, the requirement that notice be given to such person shall be reinstated. In the event that the action taken by the corporation is such as to require the filing of a certificate under any provision of the DGCL, the certificate need not state that notice was not given to persons to whom notice was not required to be given pursuant to this paragraph.

ARTICLE XIII

AMENDMENTS

        Section 45.    Amendments.    Subject to paragraph (h) of Section 43 of the Bylaws, the Bylaws may be altered or amended or new Bylaws adopted by the affirmative vote of at least sixty-six and two-thirds percent (66²/3%) of the voting power of all of the then-outstanding shares of the voting stock of the corporation entitled to vote. The Board of Directors shall also have the power to adopt, amend or repeal Bylaws.

ARTICLE XIV

LOANS TO OFFICERS

        Section 45.    Loans To Officers.    The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiaries, including any officer or employee who is a Director of the corporation or its subsidiaries, whenever, in the judgment of the Board of Directors, such loan, guarantee or assistance may reasonably be expected to benefit the corporation. The loan, guarantee or other assistance may be with or without interest and may be unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in these Bylaws shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute.

18

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TABLE OF CONTENTS
ARTICLE I Offices
ARTICLE II Corporate Seal
ARTICLE III Stockholders' Meetings
ARTICLE IV DIRECTORS
ARTICLE V Officers
ARTICLE VI EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES OWNED BY THE CORPORATION
ARTICLE VII SHARES OF STOCK
ARTICLE VIII OTHER SECURITIES OF THE CORPORATION
ARTICLE IX DIVIDENDS
ARTICLE X Fiscal Year
ARTICLE XI Indemnification
ARTICLE XII NOTICES
ARTICLE XIII AMENDMENTS
ARTICLE XIV LOANS TO OFFICERS

EX-10.22

December 23, 2001

Michael Vent
[address]

Dear Mike:

This letter sets forth the substance of the separation agreement (the "Agreement") Internap Network Services Corporation (the "Company") proposes regarding your employment transition.

1.    Separation. Your last day of employment with the Company shall be July 7, 2002 (the "Separation Date").

2.    Transition Period. Effective immediately you will resign your positions as the Company's Chief Operating Officer and President, and from now through the Separation Date (the "Transition Period"), you will report to the Company's Chief Executive Officer (the "CEO") and will be expected to complete to the Company's satisfaction projects as assigned by the CEO from time to time. You will perform these duties from Austin, Texas except as may be reasonably required by the CEO to be performed in the Seattle area. If you are asked, by the Company in its sole discretion, to travel to the Seattle area, it will be arranged for mutually agreeable times and the Company will fully reimburse you for any reasonable, out-of-pocket travel related expenses, including airfare, lodging and meals that have been approved in advance by the Company in writing and comply with the Company's reimbursement policies. From January 7, 2002 through April 7, 2002 you will be paid based on an annual base salary of $348,800 stated in your Employment Agreement, less applicable withholdings and deductions, and will be entitled to continue your employee benefits, including vacation accrual. From April 8, 2002 through the Separation Date you agree to be paid at a reduced annual base salary of $174,400, less applicable withholdings and deductions, and will be entitled to continue your employee benefits, including vacation accrual.

3.    Stock Options. Your stock options will cease vesting on the Separation Date, under the terms of your written stock option agreement(s) and the applicable plan(s) governing those agreement(s). You may exercise your vested option shares pursuant to your written stock option agreement(s) and the applicable plan(s) governing those agreement(s).

4.    Expense Reimbursements. The Company will, pursuant to its regular business practice, reimburse you for expenses approved in advance by the CEO through the Separation Date, if any, that you submit within ten (10) days of the Separation Date.

5.    Return of Company Property. On or before the Separation Date, you must return to the Company all Company documents (and all copies thereof) and other Company property that you have had in your possession at any time, including, but not limited to, Company files, notes, drawings, records, business plans and forecasts, financial information, specifications, computer-recorded information, tangible property (including, but not limited to, computers), credit cards, entry cards, computer access codes, computer programs, identification badges and keys; and any materials of any kind that contain or embody any proprietary or confidential information of the Company (and all reproductions thereof).

6.    Continuing Obligations. After the Separation Date, you will have continuing obligations to the Company, including obligations not to use or disclose any confidential or proprietary information of the Company. A copy of the agreement you signed with respect to these obligations is attached to this letter as Exhibit B ("Exhibit B"). The Company agrees to amend your obligations under Section 5 of Exhibit B as follows: (a) the one (1) year period referred to in lines 5 and 6 thereof is changed to nine (9) months; and (b) the word "hosting" in line 8 thereof is replaced with "collocation."

7.    Release. In exchange for the Transition Period and other consideration under this Agreement, to which you acknowledge you would otherwise not be entitled absent this Agreement, you hereby release, acquit and forever discharge the Company, its parent and subsidiaries, and its and their officers, directors, agents, servants, employees, shareholders, attorneys, successors, assigns and affiliates, of and from any and all claims, liabilities, demands, causes of action, costs, expenses, attorneys' fees,

damages, indemnities and obligations of every kind and nature, in law, equity, or otherwise, known and unknown, suspected and unsuspected, disclosed and undisclosed (other than any claim for indemnification you may have as a result of any third party action against you based on your employment with the Company), arising out of or in any way related to agreements, events, acts or conduct at any time prior to and including the date you sign this Agreement, including but not limited to: all such claims and demands directly or indirectly arising out of or in any way connected with your employment with the Company or the termination of that employment, including but not limited to, claims of intentional and negligent infliction of emotional distress, any and all tort claims for personal injury, claims or demands related to salary, bonuses, commissions, stock, stock options, or any other equity or ownership interests in the Company, paid time off, fringe benefits, expense reimbursements, severance pay, or any other form of compensation; claims under that certain Employment Agreement between you and the Company dated June 12, 2001 (the "Employment Agreement"); claims under the December 5, 2001 memorandum agreement between the Company and you; claims pursuant to any federal, state or local law or cause of action including, but not limited to, the federal Civil Rights Act of 1964, as amended; the federal Age Discrimination in Employment Act of 1967, as amended ("ADEA"); the federal Americans with Disabilities Act of 1990; the Texas Commission on Human Rights Act, as amended; the Washington Law Against Discrimination in Employment, as amended; the Washington Family Leave Act, as amended; tort law; contract law; wrongful discharge; discrimination; fraud; defamation; and breach of the implied covenant of good faith and fair dealing.

8.    ADEA Waiver. You acknowledge that you are knowingly and voluntarily waiving and releasing any rights you may have under the ADEA. You also acknowledge that the consideration given for the waiver and release in the preceding paragraph hereof is in addition to anything of value to which you were already entitled. You further acknowledge that you have been advised by this writing, as required by the ADEA, that: (a) your waiver and release do not apply to any rights or claims that may arise after you sign this Agreement; (b) you have the right to consult with an attorney prior to executing this Agreement; (c) you have twenty-one (21) days to consider this Agreement (although you may choose to voluntarily execute this Agreement earlier); (d) you have seven (7) days following the date you sign this Agreement to revoke the Agreement; and (e) this Agreement shall not be effective until the date upon which the revocation period has expired, which shall be the eighth (8^th) day after you sign this Agreement.

9.    Other Compensation or Benefits. Except as expressly provided in this Agreement, you will not receive any additional compensation, severance, or benefits from the Company after the Separation Date.

10.  Separation Date Release. As further consideration for the promises set forth in this Agreement, on the Separation Date you agree to execute, make effective and deliver to the Company the General Release and Waiver attached as Exhibit A ("the Separation Date Release"). You understand and acknowledge that failure to provide a Separation Date Release will constitute a material breach of this Agreement.

11.  Entire Agreement. This Agreement, including its exhibits, constitutes the complete, final and exclusive embodiment of the entire agreement between you and the Company with regard to the subject matter hereof. It supersedes any and all agreements entered into by and between you and the Company, including the Employment Agreement; provided, however, that Section 11 of the Employment Agreement regarding Proprietary Rights and Inventions is expressly made a part of and incorporated into this Agreement, and is not superseded. This Agreement is entered into without reliance on any promise or representation, written or oral, other than those expressly contained herein. It may not be modified except in a writing signed by a duly authorized officer of the Company.

12.  Successors and Assigns. This Agreement will bind the heirs, personal representatives, successors, assigns, executors and administrators of each party, and will inure to the benefit of each party, its heirs, successors and assigns.

13.  Applicable Law. This Agreement will be deemed to have been entered into and will be construed and enforced in accordance with the laws of the State of Washington as applied to contracts made and to be performed entirely within Washington.

14.  Severability. If a court of competent jurisdiction determines that any term or provision of this Agreement is invalid or unenforceable, in whole or in part, then the remaining terms and provisions hereof will be unimpaired. The court will then have the authority to modify or replace the invalid or unenforceable term or provision with a valid and enforceable term or provision that most accurately represents the parties' intention with respect to the invalid or unenforceable term or provision.

If this Agreement is acceptable to you, please sign below, and return the original to me.

Thank you for your efforts in support of the Company. We look forward to working with you during the Transition Period.

Sincerely yours,
Internap Network Services Corporation
/s/  GENE EIDENBERGGene Eidenberg Chief Executive Officer
So Agreed.
/s/  MICHAEL VENTMichael Vent
Date:	12-23-01

Attachments:
Exhibit A—Separation Date Release
Exhibit B—Employee Confidentiality, Nonraiding and Noncompetition Agreement

EX-10.23

December 12, 2001

Alan Norman
[Address]

Dear Alan:

        This letter sets forth the substance of the separation agreement (the "Agreement") Internap Network Services Corporation (the "Company") proposes regarding your employment transition.

1.    Separation. Your last day of employment with the Company shall be June 12, 2002 (the "Separation Date").

2.    Transition Period. Effective immediately you will resign your position as the Company's Vice-President Corporate Development and any positions with any affiliate of the Company other than the Japanese joint venture, and from now through the Separation Date (the "Transition Period"), you will report to Eugene Eidenberg, the Company's Chief Executive Officer ("Mr. Eidenberg") and will be expected to assist in the transition of duties regarding the Company's Japanese joint venture project, as requested by Mr. Eidenberg. Effective on June 12, 2002 you will automatically (without any further action required by you) be deemed to have resigned from the joint venture's Board of Directors, provided that the Company may change such date in its sole discretion without notice to you, in which event the Separation Date will not be affected. You will perform your transition duties from your California residence, except as required by Mr. Eidenberg. During the Transition Period you will be paid based on an annual base salary of $112,500, less applicable withholdings and deductions, and will be entitled to continue your employee benefits, including vacation accrual. You agree that as of the date of this Agreement, your accrued vacation and paid time off balance with the Company is at zero (0) days.

3.    Stock Options. Your stock options will cease vesting on the Separation Date, under the terms of your written stock option agreement(s) and the applicable plan(s) governing those agreement(s). You may exercise your vested option shares pursuant to your written stock option agreement(s) and the applicable plan(s) governing those agreement(s).

4.    Expense Reimbursements. The Company will, pursuant to its regular business practice, reimburse you for expenses approved in advance by Mr. Eidenberg through the Separation Date, if any, that you submit within ten (10) days of the Separation Date.

5.    Return of Company Property. On or before the Separation Date, you must return to the Company all Company documents (and all copies thereof) and other Company property that you have had in your possession at any time, including, but not limited to, Company files, notes, drawings, records, business plans and forecasts, financial information, specifications, computer-recorded information, tangible property (including, but not limited to, computers), credit cards, entry cards, computer access codes, computer programs, identification badges and keys; and any materials of any kind that contain or embody any proprietary or confidential information of the Company (and all reproductions thereof).

6.    Continuing Obligations. After the Separation Date, you will have continuing obligations to the Company, including obligations not to use or disclose any confidential or proprietary information of the Company. A copy of the agreement you signed with respect to these obligations is attached to this letter as Exhibit B. During the Transition Period, you may seek other employment provided that such employment shall not conflict with your obligations under Exhibit B or Sections 10 and 11 of the Employment Agreement (defined below) except to the extent that any Company policies expressly restrict your employment by another employer.

7.    Release. In exchange for the Transition Period and other consideration under this Agreement, to which you acknowledge you would otherwise not be entitled absent this Agreement, you hereby release, acquit and forever discharge the Company, its parent and subsidiaries, and its and their officers, directors, agents, servants, employees, shareholders, attorneys, successors, assigns and affiliates, of and from any and all claims, liabilities, demands, causes of action, costs, expenses, attorneys' fees,

damages, indemnities and obligations of every kind and nature, in law, equity, or otherwise, known and unknown, suspected and unsuspected, disclosed and undisclosed (other than any claim for indemnification you may have as a result of any third party action against you based on your employment with the Company), arising out of or in any way related to agreements, events, acts or conduct at any time prior to and including the date you sign this Agreement, including but not limited to: all such claims and demands directly or indirectly arising out of or in any way connected with your employment with the Company or the termination of that employment, including but not limited to, claims of intentional and negligent infliction of emotional distress, any and all tort claims for personal injury, claims or demands related to salary, bonuses, commissions, stock, stock options, or any other equity or ownership interests in the Company, paid time off, fringe benefits, expense reimbursements, severance pay, or any other form of compensation; claims under that certain Employment Agreement between you and the Company dated June 21, 2001 (the "Employment Agreement"); claims pursuant to any federal, state or local law or cause of action including, but not limited to, the federal Civil Rights Act of 1964, as amended; the federal Age Discrimination in Employment Act of 1967, as amended ("ADEA"); the federal Americans with Disabilities Act of 1990; the California Fair Employment and Housing Act; the California Labor Code; the Washington Law Against Discrimination in Employment, as amended; the Washington Family Leave Act, as amended; tort law; contract law; wrongful discharge; discrimination; fraud; defamation; and breach of the implied covenant of good faith and fair dealing.

8.    ADEA Waiver. You acknowledge that you are knowingly and voluntarily waiving and releasing any rights you may have under the ADEA. You also acknowledge that the consideration given for the waiver and release in the preceding paragraph hereof is in addition to anything of value to which you were already entitled. You further acknowledge that you have been advised by this writing, as required by the ADEA, that: (a) your waiver and release do not apply to any rights or claims that may arise after you sign this Agreement; (b) you have the right to consult with an attorney prior to executing this Agreement; (c) you have twenty-one (21) days to consider this Agreement (although you may choose to voluntarily execute this Agreement earlier); (d) you have seven (7) days following the date you sign this Agreement to revoke the Agreement; and (e) this Agreement shall not be effective until the date upon which the revocation period has expired, which shall be the eighth (8^th) day after you sign this Agreement.

9.    Section 1542 Waiver. You acknowledge that you have read and understand Section 1542 of the California Civil Code which reads as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." You hereby expressly waive and relinquish all rights and benefits under that section and any law of any jurisdiction of similar effect with respect to your release of any claims you may have against the Company.

10.  Other Compensation or Benefits. Except as expressly provided in this Agreement, you will not receive any additional compensation, severance, or benefits from the Company after the Separation Date.

11.  Separation Date Release. As further consideration for the promises set forth in this Agreement, on the Separation Date you agree to execute, make effective and deliver to the Company the General Release and Waiver attached as Exhibit A ("the Separation Date Release"). You understand and acknowledge that failure to provide a Separation Date Release will constitute a material breach of this Agreement.

12.  Entire Agreement. This Agreement, including its exhibits, constitutes the complete, final and exclusive embodiment of the entire agreement between you and the Company with regard to the subject matter hereof. It supersedes any and all agreements entered into by and between you and the Company, including the Employment Agreement; provided, however, that Section 10 of the Employment Agreement regarding Proprietary Rights and Inventions is expressly made a part of and incorporated into this Agreement, and is not superseded. This Agreement is entered into without reliance on any

promise or representation, written or oral, other than those expressly contained herein. It may not be modified except in a writing signed by a duly authorized officer of the Company.

13.  Successors and Assigns. This Agreement will bind the heirs, personal representatives, successors, assigns, executors and administrators of each party, and will inure to the benefit of each party, its heirs, successors and assigns.

14.  Applicable Law. This Agreement will be deemed to have been entered into and will be construed and enforced in accordance with the laws of the State of Washington as applied to contracts made and to be performed entirely within Washington.

15.  Severability. If a court of competent jurisdiction determines that any term or provision of this Agreement is invalid or unenforceable, in whole or in part, then the remaining terms and provisions hereof will be unimpaired. The court will then have the authority to modify or replace the invalid or unenforceable term or provision with a valid and enforceable term or provision that most accurately represents the parties' intention with respect to the invalid or unenforceable term or provision.

        If this Agreement is acceptable to you, please sign below, and return the original to me.

        Thank you for your efforts in support of the Company. We look forward to working with you during the Transition Period.

Sincerely yours,
Internap Network Services Corporation
/s/  GENE EIDENBERGGene Eidenberg Chief Executive Officer
So Agreed.
/s/  ALAN NORMANAlan Norman
Date:	December 17, 2001

Attachments:
Exhibit A—Separation Date Release
Exhibit B—Employee Confidentiality, Nonraiding and Noncompetition Agreement

EX-21.1

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EXHIBIT 21.1

Subsidiaries

CO Space, Inc. (a Delaware corporation)

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EXHIBIT 21.1

Subsidiaries