Internap Corporation Annual Report 2003

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FY2003 Annual Report · Internap Corporation

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What If Darwin
Had Studied Business
Instead Of Biology?

Internap Annual Report 2003

Our Business

Internap delivers mission-critical Internet-based solutions to businesses throughout the United States, Europe

and Japan. The Company’s network-of-networks architecture, proprietary route optimization technology,

industry-leading Service Level Agreements and superior customer service guarantee network availability and

high performance levels for business-critical applications, such as e-commerce, video and audio streaming,

voice over Internet protocol, virtual private networks and supply chain management.

Financial Highlights

Revenues
Figures in $ millions

Direct Margin*
Expressed as a percentage

Operating Cash Flow
Figures in $ millions

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Internap achieved a net increase of 365
new customers in 2003.

Operating margin grew to 45% due to cost
control and improved infrastructure optimization.

Operating Cash Flow improved 72%
during 2003.

* Direct margin percentage is defined as revenues
less direct cost of network divided by revenues.

Business Instead of Biology?

Same conclusions, Different setting.

Had naturalist Charles Darwin studied busi-

to execute and, of course, a willingness to

ness rather than biology, his conclusions would

adapt quickly to changes in the environment.

be remarkably similar. Like plants and animals

At Internap, we understand how the Internet

that survive from generation to generation,

industry evolved and have demonstrated our

great companies possess certain “survival”

ability to exploit our unique competitive advan-

attributes that distinguish them from the pack –

tages to not only survive change, but to use it

a compelling business model, a powerful

to sustain growth over the long term.

technological advantage, a superior ability

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Technological Evolution Follows
A Predictable Pattern of Boom,
Bust and Rebirth

Throughout history, and certainly since the beginning

of sound management judgement and execution. Indeed, the

of the industrial era, new technologies have emerged

winners that gradually emerge are stronger than ever and move

and established themselves in a remarkably consistent

into a phase of sustainable growth.

pattern. Railroads, steel, automobiles, computers,

software – to name a few – each of these industries

The Next Industry Inflexion Point

experienced similar phases of growth from the boom,

bust and ultimately sustainable growth built around

the surviving companies.

The Boom & Bust Cycle

The Internet was certainly not immune to this evolutionary

phenomenon. The dot-com craze of the 90s will go down as

one of the biggest booms in history. Equally as predictable, this

boom burst shortly into the new millennium. Companies disap-

peared as fast as they had appeared. And, most that survived

As new technology gains traction, it attracts a plethora of play-

were forced into some form of metamorphosis in order to do so.

ers. Rapid build out and growth ensue, regardless of whether

Certainly for Internap, we were forced to put every aspect of our

sufficient demand is present.This culminates in the boom, a

business to the test and ultimately emerged as a much more

period when market momentum is so strong that market reality

viable business and organization. Over the past year, the vetting

is largely irrelevant. Inevitably, the boom turns into the bust.

process has subsided and now industry leaders are emerging.

Though difficult, the bust phase is an essential growing pain in

It is at this inflexion point, where Internap finds itself today and

the evolution of an industry. For it is in this period when compa-

where it is now building the process of sustainable growth that

nies are truly market tested.And, it is not simply a strategic test

will parallel the maturation of the industry itself.

of customer demand and product validity, but also a financial test

Corporate SurvivalFollows A Predictable Pattern

Darwin’s Lesson: A Familiar Cycle of Boom,Bust and Rebirth

The Railroads

From the very beginning, pioneering entrepreneurs from around the world realized the potential for the steam
engine. From 1829, when the first steam engine was imported from England, America started laying down track.
Between 1830 and 1850, the amount of rail line in the United States grew from 45 miles to 9,000. By 1910, dozens
of manufacturers were building thousands of locomotives. Industrial giants such as John D. Rockefeller, Henry
Flagler and J.P. Morgan made a fortune on this new form of transportation.

Unfortunately, many businesses overestimated the demand for the expensive infrastructure of rail, engines and
cars. Passenger rail failed to live up to expectations. When freight shipments dropped suddenly during the Great
Depression, most railroads went bankrupt. Those that survived were able to consolidate their businesses and
continue to grow through the 1940s.

It was only in the 1950s and 1960s when the railroads again began to suffer as trucking and air transportation
gained prominence. Again, the surviving railroads consolidated. Today, only seven chief Class 1 railroads exist. But
to the victors go the spoils. These competitors share in the majority of a $35.3 billion industry.

Members of Internap’s Engineering Team

CLIENT APPLICATION SPIRIT AIRLINES

Spirit Airlines Flies High to Deliver
Low Fares and Quality Service

America’s largest privately held airline, Florida-
based Spirit Airlines serves 16 cities throughout
the U.S. and Mexico with over 120 flights a day.
To stay competitive, this fast-growing, low-fare
air carrier uses the latest in technology, doing as
much as 75% of its business online, selling
tickets at its own website and via online travel
agencies. And that’s where Internap’s high-
performance IP connectivity comes in.

“The reliability and accuracy of our Internet connection is essential.
The crown jewels of our business are carried by our Internap service.
It has to be as reliable as the sun coming up in the east.”

David Anderson, SVP and
Chief Information Officer

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Competitive Advantage
Drives Natural Selection

Internap’s ability to survive the Internet’s boom and

Headcount was reduced. Cost structures were realigned to

bust era is grounded in an intuitive sense of under-

reduce operational expense. A new senior management team

standing a given market environment and adapting

was recruited. Headquarters was relocated from Seattle to

to it. Since its founding in 1996, Internap’s business

Atlanta. But perhaps most important, Internap successfully

premise has been built on meeting a very real market

transitioned its culture from a dot-com mentality into a profit

need: finding the most efficient and effective

sensitive one focused on strategic thinking, financial viability

Internet transmission path for mission-critical data.

and sustainable growth. All of these decisions combined to

Internap’s proprietary intelligent route control tech-

produce a business model suited ideally for the next phase of

nology and “carrier-agnostic” architecture represent

industry evolution.

the ideal solution for business data that requires

transmission with the highest standards of reliability

Managing For Sustained Growth

and security. Further, Internap understands compet-

itive dynamics and has outpaced its peers with an

industry-leading Service Level Agreement that guar-

antees 100% availability over the entire Internet…

all of the time.

Surviving The Bust

Internap has entered this next phase in an enviable position. Its

financial credentials are strong. The Company is expanding

margins and maintaining a healthy balance sheet.The customer

base is exemplary. During the year, Internap added 365 new

customers and is now serving more than 1,638 customers

worldwide, ranging from Fortune 1000 to mid-tier companies,

across a diverse base that includes travel, technology, financial

Internap’s sound business premise was established during

services, retail, healthcare and media & entertainment. Yet,

the boom. But as the inevitable bust unfolded, Internap adapted

despite its successes to date, Internap is constantly aware of

swiftly to an environment consumed by rapid and dramatic

continued industry change and is determined not only to adapt

change. Tough decisions were made in order to survive.

to it but, indeed, to be the catalyst of the change.

Competitive Advantage Drives Natural Selection

Darwin’s Lesson: Natural Selection at Work

Automotive

In 1885, two German engineers, Karl Benz and Gottlieb Daimler, separately produced a gasoline-powered vehicle and
simultaneously gave birth to the age of the automobile. Hundreds of companies joined the revolution, adding their
own distinct models. However, when Ford Motor Company introduced the Model T in 1908, the automobile became
affordable for everyone. Over the next two decades, the automobile industry would rise to sales of $5.5 million.

Those enterprising days ended with the Great Depression. In 1929, sales dropped 80% to under $1.5 million.
Automobile manufacturers shrank from 110 companies to 44 in a matter of years. Three companies weathered the
storm and grew into superpowers: Ford, General Motors and Chrysler. Even after the end of the Depression, other car
companies continued to struggle as the big three continued to gain popularity. Today, these three companies repre-
sent over 19.9 million in worldwide unit sales.

Keiana Moore, Senior Telco Cost Analyst

CLIENT APPLICATION EXPERIENCE MUSIC PROJECT

Interactive Museum Delivers
Unique Musical ‘Experience’

With its gleaming stainless steel “skin” and swooping
curves, the Experience Music Project in downtown
Seattle gives museum goers much more than just
a cool place to see and hear contemporary musical
history. Thanks to reliable high-speed IP connectivity
from Internap, web surfers can browse through the
EMP Digital Collection from the comfort of their own
homes and enjoy the eras of rock-and-roll, blues,
hip-hop, punk, country, jazz – even disco.

“As a museum committed to the most in-depth,interactive experience possible,
we must ensure that our IP needs are met by the best solutions in the industry.
Internap does so and is helping to ensure that the Experience Music Project is
as cutting edge as the technology that supports it.”

Paul Abramowitz, Chief Executive Officer

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Adaptability
Drives Sustained Growth

As 2004 begins, the Internet is once again entering

geographic footprint. Internap will pursue additional acquisi-

a new cycle of growth – one in which Internap and

tions and alliances, such as those Internap has forged with

the Internet will emerge as the provider and network

Telefonica USA,Akamai, Hitachi, NEC, Dimension Data and Cisco.

of choice. Among the trends influencing this next

phase of evolution are advanced applications such

Superior Solutions Drive Migration to the Internet

as Voice over IP (VoIP), streaming audio and video,

Virtual Private Networks (VPN) and IP VPNs. These

next-generation applications are driving demand for

As Internap evolves into a single-source technology solution for

the Internet, it has the potential to be thecatalyst for a sea change
in Internet usage. Transmission of the vast majority of business

high-performance Internet service solutions. And, it is

data remains on private networks that were constructed in the

expected that large enterprises will increasingly seek

1980s. While these networks are expensive to maintain and

bundled IP solutions from single-source providers.

upgrade, large enterprises continue to depend upon them due to

This is likely to spur industry consolidation as leaders

concerns about the public Internet’s ability to meet high security,

combine or form alliances to offer customers a single

reliability and cost standards.

point of service.

Acquisitions and Alliances Expand Opportunity
Internap is adapting quickly to capitalize on this next emerg-

Internap Benefits Through Sustained Growth
The Internap solution, however, overcomes these objections

and makes a compelling case for the balance of the data world

ing set of industry dynamics. The acquisitions of netVmg and

to migrate to the public Internet. Therein lies the Internap oppor-

Sockeye Networks last year expanded Internap’s portfolio to

tunity: as the Internet becomes the network of choice, Internap

include on-site, customer-premise equipment. These acquisi-

stands to be a major beneficiary. It’s a classic case of competi-

tions expand the Company’s technology product offerings and

tive advantage driving natural selection, which, in turn, drives

its market opportunity through the ability to further penetrate

sustained growth – as history has proven time and again.

existing customers, support advanced applications and extend

Technological Evolution Requires Adaptability

Darwin’s Lesson: A 47-Year History in Innovation

The Internet

History doesn’t have to be far in the past. For the Internet, history started in 1957, when in response to the Russians
launching Sputnik, the U.S. government formed ARPA (the Advanced Research Projects Agency). Under this program,
some of the best minds in the world gathered to create a way for computers to communicate. In 1969, ARPANET
connected four computers. In 1971, it was 15. By 1974, the first public server was launched and the Web never
looked back.

In 1995, Netscape signaled the coming boom of the industry when it went public. The browser software provider
was the second biggest IPO in Nasdaq history. Soon, a wave of e-companies hit the markets. Prospectors and
venture capitalists offered top dollar for companies that found new uses for the Internet.

However, the new century brought anything but prosperity for the young companies. From 2000 to 2002, over 900
companies went bankrupt, and 500,000 jobs and $2 trillion in market value were lost. The survivors, however, have
now emerged ready to continue to innovate, change their business model and move forward. Today, consumers spend
approximately $4.3 billion a month online. There is no doubt the Internet and the surviving service providers will have
a huge role in the future of commerce.

Shannon Wells, Senior Field Operations Engineer

CLIENT APPLICATION VERISIGN INC.

VeriSign: Delivering Reliable,
Secure E-Commerce Infrastructure

One of the original architects of the Digital Age,
VeriSign Inc. provides online security, digital certifi-
cation, dot.com registration and other products for
customers worldwide, including some 100,000
e-commerce merchants. More than 28% of America’s
online sales rely on VeriSign – and VeriSign relies on
Internap for its high-performance Internet connec-
tivity and colocation services.

“We chose Internap because of their reliability and scalability. Their sales

and engineering team ‘gets it.’ They’re more than just a service provider

to us. They had a presence where we needed them to be and they had

a redundant architecture at a better price point than other providers.”

Ken Silva, Vice President
of Networking and Security

GREGORY A. PETERS, President and Chief Executive Officer

“Internap has never been in a stronger position
to serve its customers.”

DEAR INTERNAP SHAREHOLDER:

Many of you may wonder why Charles Darwin is on the cover of this year’s annual report.As you have read on the

previous pages,there is a clear logic and correlation between the technological evolution of the Internet and the business

evolution of Internap.

As a matter of course, we study technological evolution to learn lessons for the future. In doing so, we have found a predictable

pattern throughout history. In the initial stages of an emerging technology, there are the innovators who lead change with experi-

mental designs, productivity breakthroughs and early adoption of new products.Then, come the followers, who discover sus-

tainable applications. Because this group is driven by economics, rather than breakthroughs, new players quickly crowd the

space.This pattern leads to the boom and bust cycles that all major technologies have weathered in their formative years.

The foundation lesson of this phenomenon is that the boom cycle is characterized by more participants than the market will

allow to survive.As a result, the bust cycle is a process of natural selection in which only the strongest survive.And it is around

these survivors that sustainable industries are built. From railroads and electricity to automobiles and the Internet, this pre-

dictable cycle has driven the evolution of every major technology that shapes the way we live our lives today.

Internap has weathered the Internet natural selection process.We were once one of many and now we are one of a few. Of the

many single-product companies created during the Internet boom, we estimate that only five percent survived. Internap, along

with partners such as VeriSign, ISS,Akamai and Equinix, are the foundation of the next generation of sustainable Internet

businesses, all of which have the technologies, business models and leadership to survive.

After the Bubble: A Focus on Core Strengths

In 2002, our goal was to shed the remnants of the Internet bubble through a series of strategic moves designed to focus

Internap on its core strengths. We addressed all aspects of our headquarters operation, focusing on improved financial met-

rics and enhanced productivity. The culture of the company also went through its own evolution as we moved our corporate

Order From Disorder

Internap Service Point

Virtual Extension (VEX) Service Point

Internap Connectivity available via partnership

Customer
HQ

Switch

Router

Remote
Access

Flow Control
PlatformTM

Internap®
P-NAP

Alternative
ISPs

NSP 1

NSP 2

NSP 3

NSP 4

NSP 5

NSP 6

NSP 7

NSP 8

Data Center Services

Customer
Router

MAN
Last Mile

Branch/
Workstation

Internap®
P-NAP

Optimizing Reliability and Security For a Worldwide Web of Challenges

A multitude of shared networks comprise the Internet, resulting in an infrastructure design that does not lend itself to routing
data or controlling applications in the most effective and efficient manner possible. With the explosion of Internet usage, there is
no guarantee that traffic will move swiftly, reliably and securely between destinations. Internap’s proprietary technology solu-
tions address these challenges by providing both managed Internet services and route-optimization equipment and software.

A Sampling of Internap’s 1,638 Clients

Financial Services

Media & Entertainment

Travel

Retail

Technology

Healthcare

ADP

Allstate

Associated Press

American Airlines

Best Buy

Fox

Delta Airlines

Circuit City

Apple

EDS

Amgen

Bristol-Myers Squibb

Charles Schwab

The McGraw-Hill Companies

Hotwire

CompUSA

Google

CheckFree

Fannie Mae

The New York Times

Southwest Airlines

Crate & Barrel

Microsoft

The Seattle Times

Spirit Airlines

eBay

Motorola

e-NetChina

JPMorgan Chase

Viacom

Travelocity

JCPenney

Sun

HealthAnswers

Mass Mutual

The Walt Disney Co.

United Airlines

Sotheby’s

VeriSign

Nasdaq

Wal-Mart

Sharp

QualCare

Chiron

Covance

headquarters from Seattle to Atlanta. This resulted in approximately 60% of new staff at headquarters and over 80% of new

senior management team members.

Our 2003 Agenda: A Strengthened Market Position

In 2003, the evolution continued, with a focus on the enhancement of our product-to-market process.We restructured our sales

team and forged partnerships and alliances to better position our products and services with larger, more strategic customers.

Now, our sales team’s productivity is at the highest level since the founding of Internap.

New alliances also are contributing to top line growth. During the year, we announced strategic relationships with Cisco, NEC,

Hitachi, Dimension Data,Telefonica, Internet Security Systems (ISS) and VeriSign. Our long-standing relationship with Akamai

was also elevated to a more strategic level, with enhanced incentives now in place for the Akamai team to heighten Internap’s

visibility with their customers. In addition, our joint venture in Japan with NTT continued its growth trajectory with the addition

of 24 new customers during the year.

Beyond these product-to-market initiatives, our overall goals in 2003 included completing restructuring activities, exploring

strategic opportunities and turning free cash flow positive. Remaining restructuring activities were largely focused on data

center and field operations real estate. Our service point locations were rationalized to eliminate redundant or non-carrier

neutral facilities. At year-end, we operated 29 service point locations versus more than 40 at the peak of the bubble. This

rationalization, combined with aggressive attention to cost of network capacity, drove gross margins to 45% for the year and

48% for the fourth quarter.This healthy gross margin contribution allowed Internap to meet its goal of turning free cash flow

positive (defined as net cash flow from operating activities less capital expenditures) for the month of December.

On the strategic front, Internap acquired two respected young companies in the route management space, netVmg and

Sockeye Networks.With these acquisitions, Internap purchased leading-edge route management code for a small percentage

of invested capital. Our engineering team already has assimilated the majority of the software purchased in these acquisitions

with Internap’s patented and patent-pending state-of-the-art technology. Our software-based technology can be delivered to

customers through Internap’s traditional outsourced service model or on a customer’s corporate campus in a route control

appliance.Thanks to these solutions, Internap now enjoys the enviable position as a premier single-source provider for man-

aged service and premise-based applications, all supported by our unmatched customer service.

This position expands our market opportunity in a number of ways. Our technology solutions can address more complex needs

and increase penetration into our existing customer base.The ability to extend our technology to the customer’s premise also

extends our geographic reach to areas outside of existing service locations and to a broader base of enterprise customers

throughout North America and internationally.And, perhaps most significantly, the integration of these solutions enables mission-

critical applications to utilize the Internet in the most cost efficient manner and with the highest level of performance. As a

result, we have the technological strength to support the industry’s most advanced and demanding business applications, such

as VoIP,VPN, streaming video, storage, CDN and security – all of which will drive network growth.

“From a single-product company,Internap has expanded to provide a broad
portfolio of high-performance technologies that offer an entirely new level
of reliable,secure and flexible Internet solutions.”

More Significant 2003 Accomplishments

In addition to these operational and strategic highlights, it is important for you, as stockholders, to be aware of several other

important achievements in 2003:

Revenue for the year grew 5%.This growth was achieved in conjunction with two other objectives that had revenue implica-

tions. First, we maintained pricing levels commensurate with our value proposition, underscoring management’s commitment

to profitable top line growth. Second, Internap took a leadership position in the fight against fraudulent and obscene unso-

licited e-mail or “spam.” Though our decision terminated a significant amount of revenue, there is no doubt that our policies

will better protect our customers and our business model over the long term.

The Company’s customer base is broad and diversified.Our top 25 customers represent less than 20% of total revenue, with no

single customer exceeding three percent of total revenue. This diversification removes risks associated with over-reliance on

any one or two individual customers. In addition, our customer base is a broad one that added 365 net new customers during

the year to reach 1,638 customers in total. Finally, our customers are quality customers, with approximately seven percent of

the Fortune 1000 represented in key strategic verticals.

Our focus on profitability is well demonstrated.Gross margins grew from 37% to 45% in 2003. Based on organic growth, our

model is expected to contribute healthy gross margins in the high 40% to low 50% range in 2004 and 2005, respectively. We

continue, however, to be alert to strategic prospects and are open to adjusting this metric as needed in order to capitalize on

opportunities that enhance our long-term position.

Fixed operating expenses decreased 17%.Our headcount, after reaching a low of approximately 260 during our transition to

Atlanta, leveled out at 332 employees in early 2003.With the addition of the netVmg and Sockeye team, we are now at approxi-

mately 350 staff members – a very favorable comparison with our staffing level of over 800 a few years ago. Our productivity

levels are at historical highs in all departments.

Capital expenditures were less than $4 million in 2003.Internap invested heavily in routing infrastructure during its early

growth period. As a result, the Company has enjoyed the benefit of lower capital expenditures during its restructuring period.

We have also redeployed infrastructure, while investing in software upgrades to maintain feature functionality. Our routing

infrastructure is operating at approximately 35% of capacity, allowing for significant growth on our current platform.

Our balance sheet is strong.In August, Internap closed a $10 million private placement of common stock, with the proceeds

remaining on our balance sheet. This transaction not only was important for balance sheet purposes, but it also served as a

strong indicator of the public market’s acceptance of Internap. With this acceptance and the appreciation that the invest-

ment community illustrated during the year, we also completed a public offering of common stock during the first quarter of

2004, which contributed approximately $57 million to our balance sheet. Finally, we successfully convinced over 50% of the

Series A Preferred Stockholders to convert to common stock. Today, approximately 20% of the fully diluted shares are in the

hands of preferred stockholders with a mandatory convert coming in September of this year. With the orderly conversion of

these stockholders and our low debt levels, Internap’s capital structure is and will be one of the strongest in our industry

segment, and our balance sheet is strong.

I share these points with a great sense of pride, satisfaction and accomplishment. Internap has faced and successfully met a

series of challenges over the past several years, some unique to our company and others that were felt throughout the industry.

The past year, however, has been our most successful ever and reflects the incredible talent and commitment of our employees.

I cannot thank them enough. Indeed, the past 12 months have been a transformational period on every front for Internap.

From a single-product company, Internap has expanded to provide a broad portfolio of high-performance technologies that offer

an entirely new level of reliable, secure and flexible Internet solutions. Now, Internap is at an inflection point, ready to pursue

market share and take the business to its next phase of expansion and level of performance.

Well-Positioned For The Next Market Opportunity

As Internap moves to its next level of performance, its potential is aligned perfectly with the next round of emerging industry

trends. By 2006, the market for Internet value-added services is expected to exceed $60 billion annually, as enterprises view

IP-based services as mission-critical and VoIP, Virtual Private Networks (VPN), streaming audio/video and other services as

significant cost-savings opportunities. Market growth is directly correlated to the development of a suitable level of confidence

in the medium.And, this requires acceptable performance standards.

Internap is in an exceptional position to meet these requirements. For example, an assessment by NEC Business Network

Solutions documented that Internap’s multi-carrier methodology for managing voice and video traffic over the public Internet far

exceeded the acceptable performance levels of delay, packet loss and jitter recommended by the ITU Telecommunications

Standardization Sector. Simply put, Internap is setting the industry standard for service quality.

Technology solutions that combine cost effectiveness with quality and reliability will increasingly provide enterprises with

the confidence level necessary to abandon their inefficient and costly private networks in favor of Internet-based services.

In doing so, they will look to industry leaders like Internap to provide the same level of reliability, security and flexibility that

they have received from their private networks. This transformation – from private to public data services – is the growth

opportunity that Internap seeks to exploit and, indeed, will be the catalyst for offering the performance services that com-

panies demand from the Internet.

Like the evolution of the railroad, the automobile and numerous other industries in the past, the Internet is a marketplace still

in its formative stages, and, as such, represents a valuable opportunity for companies that can adapt to its constantly chang-

ing dynamics and demand. Internap will continue to adapt. Internap will continue to lead. Internap will continue to be a winner.

We appreciate your support as we make this happen for you.

Gregory A. Peters

President and Chief Executive Officer

Eugene Eidenberg, Chairman

“The rate of change in our industry continues to accelerate.
Your board is confident that change is good and that Internap
is increasingly driving that change.”

FROM THE CHAIRMAN

Dear Fellow Shareholders,

The year 2003 was important in Internap’s development as
the provider of the gold-standard for Internet connectivity for
business enterprises. As Internap CEO Greg Peters noted in
his letter, your company had its best year ever in 2003. The
Company’s board is enthusiastic about the opportunities that
are before us as the Company focuses on a period of sus-
tained growth.

Early in 2004, Internap co-founder, board member and former
CEO, Anthony (Tony) Naughtin, retired from Internap’s board.
Needless to say, without Tony’s vision and leadership, Internap
would not have had the chance to be the exciting and promis-
ing company it has become. The board is grateful for Tony’s
lasting contributions to the Company and wishes him well in
his new endeavors.

American business has entered an era of renewed focus on
corporate governance. Each member of your board of directors
takes his obligation to represent shareholder interests very
seriously. Considerable time and effort is directed to meeting
the standards of the Sarbanes-Oxley Act, which is the new
legal touchstone of corporate governance in the United States.

As 2003 drew to a close, the Company prepared to move
from the Nasdaq Small Cap Market to the American Stock
Exchange, where we are now trading under the symbol “IIP.”
This move allows the Company to trade on a national exchange
rather than a “small cap” exchange. This positions Internap to
trade alongside its peers in the public markets.

During the past year, we welcomed two new board members,
Charles B. Coe and James DeBlasio, who have assumed
important leadership roles on the board. Charlie Coe chairs
the board’s Compensation Committee and Jim DeBlasio
chairs the board’s Audit Committee.

Charlie Coe is a 28-year veteran of the telecommunications
industry, having served in a number of senior management
positions for BellSouth, AT&T Communications and American
Telesystems Corporation. Jim DeBlasio brings 22 years of
financial experience in the telecommunications industry to
Internap. He is currently Financial Vice President for Lucent
Technologies’ Mobility & INS Products. We are fortunate to have
the 50 years of experience that these industry leaders bring to
your board’s deliberations.

The rate of change in our industry continues to accelerate.
Your board is confident that change is good and that Internap is
increasingly driving that change. Greg and the team at Internap
are focused alongside the board in creating value for you —
our owners. On behalf of that team, I want to express our
gratitude for your continuing support and look forward to
working for and with you during the exciting period ahead.

Eugene Eidenberg
Chairman

Internap 2003 Annual Report
SELECTED FINANCIAL DATA

The following selected ﬁnancial data are qualiﬁed by reference to, and should be read in conjunction with our ﬁnan-
cial reports ﬁled with The Securities and Exchange Commission, our ﬁnancial statements and the notes thereto and
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in
the annual report. The consolidated statement of operations data and other ﬁnancial data presented below for the
years ended December 31, 2001, 2002 and 2003, and the balance sheet data as of December 31, 2002 and 2003
are derived from our audited ﬁnancial statements included elsewhere in this annual report. The consolidated state-
ment of operations data presented below for the years ended December 31, 1999 and 2000, and the balance sheet
data as of December 31, 1999, 2000 and 2001 are derived from our audited ﬁnancial statements that are not
included in this annual report.

Year Ended December 31,

(In thousands, except per share data)

Statement of Operations Data:
Revenues

Costs and expenses:

Direct cost of network, exclusive of depreciation

shown below
Customer support
Product development
Sales and marketing
General and administrative
Depreciation and amortization

Amortization of goodwill and other intangible assets
Amortization of deferred stock compensation
Pre-acquisition liability adjustment
Lease termination expense
Restructuring cost (beneﬁt) (1)
Impairment of goodwill and other intangible assets (2)
In-process research and development (3)
(Gain) loss on sales and retirements of property

2003

2002

2001

2000

1999

$138,580 $132,487 $ 117,404 $ 69,613

$ 12,520

75,730
9,045
6,923
18,429
20,032
33,892
3,352
390
(1,313)
–
1,084
–
–

83,207
12,913
7,447
21,641
20,848
49,600
5,626
260
–
804
(3,781)
–
–

98,915
21,480
12,233
38,151
44,491
48,550
38,116
4,217
–
–
64,096
195,986
–

62,465
20,320
11,924
35,390
32,962
20,522
54,334
10,651
–
–
–
–
18,000

17,848
5,796
3,876
17,519
7,335
4,808
–
7,569
–
–
–
–
–

and equipment

(53)

2,829

2,714

–

Total operating costs and expenses

167,511

201,394

568,949

266,568

64,751

Loss from operations
Other income (expense):

Interest income (expense), net
Loss on investments

Total other income (expense)
Net loss
Less deemed dividend related to beneﬁcial

(28,931)

(68,907)

(451,545)

(196,955)

(52,231)

(3,280)
(827)

(2,194)
(1,244)

(1,272)
(26,345)

11,498
–

2,314
–

(4,107)
(33,038)

(3,438)
(72,345)

(27,617)
(479,162)

11,498
(185,457)

2,314
(49,917)

conversion feature (4)

(34,576)

–

Net loss attributable to common stockholders

$ (67,614) $ (72,345) $(479,162) $(185,457)

$(49,917)

Basic and diluted net loss per share

(0.39) $

(0.47) $

(3.19) $

(1.30)

$ (1.31)

Weighted average shares used in computing basic

and diluted net loss per share (5)

174,602

155,545

150,328

142,451

37,994

Internap 2003 Annual Report
SELECTED FINANCIAL DATA continued

Year Ended December 31,

(In thousands)

Balance Sheet Data:
Cash, cash equivalents and short-term investments
Total assets
Notes payable and capital lease obligations,

less current portion

Series A convertible preferred stock (5)(6)
Total stockholders’ equity

Year Ended December 31,

(In thousands)

Other Financial Data:
Purchases of property and equipment
Net cash used in operating activities
Net cash (used in) provided by investing activities
Net cash (used in) provided by ﬁnancing activities

2003

2002

2001

2000

1999

$ 18,885 $ 25,219
172,969

142,451

$ 82,306
284,977

$153,965
650,110

$205,352
245,546

17,812
51,841
78,150

27,913
79,790
1,835

16,448
86,314
66,169

27,646
–
531,953

14,378
–
210,500

2003

2002

2001

2000

1999

$ (3,799) $ (8,632) $ (32,094) $ (57,698) $ (12,905)
(33,818)
(123,048)
(68,020)
12,292
256,747
72,147

(95,104)
(106,193)
148,273

(11,088)
561
4,193

(40,261)
9,581
(7,652)

(1) Restructuring cost (beneﬁt) relates to restructuring programs in which management determined to exit certain non-strategic real estate

lease and license arrangements, consolidate network access points and streamline the operating cost structure.

(2) In 2000, we acquired CO Space, Inc. and the purchase price was allocated to net tangible assets and identiﬁable intangible assets and
goodwill. In 2001, the estimated fair value of certain assets acquired was less than their recorded amounts, and an impairment charge
was recorded for approximately $196.0 million.

(3) In-process research and development is related to technology acquired in 2000 from VPNX.com, Inc., formerly Switchsoft Systems,

Inc., 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.

(4) In August 2003, we completed a private placement of our common stock which resulted in a decrease of the conversion price of

our series A preferred stock to $0.95 per share and an increase in the number of shares of common stock issuable upon conversion
of all shares of series A preferred stock by 34.5 million shares. We recorded a deemed dividend of $34.6 million in connection with
the conversion price adjustment, which is attributable to the additional incremental number of shares of common stock issuable upon
conversion of our series A preferred stock.

(5) 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.

(6) As of December 31, 2003, there were 1,751,385 shares of our series A preferred stock outstanding convertible into 58,994,032 shares

of our common stock. These shares are included in total stockholders’ equity as of December 31, 2003.

Internap 2003 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview
We provide high performance, managed Internet con-
nectivity solutions to business customers who require
guaranteed network availability and high performance
levels for business-critical applications, such as e-com-
merce, video and audio streaming, voice over Internet
Protocol, virtual private networks and supply chain
management. We deliver services through our 29 net-
work access points, which feature multiple direct high
speed connections to major Internet networks. Our pro-
prietary route optimization technology monitors the per-
formance of these Internet networks and allows us to
intelligently route our customers’ Internet trafﬁc over the
optimal Internet path in a way that minimizes data loss
and network delay. We believe this approach provides
better performance, control, predictability and reliability
than conventional Internet connectivity providers. Our
service level agreements guarantee performance across
the entire Internet in the United States, excluding local
connections, whereas conventional Internet connectivity
providers typically only guarantee performance on their
own network. We provide services to customers in
various industry verticals, including ﬁnancial services,
entertainment and media, travel, e-commerce and retail
and technology. As of December 31, 2003, we provided
our services to over 1,600 customers in the United
States and abroad, including approximately 70 cus-
tomers in the Fortune 1000 companies.

At December 31, 2003, we operated 29 network access
points in 17 metropolitan market areas. During 2003, our
total number of network access points were reduced from
34 to 29, with nine network access points relocated dur-
ing the year to lower operating cost, enhance customer
connectivity and improve our technology.

Due to the nature of the services we provide, we gen-
erally price our Internet connectivity services at a pre-
mium to the services offered by conventional Internet
connectivity service providers. We believe customers
with business-critical Internet applications will continue
to demand the highest quality of service as their Internet
connectivity needs grow and become even more com-
plex and, as such, will continue to pay a premium for our
high performance managed Internet connectivity services.

Our success in executing our premium pricing strategy
depends, to a signiﬁcant degree, on our ability to differ-
entiate our connectivity solutions from lower cost alter-
natives. The key measures of our success in achieving
this differentiation are revenue and customer growth.
During 2003, our net new customers increased by 365

to over 1,600 enterprise customers as of December 31,
2003. Revenue for the year ended December 31, 2003
increased 5% to $138.6 million, compared to revenue of
$132.5 million for the year ended December 31, 2002.

We intend to increase revenue by leveraging the capabili-
ties of our existing network access points. In our existing
markets, we realize incremental margin as new customers
are added. Additional volume in an existing market allows
improved utilization of existing facilities and an improved
ability to cost-effectively predict and acquire additional
network capacity. Conversely, decreases in the number
of customers in an established market lead to decreased
facility utilization and increase the possibility that direct
network resources are not cost-efﬁciently employed.
These factors have a direct bearing on our ﬁnancial posi-
tion and results of operations.

We also intend to increase revenue by expanding our
geographic coverage in key markets in the United States
and abroad. As we enter new geographic markets, oper-
ating results will be affected by increased expenses for
hiring, training and managing new employees, acquiring
and implementing new systems and expenses for new
facilities. Our ability to generate increased revenues
depends on the success of our cost control measures
as we expand our geographic coverage.

Finally, we intend to increase revenue by expanding our
complementary managed Internet service product offer-
ings. These services include, but are not limited to, con-
tent distribution, virtual private networking, colocation
services, managed security, managed storage, video
conferencing and Voice over Internet Protocol services.

Business Combinations
On October 1, 2003, we completed our acquisition of
netVmg. The acquisition was recorded using the pur-
chase method of accounting under Statement of
Financial Accounting Standards, or SFAS, No. 141,
“Business Combinations” (“SFAS 141”). The aggregate
purchase price of the acquired company, plus related
charges, was approximately $13.7 million and was com-
prised of 345,905 shares of our series A preferred stock,
acquisition costs and warrants to purchase 1.5 million
shares of our common stock. The warrants are exercis-
able only in the event the former netVmg stockholders
invest an amount no less than $4.4 million in any future
private placement of our equity securities. Results of
operations of netVmg have been included in our ﬁnan-
cial results since the closing date of the transaction.

Internap 2003 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued

On October 15, 2003, we completed our acquisition
of Sockeye. The acquisition was recorded using the
purchase method of accounting under SFAS 141. The
aggregate purchase price of the acquired company,
plus related charges, was approximately $1.9 million
and was comprised of 1,420,775 shares of our common
stock and acquisition costs. Results of operations of
Sockeye have been included in our ﬁnancial results
since the closing date of the transaction.

Critical accounting policies and estimates
The discussion and analysis of our ﬁnancial condition
and results of operations are based upon our consoli-
dated ﬁnancial statements, which have been prepared
in accordance with accounting principles generally
accepted in the United States. The preparation of these
ﬁnancial statements requires management to make esti-
mates 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, customer credit
risk, investments, goodwill and other intangible assets,
long-lived assets, income taxes, restructuring costs,
long-term service contracts, contingencies and litiga-
tion. 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 assump-
tions or conditions.

Management believes the following critical accounting
policies affect the judgments and estimates used in the
preparation of our consolidated ﬁnancial statements.

Revenue recognition. The majority of our revenue is
derived from high-performance Internet connectivity
and related colocation services. Our revenues are gen-
erated 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 colocation, content dis-
tribution, server management and installation services,
virtual private networking services, managed security
services, data backup, remote storage and restoration
services, and video conferencing services. We also offer
T-1 and fractional DS-3 connections 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. Contracts and sales or pur-
chase orders are generally used to determine the exis-
tence of an arrangement. We test for availability or use
shipping documents when applicable to verify delivery of
our product or service. We assess whether the fee is
ﬁxed or determinable based on the payment terms asso-
ciated with the transaction and whether the sales price
is subject to refund or adjustment.

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 net-
work equipment, which are amortized over the estimated
life of the customer relationship. Revenues associated
with billings for installation of customer network equip-
ment are deferred and amortized over the estimated life
of the customer relationship, as the installation service
is integral to our primary service offering and does not
have value to a customer on a stand-alone basis.

Customer credit risk. We review the creditworthiness
of our customers routinely. If we determine that collec-
tion of service revenues is uncertain, we do not recog-
nize revenue until cash has been collected. Additionally,
we maintain allowances for doubtful accounts resulting
from the inability of our customers to make required pay-
ments on accounts receivable. To establish the amount
of the allowances against revenue and receivables on
the balance sheet, we apply a credit risk rating system
that is based on management’s best understanding of
our customers’ ability to pay. Our assessment of cus-
tomers’ creditworthiness may include consideration of
payment history. The sum of individual customer receiv-
able balances multiplied by the credit rating is the basis
for reserves against revenues and receivables. We also
increase our reserve estimates for estimated customer
credits. If the ﬁnancial condition of our customers were
to deteriorate, or management becomes aware of new
information impacting a customer’s credit risk, addi-
tional allowances may be required.

Investments. We account for investments without read-
ily determinable fair values at historical cost, as deter-
mined by our initial investment. The recorded value of
cost basis investments is periodically reviewed to deter-
mine the propriety of the recorded basis. When a decline

Internap 2003 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued

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 abil-
ity to exercise signiﬁcant inﬂuence, but not control, over
an investee using the equity method of accounting.
Signiﬁcant inﬂuence, but not control, is generally deemed
to exist if we have an ownership interest in the voting
stock of the investee of between 20% and 50%, although
other factors, such as minority interest protections, are
considered in determining whether the equity method of
accounting is appropriate. As of December 31, 2003, we
have a single investment that qualiﬁes for equity method
accounting, our joint venture with NTT-ME Corporation of
Japan, known as Internap Japan. We record our propor-
tional share of the losses of our investee one month in
arrears on the consolidated balance sheets as a compo-
nent of non-current investments and our share of the
investee’s losses as loss on investment on the consoli-
dated statement of operations.

Goodwill. We may record goodwill as a result of acqui-
sitions. We recorded goodwill as a result of our acquisi-
tions of CO Space, Inc., VPNX.com, Inc., netVmg, Inc.,
and Sockeye Networks, Inc. We account for goodwill
under SFAS No. 142, “Goodwill and Other Intangible
Assets.” This statement requires an impairment-only
approach to accounting for goodwill. The SFAS No. 142
goodwill impairment model is a two-step process. First,
it requires a comparison of the book value of net assets
to the fair value of the related operations that have good-
will assigned to them. If the fair value is determined to
be less than book value, a second step is performed to
compute the amount of the impairment. In this process,
a fair value for goodwill is estimated, based in part on
the fair value of the operations used in the ﬁrst step, and
is compared to the carrying value for goodwill. Any short-
fall of the fair value below carrying value represents the
amount of goodwill impairment. SFAS No. 142 requires
goodwill to be tested for impairment annually at the
same time every year and when an event occurs or cir-
cumstances change such that it is reasonably possible
that impairment may exist. We selected August 1 as our
annual testing date.

To estimate fair value in the future, for purposes of com-
pleting the ﬁrst step of the SFAS No. 142 analysis, we
will use a market-based analysis based on the value of
our equity and a discounted cash ﬂow analysis. The

forecasts of future cash ﬂows will be based on our best
estimate of future revenues, operating costs and gen-
eral market conditions, and is subject to review and
approval by senior management. Both approaches to
determining fair value will depend on our stock price
since market capitalization will impact the discount rate
to be applied as well as a market multiple analysis.
Changes in the forecast could cause us to either pass
or fail the ﬁrst step test and could result in the impair-
ment of goodwill.

Restructuring liability. When circumstances warrant, we
may elect to exit certain business activities or change the
manner in which we conduct 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 previ-
ous estimates to reﬂect what it then believes to be a

Finance

Robert Jenks, David Buckel and Don Burke

“Our ﬁnancial achievements reﬂected in improved revenue

and a decline in network cost and operating expenses

underscore the validity of our operational model.”

Robert Jenks, Chief Financial Ofﬁcer

Internap 2003 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued

more accurate representation of expected future costs.
Because management’s estimates and assumptions regard-
ing restructuring costs include probabilities of future events,
such estimates are inherently vulnerable to changes due
to unforeseen circumstances, changes in market condi-
tions, regulatory changes, changes in existing business
practices and other circumstances that could materially
and adversely affect our results of operations. A 10%
change in our restructuring estimates in a future period,
compared to the $6.4 million restructuring liability at
December 31, 2003 would result in a $0.6 million
expense or beneﬁt in the statement of operations during
the period in which the change in estimate occurred.

Deferred taxes. We record a valuation allowance to
reduce our deferred tax assets to the amount that is
more likely than not to be realized. 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 fea-
sible 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 adjust-
ment to the deferred tax asset would increase income
in the period such determination was made.

Technology

Eric Klinker, David Lindstrom and Ali Marashi

“New,high-demand applications,such as VoIP,virtual private

networks,e-commerce,streaming audio and video will

further drive demand in the intelligent route control market.”

Ali Marashi, Chief Technology Ofﬁcer and
Vice President, Engineering

Network service commitment liability. We monitor our
network service commitments with our network service
providers. When we determine that a service commit-
ment will not be achieved through the ordinary course
of business and the service provider is not expected
to provide relief from the commitment, we record an
expense to the direct costs of network and a liability
for the estimated shortfall. If we are unable to continue
increasing our base of customers or if our customer
base decreases, we may experience a deterioration
of our operating margins.

Recent accounting pronouncements
In January 2003, the FASB issued Interpretation No. 46
(“FIN 46”), “Consolidation of Variable Interest Entities,”
which clariﬁes the application of Accounting Research
Bulletin No. 51, “Consolidated Financial Statements,”
relating to consolidation of certain entities. First, FIN 46
requires identiﬁcation of our participation in variable
interest entities (“VIE”), which are deﬁned as entities
with a level of invested equity that is not sufﬁcient to
fund future activities to permit them to operate on a
stand-alone basis, or whose equity holders lack certain
characteristics of a controlling ﬁnancial interest. Then,
for entities identiﬁed as VIE, FIN 46 sets forth a model
to evaluate potential consolidation based on an assess-
ment of which party to the VIE, if any, bears a majority
of the exposure to its expected losses, or stands to
gain from a majority of its expected returns. FIN 46 also
sets forth certain disclosures regarding interests in VIE
that are deemed signiﬁcant, even if consolidation is not
required. We evaluated our investments and other rela-
tionships and concluded that none qualify as a VIE as
deﬁned in FIN 46.

On May 15, 2003, the FASB issued SFAS No. 150,
“Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity.” This state-
ment establishes standards for classifying and measuring
as liabilities certain ﬁnancial instruments that embody
obligations of the issuer and have characteristics of both
liabilities and equity. This statement represents a signiﬁ-
cant change in practice in the accounting for a number of
ﬁnancial instruments, including mandatorily redeemable
equity instruments and certain equity derivatives that are
frequently used in connection with share repurchase pro-
grams. This statement is effective for all ﬁnancial instru-
ments created or modiﬁed after May 31, 2003, and to
other instruments as of July 1, 2003. We adopted the
provisions of this standard during 2003 and it had no
material impact on our ﬁnancial position and results
from operations.

Internap 2003 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued

Product development costs consist principally of com-
pensation 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 pro-
grams, 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.

The revenue and income potential of our business and
market is unproven, and our limited operating history
makes it difﬁcult to evaluate our prospects. Although we
have been in existence since 1996, we have recently
substantially completed signiﬁcant operational restruc-
turings, which have included substantial changes in our
senior management team, a reduction in headcount
from a high of 860 employees to 354 employees at
December 31, 2003, streamlining our cost structure,
consolidating network access points, terminating certain
nonstrategic real estate leases and license arrangements
and moving our headquarters from Seattle, Washington
to Atlanta, Georgia to further reduce costs. We have
incurred net losses in each quarterly and annual period
since we began operations in May 1996. As of
December 31, 2003, our accumulated deﬁcit was
$829.5 million.

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
colocation, content distribution, server management
and installation services, virtual private networking ser-
vices, managed security services, data backup, remote
storage and restoration services and video conferencing
services. We also offer T-1 and fractional DS-3 connec-
tions at ﬁxed rates. We recognize revenues when per-
suasive 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 rev-
enues 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 primarily of the
costs for connecting to and accessing Internet net-
work service providers and competitive local exchange
providers, costs related to operating and maintaining
network access points and data centers and costs
incurred for providing additional third-party services to
our customers. To the extent a network access point is
located a distance from the respective Internet net-
work service providers, we may incur additional local
loop charges on a recurring basis. Connectivity costs
vary depending on customer demands and pricing
variables while network access point facility costs are
generally ﬁxed in nature.

Customer support costs consist primarily of employee
compensation costs for employees engaged in con-
necting customers to our network, installing customer
equipment into network access point facilities, and serv-
icing customers through our network operation centers.
In addition, facilities costs associated with the network
operations center are included in customer support costs.

Internap 2003 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued

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

Year Ended December 31,

2003

2002

2001

Revenues

100% 100% 100%

Costs and expenses:

Direct cost of network,

exclusive of depreciation
shown below
Customer support
Product development
Sales and marketing
General and administrative
Depreciation and amortization
Amortization of goodwill and
other intangible assets
Amortization of deferred
stock compensation
Pre-acquisition liability

adjustment

Lease termination expense
Restructuring costs (beneﬁt)
Impairment of goodwill and
other intangible assets

Loss on sales and retirements
of property and equipment

Total operating costs

and expenses

Loss from operations

Other expense:

Interest expense, net
Loss on investments

Total other expense

Net loss

55%
7%
5%
13%
14%
25%

63%
10%
6%
16%
16%
37%

84%
18%
10%
32%
38%
41%

33%

–

(1)%
–
1%

–
1%
(3)%

–
–
55%

–

167%

121% 152% 484%
(21)% (52)% (384)%

2%
1%
3%

2%
1%

1%
23%

24%
3%
(24)% (55)% (408)%

Years Ended December 31, 2003 and 2002
Revenues. Revenues for 2003 increased $6.1 million
from $132.5 million for the year ended December 31,
2002 to $138.6 million for the year ended December 31,
2003, an increase of 5%. Revenue for Internet Protocol
connectivity and third party services at our existing net-
work access points increased 2% primarily due to an
increase in our customer base from 1,273 to 1,638, a 29%
increase. Pricing pressures due to general market con-
ditions caused a decrease in our revenue per customer.

Revenue from complementary managed Internet serv-
ices, such as content distribution, increased 10% exclud-
ing the revenues from the acquisition of netVmg. Revenue
for 2003 reﬂects the addition of netVmg operations sub-
sequent to its acquisition in the fourth quarter. We expect
the composition of future revenue increases will include
an increasing percentage of revenue from complementary
managed Internet services than in the past.

Direct cost of network. Direct cost of network
decreased 9% from $83.2 million for the year ended
December 31, 2002 to $75.7 million for the year ended
December 31, 2003. This decrease of $7.5 million was
primarily due to a reduction in negotiated rates with
Internet network service and local exchange providers
throughout 2003. The decrease was partially offset by a
28% increase in content distribution costs, which were
in line with the increase in content distribution revenue.

Facility costs comprise approximately one-third of total
direct network costs. During 2004, we anticipate achiev-
ing a reduction in these facilities costs due to the con-
solidation from 34 to 29 locations late in 2003. The
resulting lower facilities costs are expected to be stable
in future years with incremental increases directly related
to expansion into new metropolitan market areas. The
remaining direct network cost is anticipated to maintain
a similar relationship with revenue.

Customer support. Customer support expenses
decreased 30% from $12.9 million for the year ended
December 31, 2002 to $9.0 million for the year ended
December 31, 2003. This decrease of $3.9 million was
primarily driven by decreases in compensation and
related costs (representing 70% of the decrease) due to
a headcount reduction of 51 employees and decreased
facilities costs (representing 28% of the decrease).

Product development. Product development costs
for the year ended December 31, 2003 decreased 7%
to $6.9 million from $7.4 million for the year ended
December 31, 2002. The decrease of $0.5 million was
due primarily to decreased facilities costs of $0.8 mil-
lion, partially offset by increases in compensation and
related costs of $0.2 million related to the acquisitions
of Sockeye and netVmg.

Internap 2003 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued

Sales and marketing. Sales and marketing costs for
the year ended December 31, 2003 decreased 15%
to $18.4 million from $21.6 million for the year ended
December 31, 2002. This decrease of $3.2 million was
primarily due to decreases in facilities costs (represent-
ing 59% of the decrease), compensation and related
costs (representing 53% of the decrease) due to a head-
count reduction of 29 employees, partially offset by a
$0.3 million increase in market research expenditures.

General and administrative. General and adminis-
trative costs for the year ended December 31, 2003
decreased 4% to $20.0 million from $20.8 million for
the year ended December 31, 2002. The decrease of
$0.8 million primarily reﬂects decreased compensation
and related expenses of $1.8 million due to a headcount
reduction of 20 employees offset by increased facilities
costs of $1.3 million.

Depreciation and amortization. Depreciation and
amortization of property and equipment for the year
ended December 31, 2003 decreased 32% to $33.9 mil-
lion compared to $49.6 million for the year ended
December 31, 2002. The decrease of $15.7 million was
primarily due to assets becoming fully depreciated during
2003, which were not replaced by the same level of pur-
chases of property and equipment as during prior years.

Amortization of goodwill and other intangible assets for
the year ended December 31, 2003 decreased 40% to
$3.4 million compared to $5.6 million for the year ended
December 31, 2002. The decrease of $2.2 million was
due to intangible assets becoming fully amortized dur-
ing 2003, which was only partially offset by amortization
expense for the additional intangible assets related to
the netVmg acquisition during 2003.

Pre-acquisition liability adjustment. As part of our
acquisition of CO Space on June 20, 2000, we recorded
a pre-acquisition liability of $1.3 million for network
equipment purchased by CO Space. During 2003, we
reevaluated the likelihood of settling the liability related
to this equipment and concluded that a contingent
obligation no longer exists. Therefore, the liability was
eliminated resulting in a one-time reduction in costs
and expenses of $1.3 million.

Restructuring cost (beneﬁt). A restructuring charge of
$1.1 million was recorded in 2003 for costs associated
with the relocation of our corporate headquarters to
Atlanta, Georgia. This compares with a restructuring
beneﬁt of ($3.8) million in 2002 reﬂecting non-cash
restructuring plan adjustments and write-downs net of
additional 2002 restructuring and impairment charges.

Deemed dividend related to beneﬁcial conversion
feature. Our 2003 net loss per share includes the effect
of a deemed dividend of $34.6 million related to certain
conversion features of our series A preferred stock in
2003. In August 2003, we completed a private placement
of our common stock which resulted in a decrease of
the conversion price of our series A preferred stock to
$0.95 per share and an increase in the number of
shares of common stock issuable upon conversion of

Process Improvement/Operations

Marla Eichmann and Eric Suddith

“Using group and individual productivity metrics,we achieved

signiﬁcant improvements in 2003.”

Marla Eichmann, Vice President, Cross Fuctional Operations

Internap 2003 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued

all shares of series A preferred stock by 34.5 million
shares. We recorded a deemed dividend of $34.6 million
in connection with the conversion price adjustment,
which is attributable to the additional incremental num-
ber of shares of common stock issuable upon conver-
sion of our series A preferred stock. See note 15 to our
ﬁnancial statements included in this annual report on
Form 10-K.

Years Ended December 31, 2002 and 2001
Revenues. Revenues for the year ended December 31,
2002 increased by 13% to $132.5 million, up from
$117.4 million for the year ended December 31, 2001.
The increase during 2002 was primarily driven by
increased connectivity service revenues, accounting for
75% of the increase, which reﬂects a full year of opera-
tions at the six network access points that were opened
during 2001, and an increase in our overall customer base
from 974 to 1,273 customers across our metropolitan
market network access points. Revenues for the year
ended December 31, 2002 also increased by $3.2 mil-
lion compared to 2001 due to a reduction in the term of
a customer’s service contract. As a result of this reduc-
tion in the contractual service period and other factors,

Corporate Development

Constantine Dantoulis, Ping Kiang and John Scanlon

“We believe the industry is entering a consolidation phase and

we will continue to look for business combinations that expand

our product portfolio,footprint and/or market share.”

John Scanlon, Vice President, Corporate Development

we changed the estimated life of the customer relation-
ship over which we recognize deferred revenues from
120 months to 46 months, with 14 months remaining at
December 31, 2002. The current balance of deferred
revenue attributable to the customer therefore increased
to reﬂect the amortization of the remaining balance over
the remaining customer relationship period. Also included
are contract termination revenues of $1.3 million col-
lected from customers that discontinued service during
the year. Of the remaining increase, 23% can be attrib-
uted primarily to content delivery network services and
the remaining 2% can be attributed to colocation data
center services, including facilities charges.

Direct cost of network. Direct cost of network for
the year ended December 31, 2002 decreased 16%
to $83.2 million from $98.9 million for the year ended
December 31, 2001. The decrease of $15.7 million in
2002 reﬂects reduced network cost and local access
expenses (representing 107% of the decrease), resolu-
tion of disputes with network vendors (representing 9%
of the decrease) and lower third-party colocation and
service point facility costs (representing an additional
8% of the decrease). These decreases were offset by
a 10% increase in customer local access costs, a
6% increase in colocation costs in our facilities and a
14% increase in costs associated with content delivery
network services.

Customer support. Customer support costs for the
year ended December 31, 2002 decreased 40% to
$12.9 million from $21.5 million for the year ended
December 31, 2001. The decrease of $8.6 million was
primarily driven by decreases in compensation (repre-
senting 65% of the decrease), facilities (representing
20% of the decrease), and decreases in communica-
tions, general ofﬁce, travel and entertainment and other
costs (representing 15% of the decrease). Customer
support costs are primarily related to employee costs.

Product development. Product development costs
for the year ended December 31, 2002 decreased 39%
to $7.4 million from $12.2 million for the year ended
December 31, 2001. The decrease of $4.8 million reﬂects
reduced compensation expense (representing 51%
of the decrease), facilities (representing 16% of the
decrease), outside professional services (representing
25% of the decrease) and communications and other
costs (representing 8% of the decrease).

Internap 2003 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued

Sales and marketing. Sales and marketing costs for
the year ended December 31, 2002 decreased 44%
to $21.6 million from $38.1 million for the year ended
December 31, 2001. Approximately 35% of the $16.5 mil-
lion decrease can be attributed to a marketing and
advertising campaign in 2001. Additionally, 34% of the
decrease relates to compensation costs as a result of
employee terminations completed during 2002.

General and administrative. General and administrative
costs for the year ended December 31, 2002 decreased
54% to $20.8 million from $44.5 million for the year
ended December 31, 2001. The decrease of $23.7 mil-
lion reﬂects lower facility costs (representing 28% of
the decrease), lower compensation costs (representing
25% of the decrease), decreases in taxes and bad debt
expense (each representing 12% of the decrease),
reduced professional services (representing 8% of the
decrease), lower training, communications, travel and
entertainment and other ofﬁce costs (representing 15%
of the decrease).

Depreciation and amortization. Depreciation and
amortization of property and equipment for the year
ended December 31, 2002 increased 2% to $49.6 mil-
lion as compared to $48.6 million for the year ended
December 31, 2001. The increase is attributable to a
6% increase in depreciation and amortization expense
relating to network and service point assets, including
the deployment of six additional network access points
during 2001. The increase in depreciation and amortiza-
tion related to network assets was partially offset by a
5% decrease in depreciation and amortization related
to non-network assets. This decrease was primarily due
to retirements and write-downs of assets during 2001
and 2002.

Other expense. Other expense consists of interest
income, interest and ﬁnancing expense, investment losses
and other non-operating expenses. Other expense for the
year ended December 31, 2002 decreased to $3.4 million
from $27.6 million for the year ended December 31, 2001.
This decrease was primarily due to losses incurred during
2001 on our investments in 360networks, Inc. and
Aventail Corporation of $14.5 million and $4.8 million,
respectively, and the $6.0 million provision we recorded
on a note receivable. During 2002, our other expense
items consisted of $1.2 million in losses related to our
equity-method investment and $2.2 million of interest,
which increased approximately $900,000 during 2002
as compared to 2001 due primarily to lower interest
income on reduced cash balances.

Liquidity and Capital Resources
Cash Flow for the Years Ended December 31, 2003, 2002,
and 2001
Net cash used in operating activities. Net cash used
in operating activities was $11.1 million for the year ended
December 31, 2003, and was primarily due to the net loss
of $33.0 million adjusted for non-cash items of $40.8 mil-
lion, an increase in accounts receivable of $2.7 million, a
decrease in accounts payable of $5.9 million, a decrease
in deferred revenue of $4.5 million, a decrease in accrued
restructuring costs of $7.2 million and a decrease in
accrued liabilities of $1.1 million. These uses of cash were
offset by a $2.5 million decrease in prepaid and other
assets. The increase in receivables at December 31, 2003
compared to December 31, 2002 was related to the 5%
increase in revenue compared to the prior year as day’s
sales outstanding remained constant at 38 days. The
decrease in payables is primarily related to a lower overall
level of operating expenses in 2003 compared to 2002.

Net cash used in operating activities was $40.3 million
for the year ended December 31, 2002, and was primarily
due to the net loss of $72.3 million adjusted for non-cash
items of $58.0 million, an increase in accounts receivable
of $2.4 million, a decrease in accounts payable of $0.8 mil-
lion, a decrease in deferred revenue of $4.3 million, a
decrease in accrued restructuring costs of $15.3 million
and a decrease in accrued liabilities of $3.9 million. These
uses of cash were offset by a $0.7 million decrease in
prepaid and other assets. The increase in receivables
was related to higher overall revenue offset by a seven-
day improvement in day’s sales outstanding compared
to the prior year. The decrease in payables is primarily
related to a lower overall level of operating expenses in
2002 compared to 2001.

Net cash used in operating activities was $123.0 million
for the year ended December 31, 2001 and was primarily
due to the net loss of $479.2 million adjusted for non-
cash items of $325.7 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 an increase
in 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.
Day’s sales outstanding were 62 days at December 31,
2000, and reached 65 days during the ﬁrst half of 2001,

Internap 2003 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued

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 provided by investing activities. Net cash
provided by investing activities for the year ended
December 31, 2003 was $0.6 million and primarily con-
sisted of net cash received from acquired businesses of
$2.3 million and a reduction in restricted cash of $2.1 mil-
lion, partially offset by purchases of property and
equipment of $3.8 million. The purchase of property and
equipment related to the purchase of assets for our net-
work infrastructure and the cost related to the relocation
of nine network access points. We expect the purchase
of property and equipment will increase during 2004 as
we continue to enhance and expand our service offerings.

Net cash provided by investing activities was $9.6 mil-
lion for the year ended December 31, 2002 and was pri-
marily from proceeds of $18.7 million received on the
redemption or maturity of investments. Cash received
was partially offset by $8.6 million used for purchases
of property and equipment and $1.3 million contributed
to our joint venture investment, Internap Japan. Of the
$8.6 million used for purchases of property and equip-
ment, $5.8 million related to the purchase of assets
from our primary provider of leased networking equip-
ment as part of terms of an amendment to our master
lease arrangement with the lessor.

Net cash provided by investing activities was $12.3 mil-
lion for the year ended December 31, 2001 and was pri-
marily 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 set-
tlement of a corporate ofﬁce facility. As part of the settle-
ment, 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 equip-
ment and $22.7 million used to purchase investments.
The purchases of property and equipment primarily rep-
resent leasehold improvements and infrastructure pur-
chases for our colocation facilities 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 coloca-
tion facilities under construction during 2000. In connec-
tion with the restructuring plan adopted by management
during February 2001, capital spending for new coloca-
tion facilities was signiﬁcantly reduced.

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. See “Liquidity” below.
Net cash provided by ﬁnancing activities for the year
ended December 31, 2003 was $4.2 million. Cash pro-
vided included net proceeds from issuance of common
stock of $9.3 million and proceeds from exercise of
stock options and warrants of $4.0 million. Net cash
provided by ﬁnancing activities was reduced by princi-
pal payments on notes payable of $4.6 million, pay-
ments on capital lease obligations of $2.9 million and
a $1.6 million reduction in our revolving credit facility.

Net cash used in ﬁnancing activities for the year ended
December 31, 2002 was $7.7 million. Cash used included
$10.3 million related to payments on capital lease obliga-
tions and $3.4 million for payments of notes payable.
These uses were offset by proceeds of $0.4 million
related to exercises of stock options and warrants and
$0.7 million related to the sale of common stock, includ-
ing stock issued to employees pursuant to the Amended
and Restated 1999 Employee Stock Purchase Plan.
During 2002 we amended the terms of our master lease
agreement with our primary supplier of networking equip-
ment. The amended terms of the master lease included a
retroactive effective date to March 1, 2002, and extended
the payment terms and provided for a deferral of lease
payments of the underlying lease schedules for a period
of 24 months in exchange for a buy-out payment of
$12.1 million in satisfaction of the outstanding lease obli-
gation on 14 schedules totaling $6.3 million and for the
purchase of the equipment leased under the same
schedules totaling $5.8 million.

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 convert-
ible preferred stock, net of issuance costs, and $2.2 mil-
lion in 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 pay-
ments 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.

Internap 2003 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued

Capital equipment leases have been used since incep-
tion to ﬁnance the majority of our networking equipment
located in our network access points other than leasehold
improvements related to our colocation facilities. Pay-
ments under capital lease agreements totaled $2.9 mil-
lion, $10.3 million and $23.4 million for the years ended
December 31, 2003, 2002 and 2001, respectively.

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 pre-
ferred 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 preferred stock and 17,113,606 war-
rants 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.

In August 2003, we completed the sale, pursuant to a
private placement, of 10,650,000 shares of our common
stock, par value $0.001 per share, at a price of $0.95 per
share. We received $9.3 million, net of issuance costs.

Liquidity
We have incurred net losses in each quarterly and annual
period since we began operations in May 1996. We
incurred net losses of $33.0 million, $72.3 million and
$479.2 million for the years ended December 31, 2003,
2002 and 2001, respectively. As of December 31, 2003,
our accumulated deﬁcit was $829.5 million. We expect
to incur additional operating losses in the future, and we
cannot guarantee that we will become proﬁtable. Even
if we achieve proﬁtability, given the competitive and
evolving nature of the industry in which we operate, we
may not be able to sustain or increase proﬁtability on a
quarterly or annual basis, and our failure to do so would
adversely affect our business, including our ability to
raise additional funds.

We have experienced negative operating cash ﬂow and
have depended upon equity and debt ﬁnancings, as well
as borrowings under our credit facilities, to meet our
cash requirements in each quarterly and annual period
since we began our operations in May 1996. We expect
to meet our cash requirements in 2004 through a combi-
nation of existing cash, cash equivalents and short-term
investments, borrowings under our credit facilities and
proceeds from our recently completed public offering in
March of 2004. Our capital requirements depend on
several factors, including the rate of market acceptance

of our services, the ability to expand and retain our cus-
tomer base and other factors. If our cash requirements
vary materially from those currently planned, if our cost
reduction initiatives have unanticipated adverse effects
on our business, or if we fail to generate sufﬁcient cash
ﬂow from the sales of our services, we may require addi-
tional ﬁnancing sooner than anticipated. We cannot
assure you that we will be able to obtain additional
ﬁnancing on commercially favorable terms, or at all.
Provisions in our existing credit facility and the terms of
our series A preferred stock limit our ability to incur
additional indebtedness. Our credit facility with Silicon
Valley Bank of $20.0 million expires on October 22, 2004
and we are currently negotiating its renewal. Under our
credit facility as of December 31, 2003, we had $3.3 mil-
lion and $8.4 million outstanding under the term loan
and revolving credit facility, respectively. We cannot
assure you that this credit facility will be renewed upon
expiration on commercially favorable terms. We believe
we have sufﬁcient cash to operate our business plan
for the foreseeable future.

Public offering. On March 4, 2004, we sold 40,250,000
shares of our common stock in a public offering at a pur-
chase price of $1.50 per share which resulted in net pro-
ceeds to us of $56 million, after deducting underwriting

Legal

Walter DeSocio

“Ethical conduct is at the core of our business.To this end,

we continually look to strengthen our corporate gover-

nance processes and accountability to our stakeholders.”

Walter DeSocio, Chief Administrative Ofﬁcer
and General Counsel

Internap 2003 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued

discounts and commissions and estimated offering expenses. We intend to use the net proceeds from the offering
for general corporate purposes. General corporate purposes may include capital investments in our network
access point infrastructure and systems, repayment of debt and capital lease obligations and potential acquisitions
of complementary businesses or technologies.

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

The following table summarizes our credit obligations and future contractual commitments (in thousands,
as of December 31, 2003):

Revolving credit facility
Notes payable
Capital lease obligations
Operating lease commitments
Service commitments (1)

Total

$ 8,392
5,431
38,138
130,059
57,353

Less than
1 year

$ 8,392
3,067
12,582
13,175
22,490

Payments Due by Period

Years 1 to 3

Years 3 to 5

–
2,364
14,839
22,483
20,457

–
–
2,455
21,486
10,105

After
5 years

–
–
8,262
72,915
4,301

Total

$239,373

$59,706

$60,143

$34,046

$85,478

(1) One of our service commitment contracts with an Internet network service provider, representing $8.0 million of scheduled minimum payments in
2004 and $1.0 million in 2005, includes a provision allowing us to defer portions of our minimum commitments into future periods in the event we
do not meet annual contract minimums.

Credit facility. We have a loan and security agreement
with a $15.0 million revolving credit facility and a $5.0 mil-
lion term loan with Silicon Valley Bank. Availability under
the revolving credit facility and term loan is based on
80% of eligible accounts receivable plus 50% of unre-
stricted cash and investments. In addition, the loan and
security agreement will make available to us an addi-
tional $5.0 million under a term loan if we meet certain
debt coverage ratios. The balance outstanding under
the term loan was $3.3 million at December 31, 2003,
while the balance under the revolving credit facility was
$8.4 million. As of December 31, 2003, we had no fur-
ther borrowing capacity under the revolving credit facil-
ity. As of December 31, 2003, the variable interest rate
under the revolving credit facility was 6.0% and the
interest rate under the term loan is ﬁxed at 8.0%. This
credit facility expires on October 22, 2004. There can be
no assurance that the credit facility will be renewed
upon expiration or that we will be able to obtain credit
facilities on commercially favorable terms.

The credit facility contains certain covenants, including
covenants that require us to maintain a minimum tangi-
ble net worth and that restrict our ability to incur further
indebtedness. As of December 31, 2003, we were in
compliance with the covenants under our credit facility.

Common and preferred stock. On September 14,
2001, we completed a $101.5 million private placement
of series A preferred stock and warrants to purchase
shares of our common stock. The terms of the series A
preferred stock contain restrictions that limit our ability
to incur additional debt without the consent of the hold-
ers of the series A preferred stock. If we required addi-
tional debt ﬁnancing in the future, we cannot assure
you that we will be able to obtain the consent of the
series A preferred stockholders.

Internap 2003 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued

On August 22, 2003, we completed a private placement
of 10,650,000 shares of our common stock at a price
of $0.95 per share. We received $9.5 million, net of
issuance costs. Because we issued shares of our com-
mon stock in the private placement at a price below the
conversion price of the series A preferred stock at that
time, the number of shares of common stock into which
the outstanding shares of series A preferred stock are
convertible increased by 34.5 million shares. In accor-
dance with generally accepted accounting principles,
we recorded a deemed dividend of $34.6 million, which
is attributable to the additional incremental number of
shares of the series A preferred stock convertible into
common stock. If we offer our common stock in the
future at a price below $0.95 per share, the conversion
price of our series A preferred stock will adjust to that
lower price and the number of shares of common stock
into which shares of our series A preferred stock are
convertible will again increase.

During the year ended December 31, 2003, series A
preferred stockholders converted 1,526,321 shares of
series A preferred stock into 50,621,204 shares of com-
mon stock at a recorded value of $41.5 million. As of
December 31, 2003, we had 1,751,385 shares of series
A preferred stock outstanding with a recorded value of
$51.8 million.

Lease facilities. Since our inception, we have ﬁnanced
the purchase of network routing equipment using capi-
tal leases with our primary supplier. Our future minimum
lease payments on the capital lease obligations totaled
$38.1 million at December 31, 2003. Of this total prin-
cipal amount $12.6 million is to be paid over the next
12 months. We have fully utilized available funds under
our lease facilities.

In April 2003, we amended the terms of our master
lease agreement with our primary supplier. Speciﬁcally,
the lease amendment provides for adjustments to our
required minimum quarterly revenue levels and minimum
quarterly earnings before interest, taxes, depreciation
and amortization levels. Under the lease amendment we
paid $2.2 million on April 15, 2003, which represented
an advance payment of our lease payments due in
March and April 2004. The terms of our master lease
agreement, as amended, include ﬁnancial covenants
that require us to maintain minimum liquidity balances,
minimum revenue levels, speciﬁed levels of earnings

before interest, taxes, depreciation and amortization
and other customary covenants. On September 4, 2003,
we entered into an additional agreement to further amend
our equipment lease obligations with our primary supplier.
This lease amendment provided for additional adjust-
ments to our required minimum quarterly levels of earn-
ings before interest, taxes, depreciation and amortization
and also provided for the removal of the requirement to
maintain compliance with all ﬁnancial covenants when
we resume lease payments. This lease amendment also
required us to issue 213,675 shares of common stock
to our primary supplier having an aggregate value of
$250,000 based on the closing price of our common
stock on September 3, 2003. The value of the common
stock issued was recorded as an additional discount
to the initial capital lease obligation and the discount is
being amortized over the remaining lease term. If we are
unable to meet the requirements of the revised covenants
under the lease or make payments when due, our pri-
mary supplier could immediately demand all remaining
payments due under the lease agreement.

Restructuring and Impairment Costs
2001 restructuring charge. During 2001, due to the
overcapacity created in the Internet connectivity market
and Internet Protocol Services market, we announced

Sales and Marketing

David Abrahamson and Allen Tothill

“An expanded product portfolio and continued investments in

our sales force allowed us to achieve a signiﬁcant increase

in the number of new clients during 2003.”

David Abrahamson, Chief Marketing Ofﬁcer

Internap 2003 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued

two separate 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.
As part of the 2001 restructuring activity, 313 employees
were involuntarily terminated. Employee separations
occurred in all departments. The majority of the costs
related to the termination of employees in 2001 were
paid during 2001. The total charges include restructuring
costs of $71.6 million. During 2001, we incurred cash
restructuring expenditures totaling $19.9 million, non-
cash restructuring expenditures of $4.7 million, and we
reduced the original 2001 restructuring charge cost
estimate by $7.7 million, primarily as a result of favor-
able lease obligation settlements, leaving a balance of
$39.3 million as of December 31, 2001. During the ﬁrst
and third quarters of 2002, we further reduced our 2001
restructuring charge liability by $5.0 million and $7.2 mil-
lion, respectively. The ﬁrst quarter 2002 reduction was
primarily due to settlements to terminate and restructure
certain colocation lease obligations on terms more
favorable than our original restructuring estimates. The
third quarter 2002 reduction was primarily due to return-
ing the previously restructured Atlanta, Georgia facility
into service as the site of the new corporate headquar-
ters. Pursuant to the original restructuring plans, the
Atlanta facility was not to be used by us in the future.
However, due to changes in management, corporate
direction, and other factors, which could not be fore-
seen at the time of the original restructuring plans, the
Atlanta facility was selected as the location for the new
corporate headquarters.

2002 restructuring charge. With the continuing over-
capacity created in the Internet connectivity market and
Internet Protocol Services market, during 2002, we imple-
mented additional restructuring actions to align our busi-
ness with market opportunities. As a result, we recorded
a business restructuring charge and asset impairments
of $7.6 million in the three months ended September 30,
2002. The charges were primarily comprised of real
estate obligations related to a decision to relocate the
corporate headquarters from Seattle, Washington to
an existing leased facility in Atlanta, Georgia, net asset
write-downs related to the departure from the Seattle
ofﬁce and costs associated with further personnel reduc-
tions. The restructuring and asset impairment charge of

$7.6 million during 2002 was offset by a $7.2 million
adjustment, described above, resulting from the deci-
sion to utilize the Atlanta facility as our corporate head-
quarters. The previously unused space in the Atlanta
location had been accrued as part of the restructuring
liability established during ﬁscal year 2001. Included in
the $7.6 million 2002 restructuring charge are $1.1 mil-
lion of personnel costs related to a reduction in force
of approximately 145 employees. This represents
employee severance payments made during 2002.

2003 restructuring costs. For the year ended Decem-
ber 31, 2003, we incurred approximately $1.1 million in
restructuring costs which primarily represented retention
bonuses and moving expenses related to the relocation
of our corporate headquarters to Atlanta, Georgia. We
continue to evaluate our restructuring reserve as plans
are being executed, which could result in additional
charges in future periods.

Real estate obligations. Both the 2001 and 2002
restructuring plans require us to abandon certain leased
properties not currently in use or that will not be utilized
by us in the future. Also included in real estate obliga-
tions is the abandonment of certain colocation license
obligations. Accordingly, we recorded real estate related
restructuring costs of $43.0 million, net of non-cash plan
adjustments, which are estimates of losses in excess of
estimated sublease revenues or termination fees to be
incurred on these real estate obligations over the remain-
ing lease terms expiring through 2015. These costs were
determined based upon our estimate of anticipated sub-
lease rates and time to sublease the facilities. If rental
rates decrease in these markets or if it takes longer than
expected to sublease these properties, the actual loss
could exceed this estimate.

Network infrastructure obligations. The changes to
our network infrastructure require that we decommis-
sion certain network ports we do not currently use and
will not use in the future pursuant to 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. These
contractual obligations will continue in the future with
no economic beneﬁt, or they contain penalties that will
be incurred if the obligations are cancelled.

Internap 2003 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued

Asset impairments. On February 28, 2001, manage-
ment and the board of directors approved a restructur-
ing plan that included ceasing development of the
executed but undeveloped leases and the termination
of core colocation development personnel. Consequently,
ﬁnancial projections for the business were lowered and,
pursuant to the guidance provided by SFAS No. 121,
“Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of,” man-
agement completed a cash ﬂow analysis of the coloca-

tion assets, including the assets acquired from CO
Space, Inc. The cash ﬂow analysis showed that the
estimated cash ﬂows were less than the carrying value
of the colocation assets. Accordingly, pursuant to SFAS
No. 121, management estimated the fair value of the
colocation assets to be $79.5 million based upon a dis-
counted future cash ﬂow analysis. As estimated fair
value of the colocation assets was less than their
recorded amounts, we recorded an impairment charge
of approximately $196.0 million.

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

Restructuring costs

Real estate obligations
Employee separations
Network infrastructure obligations
Other

Total restructuring costs

Asset impairments

Goodwill
Assembled workforce
Trade name and trademarks
Completed real estate leases
Customer relationships

Total asset impairments

Charge

$ 60.0(a)

3.3
6.3
2.0

71.6

176.1
1.5
2.2
14.8
1.4

196.0

Cash
Reductions

Non-cash
Write-downs

Non-cash
Plan
Adjustments

December 31,
2001
Restructuring
Liability

$(14.7)(a)
(3.2)
(1.9)
(0.1)

$ (3.7)
–
(1.0)
–

(19.9)

(4.7)

–
–
–
–
–

–

(176.1)
(1.5)
(2.2)
(14.8)
(1.4)

(196.0)

$(7.0)
–
(0.7)
–

(7.7)

–
–
–
–
–

–

$34.6
0.1
2.7
1.9

39.3

–
–
–
–
–

–

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.

Internap 2003 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued

The following table displays the activity and balances for restructuring and asset impairment activity for 2002
(in millions):

December 31,
2001
Restructuring
Liability

Restructuring
and
Impairment
Charges

Cash
Reductions

Non-cash
and
Write-downs

Non-cash
Plan
Adjustments

December 31,
2002
Restructuring
Liability

Restructuring costs activity for 2001

restructuring charge –

Real estate obligations
Network infrastructure obligations
Other

Restructuring costs activity for 2002

restructuring charge –

Real estate obligations
Personnel
Other

Total
Net asset write-downs for 2002

restructuring charge

$34.6
2.7
2.0

–
–
–

39.3

–

$ –
–
–

2.2
1.1
0.2

3.5

4.1

$(11.2)
(1.4)
(0.9)

(0.4)
(1.1)
(0.1)

(15.1)

–

$(1.6)
–
–

$(12.2)
–
–

$ 9.6
1.3
1.1

1.8
–
0.1

–
–
–

(12.2)

13.9

–

(0.2)

–
–
–

(1.6)

(4.3)

Total

$39.3

$7.6

$(15.1)

$(5.9)

$(12.2)

$13.7

Of the $3.5 million recorded during 2002 as restructuring reserves, approximately $212,000 related to the direct
cost of network and $3.3 million related to general and administrative costs.

The following table displays the activity and balances for restructuring and asset impairment activity for 2003
(in millions):

December 31,
2002
Restructuring
Liability

Restructuring
Charges

Cash
Reductions

December 31,
2003
Restructuring
Liability

Restructuring costs activity for 2001

restructuring charge –

Real estate obligations
Network infrastructure obligations
Other

Restructuring costs activity for 2002

restructuring charge –

Real estate obligations
Personnel
Other

Total restructuring costs
Net asset write-downs for 2002

restructuring charge

$ 9.6
1.3
1.1

1.8
–
0.1

13.9

(0.2)

$ –
–
–

–
1.1
–

1.1

–

$(5.2)
(0.1)
(0.1)

(1.8)
(1.1)
(0.1)

(8.4)

–

Total

$13.7

$1.1

$(8.4)

$4.4
1.2
1.0

–
–
–

6.6

(0.2)

$6.4

Off-Balance Sheet Arrangements
As of December 31, 2003, we did not have any arrangements that would qualify as an off-balance sheet arrangement.

Internap 2003 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued

Quantitative and Qualitative Disclosures about
Market Risk

Cash and cash equivalents. We maintain cash and
short-term deposits at our ﬁnancial institutions. Due to
the short-term nature of our deposits, they are recorded
on the balance sheet at fair value. As of December 31,
2003, all of our cash equivalents mature within three
months and our short-term investments generally
mature in less than one year.

Investments. We have a $1.2 million equity investment
in Aventail, an early stage, privately held company, after
having reduced the balance for an impairment loss of
$4.8 million in 2001. This strategic investment is inher-
ently risky, in part because the market for the products
or services being offered or developed by Aventail has
not been proven. Because of risk associated with this
investment, we could lose our entire initial investment
in Aventail. Furthermore, we have invested $4.1 million
in Internap Japan, our joint venture with NTT-ME
Corporation. This investment is accounted for using
the equity method and to date we have recognized
$3.2 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 addi-
tion, the market for services being offered by Internap
Japan has not been proven and may never materialize.

Notes payable. As of December 31, 2003 we had notes
payable recorded at their present value of $5.1 million
bearing a rate of interest which we believe is commen-
surate with their associated market risk.

Capital leases. As of December 31, 2003 we had capi-
tal leases recorded at $24.3 million reﬂecting the present
value of future lease payments. We believe the interest
rates used in calculating the present values of these
lease payments are a reasonable approximation of fair
value and their associated market risk is minimal.

Credit facility. As of December 31, 2003 we had $8.4 mil-
lion outstanding under our revolving credit facility with
Silicon Valley Bank and $3.3 million outstanding under
the term loan portion of that same facility included in
notes payable above. The interest rate under the revolv-
ing credit facility is variable and was 8% at December 31,
2003. Interest under the term loan portion is ﬁxed at 8%.
We believe these interest rates are reasonable approxi-
mations of fair value and the market risk is minimal.

Interest rate risk. Our objective in managing interest
rate risk is to maintain a balance of ﬁxed and variable
rate debt that will lower our overall borrowing costs
within reasonable risk parameters. Currently, our strat-
egy for managing interest rate risk does not include the
use of derivative securities.

Foreign currency risk. 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.

Internap 2003 Annual Report
CONSOLIDATED BALANCE SHEETS

December 31,

(In thousands)

ASSETS
Current assets:

Cash and cash equivalents
Restricted cash
Accounts receivable, net of allowance of $2,429 and $1,595, respectively
Inventory
Prepaid expenses and other assets

Total current assets

Property and equipment, net
Restricted cash
Investments
Intangible assets, net of accumulated amortization of $16,941

and $13,578, respectively

Goodwill
Deposits and other assets

Total assets

2003

2002

$ 18,885
125
15,587
492
4,245

39,334
59,337
–
2,371

3,488
36,163
1,758

$ 25,219
–
15,232
–
5,632

46,083
88,394
2,053
3,047

3,557
27,022
2,813

$142,451

$172,969

LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
Current liabilities:

Accounts payable
Accrued liabilities
Deferred revenue, current portion
Notes payable, current portion
Revolving credit facility
Capital lease obligations, current portion
Restructuring liability, current portion

Total current liabilities

Deferred revenue, less current portion
Notes payable, less current portion
Capital lease obligations, less current portion
Restructuring liability, less current portion

Total liabilities

Commitments and contingencies (Note 14)

Series A convertible preferred stock, $0.001 par value, 3,500 shares designated,

2,931 shares outstanding

Stockholders’ equity:

Common stock, $0.001 par value, 600,000 shares authorized,

228,751 and 160,094 shares issued and outstanding, respectively

Series A convertible preferred stock, $0.001 par value, 3,500 shares designated,

1,751 shares outstanding, liquidation preference of $56,032

Additional paid-in capital
Deferred stock compensation
Accumulated deﬁcit
Accumulated items of other comprehensive income

Total stockholders’ equity

$ 7,556
8,585
3,674
2,790
8,392
8,770
1,965

41,732
316
2,275
15,537
4,441

64,301

$ 13,247
11,020
6,850
4,514
10,000
2,831
6,574

55,036
1,317
5,196
22,717
7,078

91,344

–

79,790

229

160

51,841
855,240
–
(829,460)
300

–
798,344
(396)
(796,422)
149

78,150

1,835

Total liabilities, convertible preferred stock and stockholders’ equity

$142,451

$172,969

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

Internap 2003 Annual Report
CONSOLIDATED STATEMENTS OF OPERATIONS

Year Ended December 31,

(In thousands, except per share amounts)

Revenues

Costs and expenses:

Direct cost of network, exclusive of depreciation shown below
Customer support
Product development
Sales and marketing
General and administrative
Depreciation and amortization
Amortization of goodwill and other intangible assets
Amortization of deferred stock compensation
Pre-acquisition liability adjustment
Lease termination expense
Restructuring costs (beneﬁts)
Impairment of goodwill and other intangible assets
(Gain) loss on sales and retirements of property and equipment

2003

2002

2001

$138,580

$132,487

$ 117,404

75,730
9,045
6,923
18,429
20,032
33,892
3,352
390
(1,313)
–
1,084
–
(53)

83,207
12,913
7,447
21,641
20,848
49,600
5,626
260
–
804
(3,781)
–
2,829

98,915
21,480
12,233
38,151
44,491
48,550
38,116
4,217
–
–
64,096
195,986
2,714

Total operating costs and expenses

167,511

201,394

568,949

Loss from operations

Other expense:

Interest expense, net
Loss on investments

(28,931)

(68,907)

(451,545)

(3,280)
(827)

(2,194)
(1,244)

(1,272)
(26,345)

Total other expense

(4,107)

(3,438)

(27,617)

Net loss

(33,038)

(72,345)

(479,162)

Less deemed dividend related to beneﬁcial conversion feature

(34,576)

–

Net loss attributable to common stockholders

$ (67,614)

$ (72,345)

$(479,162)

Basic and diluted net loss per share

(0.39)

(0.47)

(3.19)

Weighted average shares used in computing basic and diluted

net loss per share

174,602

155,545

150,328

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

Internap 2003 Annual Report
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS

Common Stock

Series A Convertible
Preferred Stock

Par
Value

Additional
Paid-In
Capital

No Par
Value
Common
Stock

Deferred
Stock
Compensation

Accumulated
Items of
Accumulated Comprehensive
Income (Loss)

Deﬁcit

Total

Stockholders’ Comprehensive
Loss

Equity

(In thousands)

Balance, January 1, 2001
Amortization of deferred stock compensation
Reversal of deferred stock compensation

for terminated employees

Sale of stock through the Employee Stock

Purchase Plan

Exercise of employee stock options
Issuance of common stock warrants in
conjunction with Series A ﬁnancing
Issuance of warrants to purchase shares
of common stock to non-employees
Establishment of par value of common stock
Comprehensive loss:
Net loss
Unrealized loss on investments
Realized loss on investments

Comprehensive loss, December 31, 2001

Balance, December 31, 2001
Amortization of deferred stock compensation
Reversal of deferred stock compensation

for terminated employees

Sale of stock through the Employee Stock

Purchase Plan

Exercise of options and warrants to purchase

common stock

Conversion of Series A preferred stock

to common stock

Issuance and exercise of warrants to purchase

common stock to non-employees

Comprehensive loss:
Net loss
Realized loss on investments
Unrealized gain on investments

Comprehensive loss, December 31, 2002

Balance, December 31, 2002
Conversion of Series A convertible preferred

stock into common stock before
reclassiﬁcation to stockholders’ equity

Reclassiﬁcation of preferred stock

to stockholders’ equity

Conversion of Series A convertible preferred

stock into common stock after
reclassiﬁcation to stockholders’ equity
Amortization of deferred stock compensation
and reversal for terminated employees
Exercise of options to purchase common stock
Sale of stock through the Employee Stock

Purchase Plan

Issuance of common stock to investors
Issuance of common stock to lessor
Issuance and exercise of warrants
to purchase common stock
to non-employees

Issuance of stock in conjunction
with acquisition of netVmg
Issuance of stock in conjunction
with acquisition of Sockeye

Record embedded beneﬁcial conversion
feature charge related to Series A
preferred stock

Amortize deemed dividend related
to beneﬁcial conversion feature

Comprehensive loss:
Net loss
Unrealized gain on investments

Comprehensive loss, December 31, 2003

148,779
–

–

1,292
1,223

–
–

–

–
–

–

–
151

–
–
–

–

–
–

–
–
–

–

151,294
–

151
–

–

1,599

1,915

5,174

112

–
–
–

–

–
–
–

–

160,094

160

953

–

–
–

–

–
–

–

–
–

–
–
–

–

–
–

–

–
–
–

–

–
–

–

–
–

–

–
–

–
–
–

–

–
–

–

–
–
–

–

–
–

–

–
–

–

–
–
–

–

794,459
(2,668)

(1,047)

696

275

6,518

111

–
–
–

–

798,344

1,201

2,888

78,589

–

49,668

(1,483)

(40,338)

40,288

–
1,908

1,781
10,650
214

2,062

–

1,421

–

–
–

–

–
2

2
11
–

–

–
–

–

–
–

–
–
–

–

–
–

–
–
–

–

(6)
1,721

363
9,288
250

1,942

346

13,590

–

–
–

–

1,849

(34,576)

34,576

(34,576)

–
–

–

–
–

–

$786,183
(1,893)

$(11,715)
6,110

$(244,915)
–

$2,400
–

$531,953
4,217

(1,234)

1,234

1,745
440

9,321

–
794,459

48
(794,610)

–

–
–

–

–
–

–

1,745
440

9,321

48
–

–
(16,883)
14,490

(479,162)
(16,883)
14,490

$(479,162)
(16,883)
14,490

–

7
–

–

–
(7)
149

–

149

–

–
–

–
–
–

–

(481,555)

66,169
260

–

698

277

6,523

111

(72,345)
(7)
149

–

(72,203)

1,835

1,202

78,589

–

390
1,723

365
9,299
250

1,944

13,590

1,850

–

–
–

–

–
–

(479,162)
–
–

–

–
–

–

–
–

–
–
–

–

(4,371)
2,928

(724,077)
–

1,047

–

–
–
–

–

(72,345)
–
–

–

(396)

(796,422)

–

–
–

–
–
–

–

396
–

–
–
–

–

–
–

–

–
–
–

–

–
–

–

–
–
–

–

–
–

–
–
–

–

–
–

–

(33,038)
–

–

–
151

–

(33,038)
151

–

$ (32,887)

Balance, December 31, 2003

228,751 $229 1,751

$51,841 $855,240 $

– $(829,460)

$ 300 $ 78,150

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

Internap 2003 Annual Report
CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,

2003

2002

2001

(In thousands)
Cash ﬂows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization
Impairment of goodwill and other intangible assets
(Gain) loss on disposal of assets
Non-cash restructuring costs (adjustments)
Non-cash interest expense on capital lease obligations
Pre-acquisition liability adjustment
Provision for doubtful accounts
Provision for notes receivable
Loss on write-down of deposits related to a lease termination
Loss on write-down of investment
Loss on sale of investment security
Loss on equity-method investment
Non-cash expense related to warrants issued
Non-cash compensation expense

Changes in operating assets and liabilities, net of the effect of acquisitions:

Accounts receivable
Inventory
Prepaid expenses and other assets
Accounts payable
Deferred revenue
Accrued restructuring
Accrued liabilities

$(33,038)

$(72,345)

$(479,162)

37,244
–
(53)
–
1,304
(1,313)
2,435
–
–
–
–
827
–
390

(2,704)
43
2,540
(5,941)
(4,461)
(7,246)
(1,115)

55,226
–
2,829
(4,602)
702
–
1,902
–
474
–
–
1,244
–
260

(2,385)
–
712
(802)
(4,335)
(15,284)
(3,857)

86,666
195,986
2,714
4,714
–
–
4,798
6,000
–
4,824
14,490
1,216
48
4,217

744
–
4,248
(8,477)
(2,228)
39,271
(3,117)

Net cash used in operating activities

(11,088)

(40,261)

(123,048)

Cash ﬂows from investing activities:

Net cash received from acquired businesses
Purchases of property and equipment
Proceeds from disposal of property and equipment
Purchase of investments
Investment in equity-method investee
Redemption of investments
Reduction of restricted cash

Net cash provided by investing activities

Cash ﬂows from ﬁnancing activities:

Proceeds from issuance of common stock, net of issuance costs
Proceeds from the issuance of Series A convertible preferred stock, net of issuance costs
Proceeds from exercise of stock options and warrants
Principal payments on notes payable
Change in revolving credit facility
Payments on capital lease obligations

Net cash provided by (used in) ﬁnancing activities

Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

Supplemental disclosure of cash ﬂow information:
Cash paid for interest, net of amounts capitalized

Non-cash adjustment to ﬁxed assets and capital leases due to restructuring

of capital lease obligation

Impairment of ﬁxed assets due to restructuring

Equipment note transferred from revolving credit facility

Prepayment of future lease obligation via note payable

Accrued expenses transferred to a note payable

Purchase of property and equipment ﬁnanced with capital leases

Forfeiture of deposits to restructuring

Change in accounts payable attributable to purchases of property and equipment

Non-cash cost of issuing Series A convertible preferred stock

Conversion of preferred stock to common stock

Items of other comprehensive income

Issuance of stock related to capital lease amendment

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

2,307
(3,799)
–
–
–
–
2,053

561

9,299
–
4,035
(4,645)
(1,608)
(2,888)

4,193

(6,334)
25,219

–
(8,632)
434
–
(1,347)
18,747
379

–
(32,094)
1,880
(22,729)
(2,833)
61,985
6,083

9,581

12,292

698
–
388
(3,420)
5,000
(10,318)

1,745
95,635
440
(2,317)
–
(23,356)

(7,652)

72,147

(38,332)
63,551

(38,609)
102,160

$ 18,885

$ 25,219

$ 63,551

$ 2,292

$ 3,264

$ 3,710

$ 5,175

$ 5,000

$ 3,300

$ 1,838

–

125

–

(7)

–

$ 41,540

$ 6,523

151

250

142

–

5,235

–

500

–

930

558

$ 18,511

–

(991)

$ (5,311)

–

Internap 2003 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DESCRIPTION OF THE COMPANY

Internap Network Services Corporation (“Internap,”
“we,” “us,” “our” or the “Company”) provides high per-
formance, managed Internet connectivity solutions to
business customers who require guaranteed network
availability and high performance levels for business-
critical applications, such as e-commerce, video and
audio streaming, Voice over Internet Protocol, virtual
private networks and supply chain management. We
deliver services through our 29 network access points,
which feature multiple direct high-speed connections
to major Internet networks. Our proprietary route opti-
mization technology monitors the performance of these
Internet networks and allows us to intelligently route our
customers’ Internet trafﬁc over the optimal Internet path
in a way that minimizes data loss and network delay.
We believe this approach provides better performance,
control, predictability and reliability than conventional
Internet connectivity providers. Our service level agree-
ments guarantee performance across the entire Internet
in the United States, excluding local connections,
whereas conventional Internet connectivity providers
typically only guarantee performance on their own net-
work. We provide services to customers in various
industry verticals, including ﬁnancial services, media
and communications, travel, e-commerce and retail and
technology. As of December 31, 2003, we provided our
services to over 1,600 customers in the United States
and abroad, including approximately 70 customers in
the Fortune 1000 companies.

Our high-performance Internet connectivity services are
available at speeds ranging from fractional T-1 (256 kbps)
to OC-12 (622 mbps), and Ethernet Connectivity from 10
mbps to 1,000 mbps (Gigabit Ethernet) from Internap’s
29 network access points to customers. We provide our
connectivity services through the deployment of network
access points, which are redundant network infrastructure
facilities coupled with our proprietary routing technology.
Network access points maintain high-speed, dedicated
connections to major global Internet networks, commonly
referred to as backbones. As of December 31, 2003, we
operated 29 network access points in 17 major metropoli-
tan market areas.

Through our recent acquisitions of netVmg, Inc. and
Sockeye Networks, Inc., we have extended the reach of
our high-performance connectivity capabilities from our
network access points to the customer’s premises
through a hardware and software route optimization

product we refer to as our Flow Control Platform. This
product enables customers to manage Internet trafﬁc
cost, performance and operational decisions directly
from their corporate locations. Our Flow Control Platform
is designed for large businesses that choose either to
manage their Internet services with in-house information
technology expertise or outsource these services to us.

During 2001, we changed the state of our incorporation
from Washington to Delaware 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 part of the reincorpo-
ration, the number of authorized shares of common and
series A preferred stock changed to 600,000,000 and
3,500,000, respectively, and par value of $0.001 per share
of common stock and preferred stock 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. During 2002, we discon-
tinued our operations in Amsterdam and are providing
service to our Amsterdam customers from our London
service point. The consolidated ﬁnancial statements of
Internap Network Services Corporation include all activ-
ity of these subsidiaries since their dates of incorpora-
tion forward. Foreign exchange gains and losses have
not been material to date.

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, com-
petition within the industry and technology trends.

We have experienced signiﬁcant net operating losses
since inception. During 2003, we incurred net losses
of $33.0 million and used $11.1 million of cash in our
operating activities. As of December 31, 2003, we have
an accumulated deﬁcit of $829.5 million. We have taken
various steps to control our costs, including decreasing
the size of our workforce, terminating certain real estate
leases and commitments, making process enhance-
ments and renegotiating network contracts for more

Internap 2003 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued

favorable pricing and terms. We expect operating losses
will continue through December 31, 2004.

As discussed in Note 18, we have recently sold addi-
tional common stock resulting in net proceeds to us of
approximately $56 million. We expect this capital, along
with our improved operating performance, to be sufﬁ-
cient to meet our cash requirements for the foreseeable
future. Our liquidity and capital requirements depend on
several factors, including the rate of market acceptance
of our services, the ability to expand and retain our cus-
tomer base, our ability to execute our current business
plan and other factors. 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 such ﬁnancing will be available on commercially
favorable terms.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS
OF PRESENTATION

Accounting principles
The consolidated ﬁnancial statements and accompany-
ing notes are prepared in accordance with accounting
principles generally accepted in the United States of
America. The consolidated ﬁnancial statements include
the accounts of Internap and all majority owned sub-
sidiaries. Signiﬁcant inter-company transactions have
been eliminated in consolidation.

Estimates and assumptions
Our consolidated ﬁnancial statements have been pre-
pared in accordance with accounting principles gener-
ally accepted in the United States of America. The
preparation of these ﬁnancial statements requires man-
agement 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 recogni-
tion, 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.

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 experi-
enced any losses related to cash and cash equivalents.

At December 31, 2003 and 2002, we had placed
approximately $125,000 and $2.1 million respectively, in
restricted cash accounts to collateralize letters of credit
with ﬁnancial institutions. These amounts are reported
separately as restricted cash and are classiﬁed as cur-
rent or non-current assets, based on their respective
maturity dates.

Investments
We account for investments without readily deter-
minable 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 abil-
ity to exercise signiﬁcant inﬂuence, but not control, over
an investee using the equity method of accounting.
Signiﬁcant inﬂuence, but not control, is generally deemed
to exist if we have an ownership interest in the voting
stock of the investee of between 20% and 50%, although
other factors, such as minority interest protections, are
considered in determining whether the equity method of
accounting is appropriate. As of December 31, 2003 and
2002, 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 on the
consolidated balance sheets as a component of non-
current investments and our share of the investee’s
losses as a component of loss on investment on the
consolidated statements of operations.

Inventory
Inventory is carried at the lower of cost or market using
the ﬁrst-in, ﬁrst-out method. Cost includes materials
related to the production of our Flow Control Platform.

Internap 2003 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued

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 our revolv-
ing credit facility 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 acquisi-
tion cost less accumulated depreciation. Depreciation is
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.

Costs of computer software developed or obtained
for internal use
In accordance with Statement of Position 98-1, “Account-
ing for the Costs of Computer Software Developed or
Obtained for Internal Use,” we capitalize certain direct
costs incurred developing internal use software. During
the year ended December 31, 2003, we did not capital-
ize any internal software development costs. During the
years ended December 31, 2002 and 2001, we capital-
ized approximately $1.3 million and $3.0 million, respec-
tively, of internal software development costs.

Goodwill and other intangible assets
Goodwill and other intangible assets consist of goodwill,
covenants not to compete and developed technology
recorded as a result of our acquisitions of VPNX.com,
Inc, netVmg Inc., and Sockeye Networks Inc. We
adopted Statement of Financial Accounting Standards
(“SFAS”) No. 142, “Goodwill and Other Intangible
Assets” during 2002. Accordingly, effective January 1,
2002, goodwill is not being amortized and is being

reviewed for impairment on an annual basis, or more fre-
quently if indications of impairment arise. We have deter-
mined that the remainder of our intangible assets have
ﬁnite lives and we have recorded these assets at cost
less accumulated amortization. Intangibles, other than
goodwill, are being amortized on a straight-line basis
over the economic useful life of the assets, generally
three to seven years, except approximately $418,000 of
capitalized patent costs, which are being amortized over
15 years.

Valuation of long-lived assets
Management periodically evaluates the carrying value of
its long-lived assets, including, but not limited to, prop-
erty and equipment pursuant to the guidance provided
by SFAS No. 144, “Accounting for the Impairment and
Disposal of Long-Lived Assets.” The carrying value of a
long-lived asset is considered impaired when the undis-
counted cash ﬂow from such asset is separately identi-
ﬁable 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 com-
mensurate with the risk involved. Losses on long-lived
assets to be disposed of would be determined in a sim-
ilar manner, except that fair values would be reduced by
the cost of disposal. Losses due to impairment of long-
lived assets are charged to operations during the period
in which the impairment is identiﬁed.

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
On December 31, 2003, we had eight stock-based
employee compensation plans, which are described
more fully in Note 16. We account for those plans
under the recognition and measurement principles of
Accounting Principles Board (“APB”) Opinion No. 25,
“Accounting for Stock Issued to Employees,” and
related interpretations. The following table illustrates the
effect on net loss and loss per share if we had applied
the fair value recognition provisions of SFAS No. 123,

Internap 2003 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued

“Accounting for Stock-Based Compensation,” to stock-
based employee compensation.

Year ended December 31,

2003

2002

2001

(In thousands, except per share amounts)

Net loss attributable to

common stockholders,
as reported
Add: stock-based

employee compensation
expense included in
reported net loss

Deduct: total stock-based
employee compensation
expense determined
under fair value based
method for all awards

$(67,614) $(72,345) $(479,162)

390

260

4,217

(8,362)

37,577

32,844

Pro forma net loss

$(75,586) $(34,508) $(442,101)

Loss per share:
Basic and diluted –

as reported

Basic and diluted –

pro forma

$ (0.39) $ (0.47) $

(3.19)

$ (0.43) $ (0.22) $

(2.94)

The $8.4 million increase and the $37.6 million and
$32.8 million reductions to the pro forma employee
compensation expense during 2003, 2002 and 2001,
respectively, were inclusive of reductions of $0.2 million,
$115.1 million and $184.2 million, for the effect related
to options cancelled as a result of employee terminations,
offset by amortization of compensation determined
under the fair-value based method.

Revenue recognition and concentration of credit risk
The majority of our revenue is derived from high-
performance Internet connectivity and related colocation
services. 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 colocation, content distribution, server management
and installation services, virtual private networking serv-
ices, managed security services, data backup, remote
storage and restoration services, and video conferencing
services. We also offer T-1 and fractional DS-3 connec-
tions 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. Contracts and sales or
purchase orders are generally used to determine the
existence of an arrangement. We test for availability or
use shipping documents when applicable to verify deliv-
ery of our product or service. We assess whether the
fee is ﬁxed or determinable based on the payment
terms associated with the transaction and whether the
sales price is subject to refund or adjustment.

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 net-
work equipment, which are amortized over the estimated
life of the customer relationship. Revenues associated
with billings for installation of customer network equip-
ment are deferred and amortized over the estimated life
of the customer relationship, as the installation service is
integral to our primary service offering and does not
have value to a customer on a stand-alone basis.

We review the creditworthiness of our customers rou-
tinely. 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 cus-
tomers to make required payments on accounts receiv-
able. We apply a credit risk rating system that is based
on management’s best understanding of our customers’
ability to pay. Our assessment of customers’ creditwor-
thiness may include consideration of payment history.
The sum of individual customer receivable balances
multiplied by the credit rating is the basis for reserves
against revenues and receivables. We also increase our
reserve estimates for estimated customer credits. If the
ﬁnancial condition of our customers were to deteriorate,
or management becomes aware of new information
impacting a customer’s credit risk, additional allowances
may be required.

Internap 2003 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued

Product development costs
Product development costs are primarily related to net-
work engineering costs associated with changes to the
functionality of our proprietary services and network
architecture. Such costs that do not qualify for capital-
ization are expensed as incurred. Research and develop-
ment costs, which are included in product development
cost, primarily consist of compensation cost related to
our service development network architecture and are
expensed as incurred. Research and development costs
were approximately $1.5 million, $4.1 million and $6.3 mil-
lion for the years ended December 31, 2003, 2002 and
2001, respectively.

Advertising costs
We expense all advertising costs as they are incurred.
Advertising costs for 2003, 2002 and 2001 were
$945,000, $575,000 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. We have excluded
all outstanding convertible preferred stock and outstand-
ing options and warrants to purchase common stock from
the calculation of diluted net loss

per share, as such securities are antidilutive for all
periods presented.

Year ended December 31,

2003

2002

2001

(In thousands, except per share amounts)

Net loss

$(33,038) $(72,345) $(479,162)

Less deemed dividend
related to beneﬁcial
conversion feature

(34,576)

–

Net loss attributable to

common stockholders

$(67,614) $(72,345) $(479,162)

Basic and diluted:

Weighted average shares

of common stock
outstanding used in
computing basic and
diluted net loss
per share

174,602

155,545

150,328

Basic and diluted net loss

per share

$ (0.39) $ (0.47) $

(3.19)

Antidilutive securities not
included in diluted net
loss per share calculation:
Convertible preferred
stock – equivalent
common shares
Options to purchase
common stock
Warrants to purchase
common stock

58,994

63,281

68,455

39,161

23,321

25,732

17,133
115,288

17,327

18,259

103,929

112,446

Segment information
We use the management approach for determining
which, if any, of our products, locations, customers or
management structures constitute a reportable business
segment. The management approach designates the
internal organization that is used by management for
making operating decisions and assessing performance
as the source of our reportable segments. Management
uses one measurement of proﬁtability and does not dis-
aggregate its business for internal reporting and there-
fore operates in a single business segment. Through
December 31, 2003, long-lived assets and revenues
located outside the United States were not signiﬁcant.

Internap 2003 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued

On May 15, 2003, the FASB issued SFAS No. 150,
“Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity.” This
statement establishes standards for classifying and
measuring as liabilities certain ﬁnancial instruments that
embody obligations of the issuer and have characteris-
tics of both liabilities and equity. This statement repre-
sents a signiﬁcant change in practice in the accounting
for a number of ﬁnancial instruments, including manda-
torily redeemable equity instruments and certain equity
derivatives that are frequently used in connection with
share repurchase programs. This statement is effective
for all ﬁnancial instruments created or modiﬁed after
May 31, 2003, and to other instruments as of July 1,
2003. We adopted the provisions of this standard during
2003 and it had no material impact on our ﬁnancial
position and results from operations.

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.

IMPAIRMENT AND RESTRUCTURING COSTS

2001 restructuring
During 2001, due to the overcapacity created in the
Internet connectivity and Internet Protocol services mar-
ket, we announced two separate restructurings of our
business. Under the restructuring programs, management
decided to exit certain non-strategic real estate lease
and license arrangements, consolidate and exit redun-
dant network connections, and streamline the operating
cost structure. The total charges include restructuring
costs of $71.6 million. During 2001, we incurred cash
restructuring expenditures totaling $19.9 million, non-cash
restructuring expenditures of $4.7 million, and reduced
the original restructuring cost estimate by $7.7 million
primarily as a result of favorable lease obligation settle-
ments, leaving a balance of $39.3 million as of Decem-
ber 31, 2001. During the ﬁrst and third quarters of 2002,
we further reduced our restructuring liability by $5.0 mil-
lion and $7.2 million, respectively. The ﬁrst quarter 2002
reduction was primarily due to favorable settlements to
terminate and restructure certain colocation lease obli-
gations on terms favorable to our original restructuring
estimates. The third quarter 2002 reduction was primarily
due to returning the previously restructured Atlanta,
Georgia facility into service as the site of the new corpo-
rate headquarters. Pursuant to the original restructuring
plans, the Atlanta facility was not to be used by us in the
future. However, due to changes in management, corpo-
rate direction, and other factors, which could not be
foreseen at the time of the original restructuring plans,
the Atlanta facility was selected as the location for the
new corporate headquarters.

2002 restructuring
With the continuing overcapacity created in the Internet
connectivity and Internet Protocol services market, we
implemented additional restructuring actions to align
our business with market opportunities. As a result, we
recorded a business restructuring charge and asset
impairments of $7.6 million in 2002. The charges were
primarily comprised of real estate obligations related to
a decision to relocate the corporate headquarters from
Seattle, Washington to an existing leased facility in
Atlanta, Georgia, net asset write-downs related to the
departure from the Seattle ofﬁce and costs associated

Internap 2003 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued

with further personnel reductions. The restructuring and
asset impairment charge of $7.6 million during 2002 was
partially offset by a $7.2 million adjustment, described
above, resulting from the decision to utilize the Atlanta
facility as our corporate headquarters. The previously
unused space in the Atlanta location had been accrued
as part of the restructuring liability established during
ﬁscal year 2001. Included in the $7.6 million 2002 restruc-
turing charge was $1.1 million of personnel costs related
to a reduction in force of approximately 145 employees.
This represents employee severance payments made
during 2002.

Network infrastructure obligations
The changes to our network infrastructure require that
we decommission certain network ports we do not cur-
rently use and will not use in the future pursuant to 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. These contractual obligations will
continue in the future with no economic beneﬁt, or they
contain penalties that will be incurred if the obligations
are cancelled.

Real estate obligations
Both the 2001 and 2002 restructuring plans require us
to abandon certain leased properties not currently in
use or that will not be utilized by us in the future. Also
included in real estate obligations is the abandonment
of certain colocation license obligations. Accordingly,
we recorded real estate related restructuring costs of
$43 million, net of non-cash plan adjustments, which
are estimates of losses in excess of estimated sublease
revenues or termination fees to be incurred on these
real estate obligations over the remaining lease terms
expiring through 2015. These costs were determined
based upon our estimate of anticipated sublease rates
and time to sublease the facility. If rental rates decrease
in these markets or if it takes longer than expected to
sublease these properties, the actual loss could exceed
this estimate.

Asset impairments
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 colocation develop-
ment personnel. Consequently, ﬁnancial projections for
the business were lowered and, pursuant to the guid-
ance provided by SFAS No. 121, “Accounting for the
Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of” (“SFAS No. 121”), manage-
ment completed a cash ﬂow analysis of the colocation
assets. The cash ﬂow analysis showed that the esti-
mated cash ﬂows were less than the carrying value of
the colocation assets. Accordingly, pursuant to SFAS
No. 121, management estimated the fair value of the
colocation assets to be $79.5 million based upon a dis-
counted future cash ﬂow analysis. As estimated fair
value of the colocation assets was less than their
recorded amounts, we recorded an impairment charge
of approximately $196.0 million.

Internap 2003 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued

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

Restructuring
and
Impairment
Charge

Cash
Reductions

Non-cash
Write-
Downs

Non-cash
Plan
Adjustments

December 31,
2001
Restructuring
Liability

Restructuring costs

Real estate obligations
Employee separations
Network infrastructure obligations
Other

$ 60.0(a)

3.3
6.3
2.0

$(14.7)(a)
(3.2)
(1.9)
(0.1)

$ (3.7)
–
(1.0)
–

Total restructuring costs

71.6

(19.9)

(4.7)

Asset impairments

Goodwill
Assembled workforce
Trade name and trademarks
Completed real estate leases
Customer relationships

Total asset impairments

176.1
1.5
2.2
14.8
1.4

196.0

–
–
–
–
–

–

(176.1)
(1.5)
(2.2)
(14.8)
(1.4)

(196.0)

$(7.0)
–
(0.7)
–

(7.7)

–
–
–
–
–

–

$34.6
0.1
2.7
1.9

39.3

–
–
–
–
–

–

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.

The following table displays the activity and balances for restructuring and asset impairment activity for 2002
(in millions):

December 31,
2001

Restructuring Restructuring
Charge

Liability

Cash
Reductions

Non-cash
Write
Downs

Non-cash

December 31,
2002
Plan Restructuring
Liability

Adjustments

Restructuring costs activity for 2001

restructuring charge –
Real estate obligations
Network infrastructure obligations
Other

Restructuring costs activity for 2002

restructuring charge –
Real estate obligations
Personnel
Other

Total
Net asset write-downs for 2002

restructuring charge

$34.6
2.7
2.0

–
–
–

39.3

–

$ –
–
–

2.2
1.1
0.2

3.5

4.1

$(11.2)
(1.4)
(0.9)

$(1.6)
–
–

$(12.2)
–
–

(0.4)
(1.1)
(0.1)

(15.1)

–

–
–
–

(1.6)

(4.3)

$ 9.6
1.3
1.1

1.8
–
0.1

–
–
–

(12.2)

13.9

–

(0.2)

Total

$39.3

$7.6

$(15.1)

$(5.9)

$(12.2)

$13.7

Internap 2003 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued

Of the $3.5 million recorded during 2002 as restructuring reserves, approximately $212,000 related to the direct
cost of network and $3.3 million related to general and administrative costs.

The following table displays the activity and balances for restructuring and asset impairment activity for 2003
(in millions):

December 31,
2002

Restructuring Restructuring
Charge

Liability

Cash
Reductions

Non-cash
Write
Downs

Non-cash
Plan
Adjustments

December 31,
2003
Restructuring
Liability

Restructuring costs activity for 2001

restructuring charge –
Real estate obligations
Network infrastructure obligations
Other

Restructuring costs activity for 2002

restructuring charge –
Real estate obligations
Personnel
Other

Total
Net asset write-downs for 2002

restructuring charge

$ 9.6
1.3
1.1

1.8
–
0.1

13.9

(0.2)

$ –
–
–

–
1.1
–

1.1

–

$(5.2)
(0.1)
(0.1)

$ –
–
–

(1.8)
(1.1)
(0.1)

(8.4)

–

–
–
–

–

–
–
–

–

Total

$13.7

$1.1

$(8.4)

$ –

The $1.1 million recorded during 2003 as restructuring reserves related to general and administrative costs.

$4.4
1.2
1.0

–
–
–

6.6

(0.2)

$6.4

BUSINESS COMBINATIONS

The purchase price allocation for netVmg is as follows
(in thousands):

On October 1, 2003, we completed our acquisition of
netVmg, Inc. (“netVmg”). netVmg enables customers to
manage Internet trafﬁc cost, performance and opera-
tions decisions directly from their corporate locations.
The acquisition was recorded using the purchase
method of accounting under SFAS No. 141, “Business
Combinations” (“SFAS No. 141”). The aggregate pur-
chase price of the acquired company, plus related
charges, was approximately $13.7 million and was com-
prised of 345,905 shares of our preferred stock, acquisi-
tion costs and warrants to purchase 1.5 million shares
of our common stock. The warrants are exercisable only
in the event the former netVmg stockholders invest an
amount no less than $4.4 million in any future private
placement of our equity securities. Results of opera-
tions of netVmg have been included in our ﬁnancial
statements since the closing date of the transaction.

Cash acquired
Restricted cash
Inventory
Property and equipment
Other tangible assets

Tangible assets acquired

Product technology
Goodwill

Intangible assets acquired

Total assets acquired

Acquisition expenses incurred
Liabilities assumed
Value of stock issued

Total liabilities assumed and
preferred stock issued

$ 1,443
105
421
531
80

2,580

3,311
8,216

11,527

$14,107

79
438
13,590

$14,107

Internap 2003 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued

On October 15, 2003, we completed our acquisition
of Sockeye Networks, Inc. (“Sockeye”). The acquisition
was recorded using the purchase method of accounting
under SFAS No. 141. The aggregate purchase price
of the acquired company, plus related charges, was
approximately $1.9 million and was comprised of
1,420,775 shares of our common stock and acquisition
costs. Results of operations of Sockeye have been
included in our ﬁnancial statements since the closing
date of the transaction.

The purchase price allocation for Sockeye is as follows
(in thousands):

Cash acquired
Restricted cash
Property and equipment
Other tangible assets

Tangible assets acquired

Goodwill

Total assets acquired

Acquisition expenses incurred
Liabilities assumed
Value of stock issued

Total liabilities assumed and
common stock issued

$ 864
20
291
109

1,284

926

$2,210

79
281
1,850

$2,210

In accordance with SFAS No. 141, all identiﬁable assets
were assigned a portion of the purchase price of the
acquired companies on the basis of their respective fair
values. Intangible assets other than goodwill are amor-
tized over their average estimated useful lives. The value
assigned to the identiﬁable intangible assets was based
on an analysis performed by an independent third party
as of the date of the acquisitions. Pro forma results of
operations have not been presented because the effects
of these acquisitions were not material on either an indi-
vidual or aggregate basis to our results of operations.

As part of our acquisition of CO Space on June 20, 2000,
we recorded a pre-acquisition liability of $1.3 million for
network equipment purchased by CO Space. During
2003, we reevaluated the likelihood of settling the liabil-
ity related to this equipment and concluded that a con-
tingent obligation no longer exists. Therefore, the liability
was eliminated resulting in a one-time reduction in costs
and expenses of $1.3 million.

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 invest-
ment 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 con-
solidated (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 account-
ing pursuant to APB 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 Stockholder or Stockholders
Have Certain Approval or Veto Rights.” During the year
ended December 31, 2001, we recognized our propor-
tional share of Internap Japan’s losses totaling $1.2 mil-
lion, resulting in a net investment balance of $1.6 million.
Our investment in Internap Japan is reﬂected as a com-
ponent of long-term investments and losses are reﬂected
as a component of loss on investments.

During the year ended December 31, 2002, the joint
venture authorized a capital call pursuant to which we
invested an additional $1.3 million and maintained our
51% ownership interest. We recognized our proportional
share of Internap Japan’s losses totaling $1.2 million
and recorded an unrealized translation gain of $149,000,
resulting in a net investment balance of $1.9 million at
December 31, 2002. During the year ended December 31,
2003, we recognized our proportional share of Internap
Japan’s losses totaling $0.8 million and recorded an unreal-
ized translation gain of $151,000, resulting in a net invest-
ment balance of $1.2 million at December 31, 2003.

On April 17, 2000, pursuant to an investment agree-
ment among Internap, Ledcor Limited Partnership,
Worldwide Fiber Holdings Ltd. and 360networks, Inc.
(“360networks”), we purchased 374,182 shares of
360networks Class A Non-Voting Stock at $5.00 per share

Internap 2003 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued

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 mil-
lion. During 2001 we liquidated our entire investment in
360networks for cash proceeds of $2.2 million and rec-
ognized a loss on investment totaling $14.5 million.

We account for investments without readily determinable
fair values at cost. Realized gains and losses and declines
in value of securities judged to be other than temporary
are included in other 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 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 tem-
porary. As a result, during 2001 we recognized a $4.8 mil-
lion loss on investment when we reduced its recorded
basis to $1.2 million, which remains its estimated value
as of December 31, 2003.

Investments consist of the following (in thousands):

Equity-method
investments

Cost basis

investments

Equity-method
investments

Cost basis

investments

As of December 31, 2003

Cost Basis

Unrealized Recorded
Value

Gain

$ 895

$300

$1,195

1,176
$2,071

–
$300

1,176
$2,371

As of December 31, 2002

Cost Basis

Unrealized
Gain

Recorded
Value

$1,722

$149

$1,871

1,176

$2,898

–

$149

1,176

$3,047

PROPERTY AND EQUIPMENT

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

December 31,

Network equipment
Network equipment under

capital lease

Furniture, equipment and software
Furniture, equipment and software

under capital lease
Leasehold improvements

Property and equipment, gross
Less: Accumulated depreciation

($37,849 and $28,735 related to
capital leases at December 31,
2003 and 2002, respectively)

Property and equipment, net

2003
$ 48,117

2002

$ 56,663

37,075
27,549

37,753
26,024

4,434
69,974
187,149

4,378
68,923

193,741

(127,812)
$ 59,337

(105,347)

$ 88,394

Assets under capital leases are pledged as collateral
for the underlying lease agreements. Assets not under
lease are pledged as collateral under our revolving
credit facility or notes payable facilities.

During the year ended December 31, 2002, the Company
amended the terms of the master lease agreement with
our primary supplier of networking equipment (Note 11).
As part of this amendment we purchased a portion of
our leased network equipment for $5.8 million. This pur-
chase resulted in a $23.7 million transfer from network
equipment under capital lease to network equipment
and a transfer of $19.6 million of accumulated deprecia-
tion under capital lease to accumulated depreciation.

GOODWILL AND OTHER INTANGIBLE ASSETS

Effective January 1, 2002, we adopted SFAS No. 142,
“Goodwill and Other Intangible Assets,” which estab-
lishes new accounting and reporting requirements for
goodwill and other intangible assets. Under SFAS No.
142, all goodwill amortization ceased effective January
1, 2002 and recorded goodwill was tested for impair-
ment by comparing our fair value as a single reporting
unit, as determined by its implied market capitalization,
to its consolidated carrying value including recorded
goodwill. An impairment test is required to be performed
at adoption of SFAS No. 142 and at least annually

Internap 2003 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued

thereafter. Generally, any adjustments made as a result of the impairment testing are required to be recognized as
operating expenses. We will perform our annual impairment testing during the third quarter of each year absent any
impairment indicators that may cause more frequent analysis, as required by SFAS No. 142.

Based on our initial impairment test performed upon adoption of SFAS No. 142 as of January 1, 2002, as well as
our annual testing during the interim periods ended September 30, 2002 and 2003, we determined that none of the
recorded goodwill was impaired. The assumptions, inputs and judgments used in performing the valuation analysis
are inherently subjective and reﬂect estimates based on known facts and circumstances at the time the valuation is
performed. The use of different assumptions, inputs and judgments, or changes in circumstances, could materially
affect the results of the valuation. Adverse changes in the valuation would necessitate an impairment charge for the
goodwill held by us. As of December 31, 2003 and 2002, the recorded amount of goodwill totaled $36.2 million and
$27.0 million, respectively.

In connection with adopting SFAS No. 142, we also reassessed the useful lives and the classiﬁcation of our amor-
tizing identiﬁable intangible assets and determined that they continue to be appropriate. The components of our
amortizing intangible assets are as follows (in thousands):

Contract based
Technology based

December 31, 2003

December 31, 2002

Gross Carrying
Amount
$14,518
5,911
$20,429

Accumulated
Amortization
$(14,207)
(2,734)
$(16,941)

Gross Carrying
Amount

Accumulated
Amortization

$14,518
2,600

$17,118

$(11,467)
(2,094)

$(13,561)

Amortization expense for identiﬁable intangible assets
during 2003 and 2002 was $3.4 million and $5.6 million,
respectively. Estimated amortization expense for the
next ﬁve years and thereafter is as follows (in thousands):

Years Ending December 31,

2004
2005
2006
2007
2008
Thereafter

$ 578
578
545
443
443
901

$3,488

We adopted SFAS No. 142 on January 1, 2002.
Accordingly, our 2001 results presented herein are not
comparable with those in 2002 and 2003 results. On a
pro forma basis, retroactively applying the provisions of
SFAS No. 142 to exclude amortization of goodwill, 2001
net loss would have been $462,096, or $17,066 lower
than the reported net loss of $479,162 and loss per
share would have been $3.07, or $0.12 lower than the
reported loss per share of $3.19.

NOTE RECEIVABLE

During August 2000, we loaned a private network com-
pany $6.0 million in exchange for a convertible promis-
sory 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 elimi-
nate 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
recorded a provision of $6.0 million as an allowance
against our note receivable in 2001. The impact of the
provision is reﬂected as a component of loss on invest-
ments. As of December 31, 2001, the $6.0 million loan

Internap 2003 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued

was outstanding and recorded at the outstanding bal-
ance as a note receivable offset in full by a $6.0 million
allowance for doubtful collection.

During 2002, we entered into negotiations with the bor-
rower 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 out-
standing accounts receivable and the note receivable
and equity in the company, for which the estimated fair
value is zero. During January of 2002 we recognized
an investment gain of $0.4 million with respect to the
settlement of the note receivable.

ACCRUED LIABILITIES

Accrued liabilities consist of the following (in thousands):

December 31,

Network commitments
Taxes
Compensation payable
Other
Insurance payable
Property and equipment purchases

2003
$2,616
2,206
1,791
1,142
830
–
$8,585

2002

$ 3,455
2,370
1,478
574
915
2,228

$11,020

REVOLVING CREDIT FACILITY AND NOTES PAYABLE

Revolving credit facility and notes payable consist of
the following (in thousands):

December 31,

Revolving credit facility
Notes payable to ﬁnancial institutions
Notes payable to vendors

2003
$ 8,392
3,349
1,716
$13,457

2002

$10,000
6,094
3,616

$19,710

We have a loan and security agreement with a $15.0 mil-
lion revolving credit facility and a $5.0 million term loan
with Silicon Valley Bank. Availability under the revolving
credit facility and term loan is based on 80% of eligible
accounts receivable plus 50% of unrestricted cash and
investments. In addition, the loan and security agree-
ment will make available to us an additional $5.0 million
under a term loan if we meet certain debt coverage ratios.
The balance outstanding under the term loan was
$3.3 million at December 31, 2003, while the balance
under the revolving credit facility was $8.4 million.

As of December 31, 2003, we had no further borrowing
capacity under the revolving credit facility. As of Decem-
ber 31, 2003, the variable interest rate under the revolv-
ing credit facility was 6.0% and the interest rate under
the term loan is ﬁxed at 8.0%. This credit facility expires
on October 22, 2004. There can be no assurance that
the credit facility will be renewed upon expiration or that
we will be able to obtain credit facilities on commercially
favorable terms.

Both the revolving credit facility and the term loan are
governed by a common security agreement and are col-
lateralized by substantially all of our assets. The agree-
ment allows the lender to require us to maintain cash
and investment accounts with them and allows the
lender greater control over our customer deposits, as
deﬁned in the agreement. Both the revolving credit facil-
ity and the term loan also contain ﬁnancial covenants
that require us to maintain a minimum tangible net
worth as deﬁned in the agreement. Further, the lender
has the ability to demand repayment in the event, in its
view, there has been a material adverse change in our
business. As of December 31, 2003, we were in com-
pliance with the covenants under our credit facility.

During August 1999, we entered into an equipment
ﬁnancing arrangement with our primary supplier, which
allows borrowings of up to $5.0 million for the purchase
of property and equipment. The equipment ﬁnancing
arrangement includes sub-limits of $3.5 million for equip-
ment costs and $1.5 million for the acquisition of soft-
ware and other service point and facility costs. Loans
under the $3.5 million sub-limit 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 four-year U.S. Treasury Notes. Loans
under the $1.5 million sub-limit 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 sub-limit were completed prior to May 1,
2000 in accordance with the facility terms and the
aggregate balance outstanding under this facility totaled
$16,000 and $781,000 as of December 31, 2003 and
2002, respectively. The weighted average interest rate
for all borrowings under this facility was approximately
13.9% as of December 31, 2003 and 2002, respectively.

Internap 2003 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued

During 2002, we completed negotiations with a colocation
space provider that resulted in a reduction of the peri-
odic rents paid to the provider for 36 months in exchange
for a $2.7 million note payable to be paid in quarterly
installments over 36 months. The note bears interest at
a rate of 5.5% and is secured by leaseholds, equip-
ment, and customer revenues at one of our network
access points. The note payable was recorded with an
equal prepaid asset that is being amortized to direct
cost of network over 36 months. Outstanding borrow-
ings under this note were $1.3 million and $2.1 million
at December 31, 2003 and 2002, respectively.

During 2002, we completed negotiations with a second
colocation space provider that resulted in a reduction
of the periodic rent payments made to the provider in
exchange for a $0.6 million unsecured note payable to
be paid in monthly installments of principal and interest
beginning in April 2003 and continuing for 28 months.
The note bears interest at 12% per annum. The out-
standing borrowings under this note were $0.4 million
at December 31, 2003.

During 2000, we entered into an integrated sales agree-
ment to act as an exclusive reseller for a service provider.
The agreement included a revenue commitment to be
fulﬁlled over a two-year period that ended during March
2002. We had fully accrued our liability for the $1.8 mil-
lion shortfall as of the expiration date of the agreement
as a component of accrued expenses. During the sec-
ond quarter of 2002 we entered into a note payable to
the service provider in lieu of immediate payment of the
shortfall amount and reclassiﬁed the $1.8 million accrued
expense to notes payable. Outstanding borrowings under
this note were $0.9 million as of December 31, 2002.
The note matured and was paid in full in October 2003.

Maturities of notes payable at December 31, 2003 are
as follows (in thousands):

Years Ending December 31,

2004
2005

Total maturities and principal payments

Less: current portion

Notes payable, less current portion

$2,790
2,275

5,065
(2,790)

$2,275

The carrying value of our notes payable as of
December 31, 2003, approximates fair value as the
interest rates approximate current market rates of
similar debt obligations.

CAPITAL LEASES

Capital lease obligations and the leased property and
equipment are recorded at acquisition at the present
value of future lease payments based upon the terms of
the related lease agreement. Interest rates on capital
leases range from 2.3% to 21.5%. Leases have terms
expiring through 2015 and generally include an option
allowing us to purchase the leased equipment or furni-
ture at the end of the lease term for fair market value.

During January 1998, we entered into a Master Agree-
ment to Lease Equipment with one of our equipment
vendors. The terms of individual leases under the Master
Agreement to Lease Equipment range from 24 to 39
months. Since inception we have leased approximately
$61.7 million of equipment under the agreement.

During 2002, we amended the terms of our master
lease agreement with our primary supplier of networking
equipment. The amended terms of the master lease
included a retroactive effective date to March 1, 2002,
and extended the payment terms and provided for a
deferral of lease payments of the underlying lease
schedules for a period of 24 months in exchange for a
buy-out payment of $12.1 million in satisfaction of the
outstanding lease obligation on 14 schedules totaling
$6.3 million and for the purchase of the equipment
leased under the same schedules totaling $5.8 million.

The extension of payment terms under the amended
master lease agreement reduced the present value of
our future lease payments and, therefore, we reduced
our capital lease obligation and the cost basis of our
related leased property and equipment by $2.6 million.
At December 31, 2003, the capital lease obligation and
leased property accounts were reduced by $0.9 million
representing the remaining discount. Interest will con-
tinue to accrue on a periodic basis and add to the capi-
tal lease obligation through March 2004, the remaining
deferral period.

On April 14, 2003, we amended the terms of our master
lease agreement with our primary supplier. Speciﬁcally,
this lease amendment provides for adjustments to our
required minimum quarterly revenue levels and mini-
mum quarterly earnings before interest, taxes, deprecia-
tion and amortization levels. The lease amendment also
required a payment that was made on April 15, 2003,
for $2.2 million, which represented advance payment of
our lease payments due in March and April 2004. The

Internap 2003 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued

terms of our master lease agreement, as amended,
include ﬁnancial covenants that require us to maintain
minimum liquidity balances, minimum revenue levels,
speciﬁed levels of earnings before interest, taxes, depre-
ciation and amortization and other customary covenants.
On September 4, 2003, we entered into an additional
agreement to further amend our equipment lease obliga-
tions with our primary supplier. This lease amendment
provides for additional adjustments to our required mini-
mum quarterly levels of earnings before interest, taxes,
depreciation and amortization and also provided for the
removal of the requirement to maintain compliance with
all ﬁnancial covenants when we resume lease pay-
ments. This lease amendment also required us to issue
213,675 shares of common stock to our primary sup-
plier having an aggregate value of $250,000 based on
the closing price of our common stock on September 3,
2003. The value of the common stock issued was
recorded as an additional discount to the initial capital
lease obligation and the discount is being amortized
over the remaining lease term. As of December 31, 2003,
we were in compliance with all ﬁnancial covenants.

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

Years Ending December 31,

2004
2005
2006
2007
2008
Beyond 2008

Total minimum lease payments
Less: amount representing interest
Less: amount representing discount

Present value of minimum lease payments
Less: current portion

Capital lease obligations, less current portion

INCOME TAXES:

$12,582
12,260
2,579
1,246
1,209
8,262

38,138
(12,927)
(904)

24,307
(8,770)

$15,537

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.

A reconciliation of the provision (beneﬁt) for income
taxes from continuing operations to the amount compiled
by applying the statutory federal income tax rate to loss
before income taxes is as follows:

Year Ended December 31,

2003

2002

2001

Federal income tax beneﬁt

at statutory rates

State income tax beneﬁt

at statutory rates

Foreign operating losses

at statutory rates

Amortization and write-down

of goodwill

Stock compensation expense
Future utilization of losses

precluded by Section 382

Other
Change in valuation allowance

Effective tax rate

(34)% (34)% (34)%

(4)%

0%
(1)%

0%
1%
37%
0%

0%
0%

0%
0%
38%

16%
0%

11%
(1)%
11%

Temporary differences between the ﬁnancial statement
carrying amounts and tax bases of assets and liabilities
that give rise to signiﬁcant portions of deferred taxes
relate to the following:

Deferred income tax assets:
Net operating loss carryforwards
Capital loss carryforwards
Investments
Restructuring costs
Provision for doubtful accounts
Deferred revenue
Accrued compensation
Property and equipment
Other

Deferred income tax liabilities:
Amortization of discounts

on investments
Purchased intangibles

Valuation allowance
Net deferred tax assets

2003

2002

$123,212
5,446
1,824
2,435
1,017
1,491
144
23,987
447
160,003

$106,391
5,446
1,824
5,425
564
3,538
113
13,993
361
137,655

–
(1,228)
(1,228)
158,775
(158,775)
–
$

(23)
(1,584)
(1,607)
136,048
(136,048)
–
$

As of December 31, 2003, we have net operating loss
carryforwards and capital loss carryforwards of approxi-
mately $530.5 million and $14.0 million, respectively.
The net operating loss carryforwards expire during 2012
through 2023. The capital loss carryforwards expire in
2006. Utilization of net operating losses and capital loss

Internap 2003 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued

carryforwards are subject to the limitations imposed by
Section 382 of the Internal Revenue Code. Under this
provision, we will be precluded from utilizing approxi-
mately $220.3 million of our net operating and capital
loss carryforwards. The occurrence of additional changes
in ownership pursuant to Section 382 of the Internal
Revenue Code may have the impact of additional limita-
tions on the use of our net operating loss 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 eval-
uates the recoverability of the deferred tax assets 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.

EMPLOYEE RETIREMENT PLAN

We sponsor a deﬁned contribution retirement savings
plan that qualiﬁes under Section 401(k) of the Internal
Revenue Code. Plan participants may elect to have a
portion of their pre-tax compensation contributed to the
plan, subject to certain guidelines issued by the Internal
Revenue Service.

During 2001, the plan provided for us to match employee
contributions by contributing an amount equal to 50%
of employee contributions. For purposes of calculating
our matching portion, only employee contributions up to
6% of their compensation were considered. Contributions
for employer matching were $1.0 million in 2001. During
2002, the plan was amended such that employer contri-
butions, as calculated above, were discretionary. Employer
matching contributions during 2002 were $0.3 million.

Effective January 1, 2003, the plan was further amended
to change the manner in which employer contributions
were made from a percentage of employee contribu-
tions to a discretionary percentage. Pursuant to the
2003 amendment, employer contributions continue to
be discretionary. No employer contributions were made
during 2003.

COMMITMENTS, CONTINGENCIES, CONCENTRATIONS OF RISK
AND LITIGATION

Operating leases
We, as lessee, have entered into leasing arrangements
relating to ofﬁce and service point rental space and
ofﬁce equipment that are classiﬁed as operating leases.
Future minimum lease payments on non-cancelable
operating leases are as follows at December 31, 2003
(in thousands):

Years Ending December 31,

2004
2005
2006
2007
2008
Beyond 2008

$ 13,175
11,740
10,743
10,800
10,686
72,915

$130,059

Rent expense was approximately $13.1 million,
$14.8 million and $14.3 million for the years ended
December 31, 2003, 2002 and 2001, respectively. Sub-
lease income, recorded as a reduction of rent expense,
was approximately $327,000 and $406,000 during the
years ended December 31, 2003 and 2002, respectively.

Service commitments
We have entered into service commitment contracts
with Internet network service providers to provide inter-
connection services and colocation providers to provide
space for customers. Minimum payments under these
service commitments are as follows at December 31,
2003 (in thousands):

Years Ending December 31,

2004
2005
2006
2007
2008
Beyond 2008

$22,490
12,415
8,042
5,044
5,061
4,301

$57,353

One of our service commitment contracts with an Internet
network service provider, representing $8.0 million of
scheduled minimum payments in 2004 and $1.0 million
in 2005, includes a provision allowing us to defer portions
of our minimum commitments into future periods in the
event we do not meet annual contract minimums.

Internap 2003 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued

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

As part of the reincorporation, we increased the num-
ber of authorized shares of our common stock from
50,000,000 shares to 600,000,000 shares and the num-
ber of authorized shares of our preferred stock from
10,000,000 shares to 200,000,000 shares. We desig-
nated 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.

We depend on other companies to supply various key
elements of our infrastructure including the network
access local loops between our network access points
and our Internet network service providers and the local
loops between our network access points and our cus-
tomers’ networks. In addition, the routers and switches
used in our network infrastructure are currently supplied
by a limited number of vendors. We currently purchase
routers and switches from a limited number of vendors.
Furthermore, we do not carry signiﬁcant inventories of
the products we purchase, and we have no guaranteed
supply arrangements with our vendors. A loss of a sig-
niﬁcant vendor could delay build-out of our infrastructure
and increase our costs. If our limited source of suppliers
fails to provide products or services that comply with
evolving Internet standards or that interoperate with other
products or services we use in our network infrastructure,
we may be unable to meet all or a portion of our customer
service commitments, which could adversely affect our
business, results of operations and ﬁnancial condition.

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

CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY

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
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 con-
vertible 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
(“series A preferred stock”) and 17,113,606 warrants to
purchase equivalent shares of common stock. The con-
version price for the series A preferred stock and the
exercise price for the warrants were both $1.48. We
received net proceeds of $95.6 million from the issuance
of the series A preferred stock and allocated $86.3 mil-
lion to the series A 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 pursuant to APB Opinion No. 14 “Accounting
for Convertible Debt and Debt Issued with Stock
Purchase Warrants.” The fair value used to allocate pro-
ceeds to the series A 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 liquida-
tion preferences. The fair value used to allocate pro-
ceeds to the warrants to purchase common stock was
based on a valuation using the Black-Scholes model
and the following assumptions: exercise price $1.48;
no dividends; term of ﬁve years; risk free rate of 3.92%;
and volatility of 80%.

The series A preferred stock was reported as mezzanine
ﬁnancing since its inception because holders of the
series A preferred stock had rights to receive payment
of shares under speciﬁc circumstances which were
deemed to be outside our control. In July 2003, we

Internap 2003 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued

amended the deemed liquidation provisions of our char-
ter to eliminate the events that could result in payment
to the series A preferred stockholders such that the
events giving rise to payment would be within our con-
trol. As a result, 2,887,661 shares of our series A pre-
ferred stock, with a recorded value of $78.6 million, was
reclassiﬁed from mezzanine ﬁnancing to stockholders’
equity during 2003.

The August 2003 common stock private placement dis-
cussed below resulted in a decrease of the conversion
price of our series A preferred stock to $0.95 per share
and an increase in the number of shares of common
stock issuable upon conversion of all shares of series A
preferred stock by 34,500,000 shares. We recorded a
deemed dividend of $34.6 million, which is attributable to
the additional incremental number of shares of the series
A preferred stock convertible into common stock. Also as
a result of the private placement, under the terms of the
common stock warrants issued on September 14, 2001
by us in connection with issuance of the series A pre-
ferred stock, the exercise price for the warrants to pur-
chase approximately 17.3 million shares of our common
stock was adjusted from $1.48 per share of common
stock to $0.95 per share.

Holders of series A preferred stock are entitled to the
number of votes equal to the number of shares of com-
mon stock into which the shares of series A preferred
stock can be converted. Each share of series A preferred
stock was originally convertible into 21.58428 shares of
common stock subject to adjustments for certain dilu-
tive events. Also in conjunction with the August 2003
common stock private placement discussed below, the
conversion factor was changed to 33.68421053. Each
share of series A preferred stock may be converted at
any time at the option of the holder. Subject to satisfac-
tion of certain conditions, including the listing of our com-
mon stock issuable upon the mandatory conversion of
the series A preferred stock and upon the exercise of the
warrants on the New York Stock Exchange, the Nasdaq
National Market or the American Stock Exchange
(“AMEX”), the series A preferred stock automatically con-
vert 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 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 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 distri-
bution to holders of series A preferred stock, remaining
assets will be distributed ratably between holders of
series A preferred stock and holders of common stock
until holders of series A preferred stock have received
an amount equal to three times the original issue price.
In connection with our acquisition of netVmg, we issued
to the stockholders of netVmg an aggregate of 345,905
shares of our series A preferred stock, convertible into
11,651,537 shares of our common stock, and warrants
to purchase an aggregate of 1,500,000 shares of our
common stock exercisable only in certain situations as
described below.

During 2002, series A convertible preferred stockholders
converted 240,000 shares of convertible preferred stock
at a recorded value of $6.5 million into 5,173,716 shares
of common stock. During 2003, series A stockholders
converted 1,526,321 shares of series A preferred stock
into 50,621,204 shares of common stock at a recorded
value of $41.5 million. As of December 31, 2003, we
had 1,751,385 shares of series A preferred stock out-
standing with a recorded value of $51.8 million.

Common Stock
On August 22, 2003, we issued 10,650,000 shares of
our common stock in a private placement at a price of
$0.95 per share. We received $9.5 million, net of issuance
cost. In addition, in connection with the amendment of
one of our equipment leases, we issued 213,675 shares
of common stock to our primary supplier.

On October 15, 2003, in connection with our acquisition
of Sockeye and as discussed in Note 4, we issued an
aggregate of 1,420,775 shares of our common stock in
a private placement to the stockholders of Sockeye.

Warrants to purchase common stock
As of December 31, 2003, there were warrants outstand-
ing to purchase 17,133,464 shares of our common stock
at a weighted average exercise price of $1.06 per share.

Internap 2003 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued

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 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 approxi-
mately $22,000 based upon the Black-Scholes model
and was charged to expense.

On September 14, 2001, in conjunction with our series
A preferred stock ﬁnancing, we issued warrants to pur-
chase 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 approx-
imately $9.3 million based upon the Black-Scholes model.
As a result of the private placement of our common
stock in August 2003, the exercise price of the warrants
was adjusted to $0.95 per share.

On October 20, 2003, we issued warrants to purchase
426,000 shares of common stock at an exercise price of
$0.95 in connection with a private placement of our com-
mon stock. These warrants expire on August 22, 2008.

In connection with our acquisition of netVmg Inc., we
granted warrants to purchase an aggregate of 1,500,000
shares of our common stock to stockholders of netVmg
Inc. These warrants are exercisable if netVmg Inc. stock-
holders participate in a private placement of shares of
our common or preferred stock and their participation is
in an amount equal to or greater than $4.4 million. Each
warrant is exercisable for one share of our common
stock at an exercise price of $1.26 per share and expires
on October 1, 2006. There was no value allocated to
these warrants as of December 31, 2003.

Outstanding warrants to purchase shares of common
stock at December 31, 2003, are as follows (shares
in thousands):

Year of Expiration

Weighted Average
Exercise Price

2004
2005
2006
2007
2008

$8.38
–
0.98
–
0.95

191
–
16,601
–
341

17,133

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 indi-
viduals 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, 2003 there were 2,504,000 options
outstanding and 482,000 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 pro-
vides for the issuance of incentive stock options and
nonqualiﬁed stock options to eligible individuals respon-
sible 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 out-
standing 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. There was no increase to options
reserved for issuance under the 1999 Plan during 2003
and 2002. 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, 2003, there
were 20,852,000 options outstanding and no options
available for grant pursuant to the 1999 Plan.

Internap 2003 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued

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 our 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, 2003,
there were 3,747,000 options outstanding and 406,000
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 exer-
cise price of $10.00 per share. Subsequent to our 1999
initial public offering, initial grants, which are fully vested
as of the date of the grant, of 80,000 shares of our
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 meet-
ings, 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 direc-
tor for at least the prior six months. The options are
exercisable as long as the non-employee director con-
tinues to serve as a director, employee or consultant of
Internap or any of its afﬁliates. During December 2003,
the number of shares reserved for grant under the
Director Plan was increased by 3,000,000 shares. As
of December 31, 2003, there were 920,000 options
outstanding and 2,920,000 options available for grant
pursuant to the Director Plan.

In connection with the 2000 acquisition of CO Space,
we assumed the CO Space, Inc. 1999 Stock Incentive
Plan (the “CO Space Plan”). After applying the acquisi-
tion conversion ratio, the CO Space Plan authorizes
the issuance of up to 1,346,840 options to purchase
shares of Internap’s common stock. As of December 31,
2003, there were 332,000 options outstanding and
737,000 options available for grant pursuant to the
CO Space Plan.

In connection with the 2000 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 307,000 options to purchase shares
of our common stock. As of December 31, 2003, there
were 11,000 options outstanding and 212,000 options
available for grant pursuant to the VPNX Plans.

On September 10, 2002, we adopted the Internap
Network Services Corporation 2002 stock compensa-
tion plan (“2002 Plan”). The 2002 Plan provides for the
grant of non-qualiﬁed stock options to employees and
non-employees. A total of 32,000,000 shares of our
common stock has been reserved for issuance under
the 2002 Plan; however, this overall share reserve is
reduced by any outstanding options issued under the
VPNX Plans, the 1998 Plan, the 1999 Plan, the Directors
Plan, the CO Space Plan, and the 2000 Plan, discussed
above. The maximum number of shares granted to a
single participant in any particular year is 10,000,000
shares. Also, subject to certain exclusions, the maxi-
mum number of awards issued to ofﬁcers and directors
is limited to 50% of the shares eligible for issuance at
the time of the award or grant. During December 2003,
the number of shares reserved for grant under the
2002 Plan was increased by 21,000,000 shares. As of
December 31, 2003, there were 10,796,000 options
outstanding and 10,204,000 options available for grant
pursuant to the 2002 Plan.

Internap 2003 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued

Incentive stock options may be issued only to our
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. All shares issued under stock option plans are
issued at the fair value at the date of grant. In the case
of options granted to holders of more than 10% of the
voting power of the Company, 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 compen-
sation using the intrinsic value method prescribed in
APB Opinion No. 25. Accordingly, compensation cost
for stock options is measured as the excess, if any, of
the fair value of our 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 was the fair value of
our common stock on the date of grant, the participat-
ing employees cancelled all options granted six months
prior to the May 2001 offer exchange date, (ii) the par-
ticipating employees did not receive any additional
grants of options prior to the November 5, 2001 grant
date, and (iii) the participating employees were common
law employees on the date of grant. Since we account
for stock-based compensation using the intrinsic value
method prescribed by APB Opinion No. 25, compensa-
tion cost for stock options is measured as the excess,
if any, of the fair value of our stock at the date of grant
over the exercise price to be paid to acquire the stock.
Therefore, we did not recognize compensation expense
related to the grant of the new options.

Similarly, on January 6, 2003, under the terms of a
related tender offer to allow domestic employees to
cancel certain outstanding stock option grants, we
accepted cancellation of 2.0 million options to purchase
shares of common stock. On that date, we agreed to
grant the same employees options to purchase 2.0 mil-
lion shares of common stock to be granted six months
and one day after the cancellation, or subsequent to
June 7, 2003. The tender offer provides, however, that
(i) the exercise price of the future grant must be the fair
value of our common stock on the date of grant; the
participating employees must also cancel all options
granted six months prior to November 18, 2002, offer
exchange date; (ii) the participating employees must not
receive any additional grants of options prior to the
future grant date; and (iii) the participating employees
must be domestic common law employees on the date
of grant. Since we account for stock-based compensa-
tion using the intrinsic value method prescribed by APB
Opinion No. 25, compensation cost for stock options is
measured as the excess, if any, of the fair value of our
stock at the date of grant over the exercise price to be
paid to acquire the stock. Therefore, we did not recog-
nize compensation expense related to the grant of the
new options.

Option activity for 2001, 2002 and 2003 under all of our
stock option plans is as follows (shares in thousands):

Balance, December 31, 2000
Granted
Exercised
Cancelled

Balance, December 31, 2001
Granted
Exercised
Cancelled

Balance, December 31, 2002
Granted
Exercised
Cancelled

Balance, December 31, 2003

Weighted
Average
Exercise
Price

$21.71
1.40
0.36
31.69

4.21
0.60
0.25
4.49

2.43
1.22
0.89
3.47

1.52

24,159
16,729
(1,223)
(13,933)

25,732
11,668
(1,252)
(12,827)

23,321
25,499
(1,974)
(7,685)

39,161

Internap 2003 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued

The following table summarizes information about options outstanding at December 31, 2003
(shares in thousands):

Options Outstanding

Number
of Shares

5,695
4,821
6,104
5,863
4,650
1,797
9,027
1,184
10
10

39,161

Weighted Average
Remaining
Contractual Life
(In years)

8.31
9.18
9.04
8.13
8.57
8.04
9.98
6.81
6.20
6.16

8.86

Exercise Prices

$ 0.03 - $ 0.43
$ 0.44 - $ 0.44
$ 0.47 - $ 0.48
$ 0.52 - $ 0.96
$ 0.99 - $ 1.27
$ 1.35 - $ 2.00
$ 2.16 - $ 2.15
$ 2.24 - $ 69.88
$87.19 - $ 87.19
$105.91

$ 0.03 - $105.91

Options Exercisable
(Excluding Options Which Shares
Would Be Subject to the
Company’s Right of Repurchase)

Number
of Shares

Weighted Average
Exercise Prices

2,299
1,525
1,991
3,708
2,036
1,223
–
950
10
10

13,752

$ 0.27
0.44
0.48
0.88
1.23
1.88
–
17.46
87.19
105.91

2.09

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 employ-
ees. Under the purchase plan, management may spec-
ify offerings with 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 pur-
chased under the ESPP is equal to 85% of the lower of
the fair market value of the common stock at the com-
mencement 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 automati-
cally 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 adop-
tion date of the ESPP, the number of shares reserved
for issuance under the ESPP will be increased by 2%
of the total number of shares of common stock then
outstanding or, if less, by 3,000,000 shares, subject to
Series A stockholder approval. Accordingly, on July 24,
2000 and July 23, 2001, pursuant to the terms of the
ESPP, the number of shares reserved for the sale of stock
under the ESPP was increased by 1,500,000 shares on
each date. There was no increase to shares reserved
during 2002 and 2003. The ESPP is intended to qualify
as an employee stock purchase plan within the meaning
of Section 423 of the Internal Revenue Code.

As of December 31, 2003, the deferred stock compen-
sation related to such options granted during 1998 and
1999 for the total amount of $28.9 million has been
entirely written off to expense. Amortization of deferred
stock compensation was $0.4 million, $0.3 million and
$4.2 million during the years ended December 31, 2003,
2002 and 2001, respectively.

RELATED PARTY TRANSACTIONS

On January 1, 2002, we entered into a consulting
agreement with Lyford Cay Securities Corp., an afﬁliate
of one of our stockholders, INT Investments, Inc., that
beneﬁcially owned more than 5% of our outstanding
common stock. Under the terms of this consulting
agreement, which was completed in 2002, we paid
Lyford Cay Securities Corp. $400,000 to provide us
with ﬁnancial advisory and strategic advice.

In 2003 and 2002, we engaged Korn/Ferry International,
a national executive recruiting ﬁrm, to assist in the iden-
tiﬁcation and recruitment of senior executives. For 2003
and 2002, we paid Korn/Ferry $3,178 and $262,096,
respectively, in connection with executive placements.
As of December 31, 2003, the Company had a liability
of $75,000 to be paid to Korn/Ferry. Gregory A. Peters,
our president and chief executive ofﬁcer, is the son-in-
law of a managing director of Korn/Ferry.

We have entered into indemniﬁcation agreements with
our directors and executive ofﬁcers for the indemniﬁca-
tion of and advancement of expenses to such persons
to the fullest extent permitted by law. We also intend to
enter into these agreements with our future directors
and executive ofﬁcers.

Internap 2003 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued

We have adopted the disclosure only provisions of 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 2001, 2002 and 2003 (includ-
ing ESPP participation) subsequent to Internap’s initial
public offering was estimated at the date of grant using
the Black-Scholes model assuming no expected divi-
dends and the following weighted average assumptions:

Year Ended December 31,

Risk free interest rate
Volatility
Expected life

2003
4.01%
144%

2002

2001

3.52%
100%

4.50%
100%

4 years

The pro forma effect of adopting SFAS No. 123 is de-
scribed in Note 2.

Deferred stock compensation
Prior to 2000, we issued stock options to certain employ-
ees under the 1998 and 1999 Plans with exercise prices
below the deemed fair value of our common stock at
the date of grant. In accordance with the requirements
of APB Opinion No. 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 2002 and 2001, primarily related to reductions in
our workforce, we cancelled the options of individuals
for whom we had recognized deferred stock compensa-
tion and had recognized related expense on unvested
options using an accelerated amortization method.
Accordingly, during the year ended December 31, 2002
and 2001, we reduced our deferred stock compensation,
which would have been amortized to future expense, by
$1.0 million and $1.2 million, and we reduced our amor-
tization to expense of deferred stock compensation by
$2.7 million and $1.9 million to record the beneﬁt of
previously recognized expense on unvested options.

Internap 2003 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued

SUBSEQUENT EVENTS

On February 18, 2004, our common stock began trad-
ing on the American Stock Exchange, or AMEX, under
the symbol “IIP.” We voluntarily delisted our common
stock from the Nasdaq SmallCap Market effective
February 17, 2004.

On March 4, 2004, we sold 40,250,000 shares of our
common stock in a public offering at a purchase price
of $1.50 per share which resulted in net proceeds to us
of $56 million, after deducting underwriting discounts
and commissions and estimated offering expenses.
We intend to use the net proceeds from the offering for
general corporate purposes. General corporate purposes
may include capital investments in our network access
point infrastructure and systems, repayment of debt and
capital lease obligations and potential acquisitions of
complementary businesses or technologies.

After the effectiveness of the registration statement ﬁled
in connection with our recent underwritten public offer-
ing, we became aware that (1) certain unauthorized per-
sons may have accessed an Internet-based investor
presentation, or road show, that had been used by us in
the offering and (2) portions of the road show presenta-
tion had been posted by an unauthorized third party on
a generally-available Internet photo sharing website.
The road show presentation appeared on a third party
vendor’s password-protected website, and, consistent
with the Securities and Exchange Commission’s guid-
ance relating to electronic road show presentations,
was intended for access only by prospective investors
authorized by the managing underwriters. The presen-
tation included electronic slides that could be viewed

during the presentation and oral statements made by
members of our management team. Unauthorized
access to the road show presentation was provided by
posting, without our consent or the consent of the man-
aging underwriters, the website link and passwords on a
generally accessible message board maintained on the
Yahoo Finance website. In addition, unauthorized access
to the electronic slides used in the road show presenta-
tion was provided by posting images of some but not
all of the slides to an Internet photo sharing website.
The road show presentation and the posted road show
slides did not disclose the related risks and uncertain-
ties described in the prospectus for the offering. The
unauthorized access to the Internet-based investor pres-
entation and the unauthorized postings to the Internet
photo sharing website may each be deemed to consti-
tute a prospectus that does not meet the requirements
of the Securities Act and thus a violation of the Securities
Act of 1933, as amended. If we are found to have violated
the Securities Act, then for a period of one year from the
date of the violation, certain investors who purchased
shares of our common stock in the public offering may
have the right to obtain recovery of the consideration
paid in connection with their purchase from us or any
person who participated in the offering or, if they had
already sold their shares, damages resulting from their
purchase and sale of those shares. Any liability would
depend, in part, upon the number of shares purchased
by investors who assert their right of rescission or claim
for damages within the one year statute of limitations
period. If asserted, we intend to contest any claims for
rescission or damages vigorously. At this stage, it is not
possible to estimate the ﬁnancial impact, if any, of any
possible settlement from these potential claims.

Internap 2003 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued

UNAUDITED QUARTERLY RESULTS

The following table sets forth our unaudited quarterly results of operations for the years ended December 31, 2003
and 2002. 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. The quarterly operating results below are not necessarily indicative of those of future periods
(in thousands, except for per share data).

March 31,
2002

June 30, September 30, December 31,
2002

2002

March 31,
2003

June 30, September 30, December 31,
2003

2003

Revenues

Costs and expenses:

Direct cost of network, exclusive
of depreciation shown below

Customer support
Product development
Sales and marketing
General and administrative
Depreciation and amortization
Amortization of goodwill and other

intangible assets

Amortization of deferred stock compensation
Pre-acquisition liability adjustment
Lease termination expense
Restructuring costs (beneﬁts)
(Gain) loss on sale and retirements

$ 32,614 $ 33,030 $ 32,711 $ 34,132 $ 34,177 $ 34,240 $ 34,379

$35,784

24,105
3,826
1,957
6,057
6,492
12,812

1,427
352
–
–
(4,954)

22,627
3,669
1,977
5,801
5,047
13,504

1,606
(11)
–
–
–

17,302
2,867
1,836
5,330
4,548
12,390

1,165
(316)
–
–
352

19,173
2,551
1,677
4,453
4,761
10,894

1,428
235
–
804
821

18,668
2,364
1,684
5,177
4,475
10,583

1,428
390
–
–
754

18,669
2,257
1,701
5,048
4,054
9,779

1,428
–
–
–
198

19,795
2,125
1,694
4,688
4,700
7,931

362
–
–
–
132

18,598
2,299
1,844
3,516
6,803
5,599

134
–
(1,313)
–
–

of property and equipment

298

841

1,510

180

–

(53)

–

Total operating costs and expenses
Loss from operations

52,372
(19,758)

55,061
(22,031)

46,984
(14,273)

46,977
(12,845)

45,523
(11,346)

43,134
(8,894)

41,374
(6,995)

37,480
(1,696)

Other expense:

Interest expense, net
Loss on investments

Total other expense

Net loss
Less deemed dividend related

to beneﬁcial conversion feature

(231)
(349)

(580)

(464)
(313)

(777)

(629)
(334)

(963)

(870)
(248)

(738)
(290)

(943)
(194)

(1,118)

(1,028)

(1,137)

(20,338)

(22,808)

(15,236)

(13,963)

(12,374)

(10,031)

(792)
(291)

(1,083)

(8,078)

(794)
(65)

(859)

(2,555)

–

(34,576)

–

Net loss attributable to common stockholders

$(20,338) $(22,808) $(15,236) $(13,963) $(12,374) $(10,031) $(42,654)

$ (2,555)

Basic and diluted net loss per share

$ (0.13) $ (0.15) $ (0.10) $ (0.09) $ (0.08) $ (0.06) $ (0.25)

$ (0.01)

Weighted average shares used

in computing basic and diluted
net loss per share

152,002

153,537

157,177

159,433

161,084

162,058

169,352

206,876

Internap 2003 Annual Report
REPORT OF INDEPENDENT AUDITORS

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 oper-
ations, of stockholders’ equity and comprehensive loss
and of cash ﬂows present fairly, in all material respects,
the ﬁnancial position of Internap Network Services
Corporation (the “Company”) at December 31, 2003
and 2002, and the results of its operations and its cash
ﬂows for each of the three years in the period ended
December 31, 2003 in conformity with accounting prin-
ciples generally accepted in the United States of
America. These ﬁnancial statements are the responsi-
bility 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 gen-
erally accepted in the United States of America, which
require that we plan and perform the audit to obtain
reasonable assurance about whether the ﬁnancial state-
ments are free of material misstatement. An audit
includes examining, on a test basis, evidence support-
ing the amounts and disclosures in the ﬁnancial state-
ments, assessing the accounting principles used and
signiﬁcant estimates made by management, and evalu-
ating the overall ﬁnancial statement presentation. We
believe that our audits provide a reasonable basis for
our opinion.

As discussed in Note 7, effective January 1, 2002,
the Company adopted the provisions of Statement of
Financial Accounting Standards No. 142, “Goodwill and
Other Intangible Assets,” resulting in cessation of the
amortization of goodwill in 2002.

PricewaterhouseCoopers LLP

Atlanta, Georgia
March 11, 2004

Internap 2003 Annual Report
STOCKHOLDER INFORMATION

Corporate Headquarters
Internap Network Services Corporation
250 Williams Street
Atlanta, GA 30303
404-302-9700
www.internap.com

Stock Trading Information
Internap’s common stock trades on the
American Stock Exchange under the
ticker symbol: IIP.

Independent Auditor
PricewaterhouseCoopers LLP
10 Tenth Street, Suite 1400
Atlanta, GA 30309
678-419-1000

Transfer Agent
American Stock Transfer & Trust Company
59 Maiden Lane
New York, NY 10038
800-937-5449
info@amstock.com

Form 10-K
A copy of Internap’s 2003 Annual Report on Form 10-K
for the year ended December 31, 2003, as ﬁled with
the Securities and Exchange Commission, is posted
to the investor relations section of our website,
www.internap.com. A printed copy is available with-
out charge to stockholders upon written request
by contacting Investor Relations at our headquar-
ters address.

Product/Services Information
Information on Internap’s products and services can
be obtained by contacting our corporate headquarters
or visiting our website at: www.internap.com

Other Information
Forward-looking statements in this annual report are sub-
ject to change based on various factors. Stockholders
and other persons reading this annual report are urged
to read carefully our annual report on Form 10-K for the
year ended December 31, 2003, as well as other docu-
ments and materials ﬁled by the Company with the
Securities and Exchange Commission.

Inquiries regarding stock transfers, lost certiﬁcates or address

changes should be directed to the transfer agent.

Market and Dividend Information
Internap’s common stock is listed on the AMEX under
the symbol “IIP” and has traded on the AMEX since
February 18, 2004. Our common stock traded on
the Nasdaq SmallCap Market from October 4, 2002
until February 17, 2004. Prior to that, our common
stock traded on the Nasdaq National Market from
September 29, 1999, the date of our initial public
offering, until October 4, 2002, when we fell below
certain listing criteria of the Nasdaq National Market.

The following table sets forth on a per share basis the
high and low closing prices for our common stock on
the Nasdaq National Market or the Nasdaq SmallCap
Market, as applicable, during the periods indicated.

Year Ended December 31, 2003

Fourth Quarter
Third Quarter
Second Quarter
First Quarter

Year Ended December 31, 2002:

Fourth Quarter
Third Quarter
Second Quarter
First Quarter

High

Low

$2.59
1.55
1.37
0.55

$0.69
0.34
0.81
1.74

$1.11
1.04
0.37
0.39

$0.19
0.13
0.23
0.77

As of March 5, 2004, the number of stockholders of
record of our common stock was 1,212.

We have never declared or paid any cash dividends on our

capital stock, and we do not anticipate paying cash dividends

in the foreseeable future. We are prohibited from paying cash

dividends under covenants contained in our current credit

agreement and our master lease with our primary supplier. In

addition, as long as shares of our series A preferred stock con-

vertible into at least ﬁve million shares of our common stock are

outstanding, we may not declare or pay dividends on our com-

mon stock without the approval of at least 50% of the outstand-

ing shares of our series A preferred stock. We currently intend to

retain our earnings, if any, for future growth. Future dividends on

our common stock, if any, will be at the discretion of our board

of directors and will depend on, among other things, our opera-

tions, capital requirements and surplus, general ﬁnancial condi-

tion, contractual restrictions and such other factors as our

board of directors may deem relevant.

Internap 2003 Annual Report
BOARD OF DIRECTORS

Board of Directors standing (l-r):William J. Harding, James P. DeBlasio and Kevin L. Ober; seated (l-r):Fredric W. Harman, Eugene Eidenberg,

Gregory A. Peters and Charles B. Coe; not pictured:Robert D. Shurtleff, Jr.

Board of Directors

Eugene Eidenberg
Chairman
Managing Director, Granite Venture
Associates LLC; and Principal,
Hambrecht Quist Venture Associates
Director since: 1997

Gregory A. Peters
President and Chief Executive Officer,Internap
Director since: 2002

Charles B. Coe
Former President, BellSouth Network Services
Director since: 2003

Executive Management Team

James P. DeBlasio
Financial Vice President, Lucent Technologies’
Mobility & INS Products
Director since: 2003

Kevin L. Ober
Divergent Venture Partners
Director since: 1997

William J. Harding
General Partner, Morgan Stanley Dean Whitter
Venture Partners
Director since: 1999

Fredric W. Harman
General Partner, Oak Investment Partners
Director since: 1999

Robert D. Shurtleff, Jr.
S.L. Partners, a strategic consulting group
Director since: 1997

Anthony C. Naughtin
Founding CEO, Internap
Retired from Board effective January 2004
Director since: 1997

Gregory A. Peters
President and Chief Executive Officer

Marla Eichmann
Vice President, Cross Functional Operations

John M. Scanlon
Vice President, Corporate Development

David L. Abrahamson
Vice President, Sales and
Chief Marketing Officer

Walter G. DeSocio
Vice President, Chief Administrative Officer
and General Counsel

Robert R. Jenks
Vice President and Chief Financial Officer

Eric Suddith
Vice President, Operations

Ali Marashi
Vice President, Engineering and
Chief Technology Officer

Allen K. Tothill
Vice President, Carrier Alliances

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Discover how Internap can help your Internet applications evolve.
www.internap.com

Corporate Headquarters
250 Williams Street
Atlanta, GA 30303
404.302.9700
www.internap.com