Edgar Filing: INTERNAP NETWORK SERVICES CORP

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

--------------------

FORM 10-Q/A
(Amendment No. 1)
(Mark One)

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

For the Quarterly Period Ended September 30, 2002
OR

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

For the transition period from to
Commission File Number: 000-27265

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

DELAWARE 91-2145721
(State or Other Jurisdiction of IRS Employer
Incorporation or Organization) Identification No.)

601 Union Street, Suite 1000
Seattle, Washington 98101
(Address of Principal Executive Offices and Zip Code)
(206) 441-8800
(Registrant's Telephone Number, Including Area Code)

--------------------

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes / / No /X/

Indicate the number of shares outstanding of each of the registrant's classes
of common stock as of the latest practicable date: 223,309,309 shares of
common stock, $0.001 par value, outstanding as of December 31, 2002, which
includes 62,726,160 shares of common stock issuable upon conversion by the
holders of the Series A preferred stock.

EXPLANATORY NOTE

We are filing this Amendment No. 1 to our Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2002 to announce that two
amendments to our corporate charter presented to our stockholders in May 2002
and October 2002 are not effective for technical reasons of which we recently
became aware. The May amendment was intended to permit us to take certain
actions affecting the Series A preferred stock with the written consent of the
holders of that security. Because the May amendment is not effective and
shareholder approval was not properly received, the October amendment, which
would have resulted in the balance sheet reclassification of $80.3 million of
Series A preferred stock from mezzanine capital to stockholders' equity in
future periods, is also invalid. Accordingly, we are amending our quarterly
report on Form 10-Q for the quarterly period ended September 30, 2002 to
remove all references to the October amendment and its pro forma effects on
our stockholders' equity.

Although we had sought the October amendment to satisfy one of two
alternative listing requirements applicable to our maintaining our eligibility
for listing on the NASDAQ SmallCap Market, we satisfy the second alternative
requirement and, accordingly, we believe the invalidity of the amendments does
not affect our current eligibility for listing. We are examining whether to
resubmit the amendments for stockholder approval. If we decide to do so, we
would expect to seek the requisite approvals at our 2003 annual meeting or at
an earlier special meeting.

No changes have been made to our historical financial statements for
any period presented, except for the deletion of all references to the October
amendment in Footnote 11 (Subsequent Events - Series A Preferred Stock) of the
notes to our financial statements for the quarter ended September 30, 2002.

INTERNAP NETWORK SERVICES CORPORATION
FORM 10-Q/A
FOR THE QUARTER ENDED SEPTEMBER 30, 2002

TABLE OF CONTENTS

Table of Contents

Page

PART I. FINANCIAL INFORMATION............................................4

Item 1. FINANCIAL STATEMENTS....................................4

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................16

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK...................................................26

Item 4. CONTROLS AND PROCEDURES................................27

PART II. OTHER INFORMATION...............................................38

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS..............38

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....38

ITEM 5. MISCELLANEOUS..........................................38

ITEM 6. EXHIBITS...............................................39

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INTERNAP NETWORK SERVICES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)

September 30, December 31,
2002 2001
------------- ------------

ASSETS

Current assets:
Cash and cash equivalents....................................................$ 32,520 $ 63,551
Short-term investments....................................................... -- 18,755
Accounts receivable, net of allowance of $1,445 and $1,183,
respectively............................................................... 13,120 14,749
Prepaid expenses and other assets............................................ 5,057 2,981
---------- ----------
Total current assets....................................................... 50,697 100,036
Property and equipment, net of accumulated depreciation of $97,073 and
$70,507, respectively......................................................... 98,455 139,589
Restricted cash................................................................. 2,122 2,432
Investments..................................................................... 3,355 2,794
Goodwill and other intangible assets, net of accumulated amortization of
$36,314 and $32,116, respectively............................................. 32,013 36,218
Deposits and other assets....................................................... 3,352 3,908
---------- ----------
Total assets...............................................................$ 189,994 $ 284,977
---------- ----------

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable.............................................................$ 12,807 $ 13,058
Accrued liabilities.......................................................... 10,181 16,727
Deferred revenues............................................................ 6,940 2,747
Notes payable, current portion............................................... 4,007 2,038
Line of credit............................................................... 15,000 10,000
Capital lease obligations, current portion................................... 834 22,450
Restructuring liability, current portion..................................... 6,969 16,498
---------- ----------
Total current liabilities.................................................. 56,738 83,518
Deferred revenues............................................................... 2,721 9,755
Notes payable, less current portion............................................. 1,597 954
Capital lease obligations, less current portion................................. 24,605 15,494
Restructuring liability, less current portion................................... 9,196 22,773
---------- ----------
Total liabilities.......................................................... 94,857 132,494
Commitments and contingencies:
Series A convertible preferred stock, $0.001 par value, 3,500 shares
designated; 2,950 and 3,171 issued and outstanding, respectively, with
liquidation preferences of $94,408 and $101,487, respectively................. 80,292 86,314
Stockholders' equity:
Common stock, $0.001 par value, 600,000 shares authorized; 159,453 and
151,294 shares issued and outstanding, respectively........................ 159 151
Additional paid in capital................................................... 798,083 794,459
Deferred stock compensation.................................................. (938) (4,371)
Accumulated deficit.......................................................... (782,459) (724,077)
Accumulated items of other comprehensive income.............................. -- 7
---------- ----------

Total stockholders' equity................................................. 14,845 66,169
---------- ----------
Total liabilities and stockholders' equity.................................$ 189,994 $ 284,977
========== ==========

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

INTERNAP NETWORK SERVICES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)

Three-month periods ended Nine-month periods ended
September 30, September 30,
------------------------- ------------------------
2002 2001 2002 2001
------------ ---------- --------- --------

Revenues................................................... $ 32,711 $ 29,163 $ 98,355 $ 86,888
Costs and expenses:
Direct cost of network................................ 17,302 24,637 64,034 74,439
Customer support...................................... 2,867 4,789 10,362 17,502
Product development................................... 1,836 2,760 5,770 9,960
Sales and marketing................................... 5,330 7,496 17,188 31,615
General and administrative............................ 4,548 9,820 16,087 37,326
Depreciation and amortization......................... 12,390 13,468 38,706 36,133
Amortization of goodwill and other intangible
assets............................................... 1,165 5,658 4,198 32,458
Amortization of deferred stock compensation........... (316) 814 25 3,132
Restructuring costs................................... 352 67,211 (4,602) 71,553
Impairment of goodwill and other intangible
assets............................................... -- -- -- 195,986
Loss on sales and retirements of property and
equipment............................................ 1,510 -- 2,649 341
-------- --------- --------- --------
Total operating costs and expenses.................. 46,984 136,653 154,417 510,445
-------- --------- --------- --------

Loss from operations....................................... (14,273) (107,490) (56,062) (423,557)
Other income (expense):
Interest income (expense), net.......................... (629) (771) (1,324) (404)
Loss on equity method investment........................ (334) (518) (996) (592)
Loss on investments..................................... -- (6,000) -- (25,314)
-------- --------- --------- --------
Total other income (expense)............................... (963) (7,289) (2,320) (26,310)
-------- --------- --------- --------
Net loss................................................... $(15,236) $(114,779) $ (58,382) $(449,867)
======== ========= ========= =========
Basic and diluted net loss per share....................... $ (0.10) $ (0.76) $ (0.38) $ (3.00)
========= ========= ========= =========
Weighted average shares used in computing basic and
diluted net loss per share............................... 157,177 150,541 154,233 150,009

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

INTERNAP NETWORK SERVICES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)

Nine-month periods
ended September 30,
-------------------------------
2002 2001
--------------- -------------

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................................................. $ (58,382) $(449,867)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization...................................... 42,904 68,591
Impairment of goodwill and other intangible assets................. -- 195,986
Non-cash restructuring costs/(adjustments)......................... (4,602) --
Non-cash interest expense on capital lease obligations............. 535 --
Provision for doubtful accounts.................................... 1,508 3,686
Provision for note receivable...................................... -- 6,000
Non-cash compensation and warrant expense.......................... 25 3,154
Loss on disposal of property and equipment......................... 2,649 341
Loss on sale of investment security................................ -- 14,490
Loss on write-down of investment................................... -- 4,824
Loss on equity method investment................................... 996 592
Translation gain................................................... (210) --
Changes in operating assets and liabilities:
Accounts receivable.............................................. 121 1,254
Prepaid expenses, deposits and other assets...................... 1,222 5,989
Accounts payable................................................. (942) (1,515)
Accrued restructuring charge..................................... (12,771) 63,783
Deferred revenues................................................ (2,841) (1,906)
Accrued liabilities.............................................. (4,708) (7,942)
------- --------
Net cash used in operating activities.......................... (34,496) (92,540)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment.................................. (7,914) (29,792)
Proceeds from disposal of property and equipment..................... 436 397
Reduction of restricted cash......................................... 310 --
Purchase of investments.............................................. (1,347) (8,855)
Redemption of investments............................................ 18,748 54,800
------- --------
Net cash provided by investing activities...................... 10,233 16,550

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line of credit......................................... 5,000 --
Principal payments on notes payable.................................. (2,526) (1,719)
Payments on capital lease obligations................................ (10,260) (15,409)
Proceeds from exercise of stock options and warrants................. 320 374
Proceeds from issuance of common stock............................... 698 1,745
Proceeds from issuance of Series A convertible preferred stock, net
of issuance costs.................................................. -- 95,635
------- --------
Net cash provided by (used in) financing activities............ (6,768) 80,626
======= ========

Net increase (decrease) in cash and cash equivalents................. (31,031) 4,636
Cash and cash equivalents at beginning of period..................... 63,551 102,160
------- --------
Cash and cash equivalents at end of period........................... 32,520 106,796
======= ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest............................................... $ 2,432 $ 4,471
Purchase of property and equipment financed with capital leases...... $ 930 $ 19,922
Change in accounts payable attributable to purchases of property and
equipment.......................................................... $ (691) $ (7,794)
Acquisition liabilities assumed and accrued acquisition costs........ -- $ 1,356
Non-cash adjustment to fixed assets and capital leases due to
restructuring of capital lease obligation.......................... $ 3,710 --
Forfeiture of deposits to restructuring.............................. $ 558 --
Impairment of fixed assets due to restructuring...................... $ 5,175 --
Prepayment of future lease obligation via note payable............... $ 3,300 --
Accrued expense reclassified into a note payable..................... $ 1,838 --

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

INTERNAP NETWORK SERVICES CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE LOSS

NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2002
(Unaudited, in thousands)

Accumulated
Items of
Deferred Other
Additional Stock Compensated Total
Common Stock Paid-In Compen- Accumulated Income Stockholders' Compre-
Shares Par Value Capital sation Deficit (Loss) Equity hensive Loss
------ --------- ---------- -------- ----------- ----------- ------------- ------------

Balances, December 31, 2001 151,294 $151 $794,459 $(4,371) $(724,077) $ 7 $66,169 --
Conversion of Series A
convertible preferred
stock into common
stock................. 4,776 5 6,017 -- -- -- 6,022 --
Amortization of deferred
stock compensation.... -- -- (2,431) 2,456 -- -- 25 --
Reversal of deferred
stock compensation
for terminated
employees............. -- -- (977) 977 -- -- -- --
Exercise of options and
warrants to purchase
common stock.......... 1,672 2 207 -- -- -- 209 --
Issuance and exercise of
warrants to purchase
shares of common
stock to a
non-employee.......... 111 0.1 111 -- -- -- 111 --
Issuance of employee
stock purchase plan
shares................ 1,600 1 697 -- -- -- 698 --
Net loss................. -- -- -- -- (58,382) -- (58,382) (58,382)
Unrealized loss on
investments .......... -- -- -- -- -- (7) (7) (7)

Comprehensive loss.......
----- ---- ------- ----- ------- --- ------ -------

Balances, September 30,
2002.................. 159,453 $159 $798,083 $(938) $(782,459) $-- $14,845 (58,389)
======= ==== ======== ===== ========= === ======= =======

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

INTERNAP NETWORK SERVICES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The unaudited condensed consolidated financial statements of Internap
Network Services Corporation have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission and include all the
accounts of Internap Network Services Corporation and its wholly owned
subsidiaries. Certain information and footnote disclosures, normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States, have been condensed or omitted
pursuant to such rules and regulations. The unaudited condensed consolidated
financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of our financial
position as of September 30, 2002, our operating results for the 3-month and
9-month periods ended September 30, 2002 and 2001, cash flows for the
nine-month periods ended September 30, 2002 and 2001, and changes in
stockholders' equity for the 9-month period ended September 30, 2002. The
balance sheet at December 31, 2001 has been derived from our audited financial
statements as of that date. These financial statements and the related notes
should be read in conjunction with our financial statements and notes thereto
contained in our annual report on Form 10-K filed with the Securities and
Exchange Commission.

The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities and revenues
and expenses in the financial statements. Examples of estimates subject to
possible revision based upon the outcome of future events include, among
others, recoverability of long-lived assets and goodwill, depreciation of
property and equipment, restructuring allowances, amortization of deferred
stock compensation and the allowance for doubtful accounts. Actual results
could differ from those estimates.

Certain prior year balances have been reclassified to conform to
current year presentation. These reclassifications have not affected our
financial position, results of operations or net cash flows.

The results of operations for the three- and nine-month periods ended
September 30, 2002 are not necessarily indicative of the results that may be
expected for the future periods or for the full year.

2. Risks and Uncertainties

We have a limited operating history and our operations are subject to
certain risks and uncertainties frequently encountered by companies in rapidly
evolving markets. These risks include the failure to develop or supply
technology or services, the ability to obtain adequate financing, the ability
to manage rapid growth or expansion, competition within the industry and
technology trends. We have experienced significant net operating losses since
inception. During fiscal year 2001, we incurred net losses of $479.2 million
and used $123.0 million of cash in our operating activities. From January 1,
2002 through September 30, 2002, we incurred net losses of $58.4 million and
used $34.5 million of cash in our operating activities. Management expects net
losses and negative cash flows will continue for several more quarters. We
have decreased the size of our workforce by 194 employees during fiscal year
2002 in addition to the reduction of 313 employees during the prior fiscal
year, and terminated certain real estate leases, network and other vendor
commitments in order to control costs. Our plans indicate our existing cash is
adequate to fund our operations for several more quarters. However, our
capital requirements depend on several factors, including the rate of market
acceptance of our services, the ability to expand and retain our customer base
and other factors. If we fail to realize our planned revenues or costs,
management believes it has the ability to further curtail spending and reduce
expenses. If, however, our cash requirements vary materially from those
currently planned, or if we fail to generate sufficient cash flow from the
sales of our services, we may require additional financing sooner than
anticipated. We cannot assure you such financing will be available on
acceptable terms, if at all.

3. Restructuring Charges

2001 Restructuring Charge

During fiscal year 2001, due to the decline and uncertainty of the
telecommunications market, 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
redundant network connections and streamline the operating cost structure. The
total charges include restructuring costs of $71.6 million. During fiscal year
2001, we incurred cash restructuring expenditures totaling $19.9 million and
non-cash restructuring expenditures of $4.7 million. We reduced the original
restructuring cost estimate by $7.7 million primarily as a result of favorable
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 restructuring liability by $5.0 million and $7.2 million,
respectively. The first quarter 2002 reduction was primarily due to
settlements to terminate and restructure certain collocation lease obligations
on terms more favorable than our original restructuring estimates. The third
quarter 2002 reduction was primarily due to the decision to relocate our
corporate headquarters to the previously restructured Atlanta, Georgia
facility. Pursuant to the original restructuring plans, we did not anticipate
using the Atlanta facility in the future. However, due to changes in
management, corporate direction, and other factors, that 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 and Asset Impairment Charge

Due to the continuing decline and uncertainty in the
telecommunications market, we committed to 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 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 reductions. The
restructuring and asset impairment charge of $7.6 million for the three months
ended September 30, 2002 was 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 restructuring charge is $1.1 million of
personnel costs related to a reduction in force of approximately 145
employees. This represents employee severance payments made during the three
months ended September 30, 2002. We expect that there will be additional
restructuring costs in the future as additional payments are made to employees
who are subject to deferred compensation arrangements payable at the
completion of interim employment agreements. We expect these costs to total
less than $2.0 million. Additionally, we continue to evaluate the
restructuring reserve as plans are being executed, which could result in
additional charges or adjustments.

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 collocation license obligations. Accordingly, we recorded real
estate related restructuring costs of $40.8 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. This cost was 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.

Network Infrastructure Obligations

The changes to our network infrastructure require that we
decommission certain network ports we do not currently use and will not use in
the future 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.

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

December 31, Restructuring September 30,
2001 and Non-cash 2002
Restructuring Impairment Cash and Write Non-cash Plan Restructuring
Liability Charge reductions Downs Adjustments Liability
------------- ------------- ---------- --------- ------------ -------------

Restructuring costs activity for 2001
restructuring charge--
Real estate obligations......... $ 33.5 $ -- $ (9.5) $ (0.5) $(12.2) $ 11.3
Network infrastructure obligations 2.7 -- (1.3) -- -- 1.4
Other........................... 2.0 -- (0.9) -- -- 1.1

Restructuring costs activity for 2002
restructuring charge--
Real estate obligations......... -- 2.2 -- -- -- 2.2
Personnel....................... -- 1.1 (1.1) -- -- --
Other........................... -- 0.2 -- -- -- 0.2
------ ------ ------ ------ ------ ------

Total restructuring costs... 38.2 3.5 (12.8) (0.5) (12.2) 16.2

Net asset write-down, 2001 restructuring
charge............................. 1.1 -- -- (1.1) -- --

Net asset write-downs for 2002
restructuring charge............... -- 4.1 -- (4.1) -- --
------ ------ ------ ------ ------ ------

Total asset impairments..... 1.1 4.1 -- (5.2) -- --
------ ------ ------ ------ ------ ------

Total....................... $ 39.3 $ 7.6 $(12.8) $ (5.7) $(12.2) $ 16.2
====== ====== ====== ====== ====== ======

4. Net Loss Per Share

Basic and diluted net loss per share have 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 convertible
preferred stock, warrants, outstanding options to purchase common stock and
shares subject to repurchase from the calculation of diluted net loss per
share, as such securities are antidilutive for all periods presented. Basic
and diluted net loss per share for the three- and nine-month periods ended
September 30, 2002 and 2001 are calculated as follows (in thousands, except
per share amounts):

Three-month periods ended September 30, Nine-month periods ended September 30,
--------------------------------------- --------------------------------------
2002 2001 2002 2001
------------------ ------------------- ---------------- -------------------
(unaudited) (unaudited) (unaudited) (unaudited)

Net loss...................................... $(15,236) $(114,779) $(58,382) $(449,867)

Basic and diluted:
Weighted-average shares of common stock
outstanding used in computing basic and
diluted net loss per share............. 157,177 150,541 154,233 150,009
Basic and diluted net loss per share..... $ (0.10) $ (0.76) $ (0.38) $ (3.00)

Antidilutive securities not included in
diluted net loss per share calculation:

Convertible preferred stock.............. 63,679 68,455 63,679 68,455
Options to purchase common stock......... 21,258 14,918 21,258 14,918
Warrants to purchase common stock........ 17,326 18,795 17,326 18,795
------- ------- ------- -------
102,263 102,168 102,263 102,168
======= ======= ======= =======

5. Accounting for Goodwill and Intangible Assets Pursuant to Statement of
Financial Accounting Standard No. 142

Effective January 1, 2002, we adopted Statement of Financial
Accounting Standard (SFAS) No. 142, "Goodwill and Other Intangible Assets,"
which establishes 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 impairment by
comparing the fair value of Internap Network Services Corporation 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
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, we determined that none of the recorded goodwill was impaired as of
January 1, 2002. During the period ended September 30, 2002, we performed our
annual impairment testing. This test was performed by comparing the adjusted
book value of the consolidated company to its fair value. In determining
Internap's fair value we considered both market-based and income-based
approaches to estimate value.

Based on the results of the analysis performed we concluded that no
goodwill impairment existed as of September 30, 2002. 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 was 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 Internap. As of September 30, 2002,
goodwill totaled $27.0 million.

In connection with adopting SFAS 142, we also reassessed the useful
lives and the classification of our amortizing identifiable intangible assets
and determined that they continue to be appropriate. The components of our
amortized intangible assets are as follows (in thousands):

December 31, 2001 September 30, 2002
------------------------------ ------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
--------------- ------------- --------------- -------------

Contract based............ $14,535 $(6,711) $14,535 $(10,259)
Technology based.......... $ 2,600 $(1,228) $ 2,600 $ (1,878)

Amortization expense for identifiable intangible assets during the
third quarter of 2002 was $1.2 million and $4.2 million year-to-date.
Estimated amortization expense for the remainder of 2002, 2003 and thereafter
is as follows (in thousands):

Estimated
Amortization Expense
--------------------

2002 (remainder)....................................... $ 1,407
2003................................................... 3,266
Thereafter............................................. 325

Actual results of operations for the three- and nine-month periods
ended September 30, 2002 and pro forma results of operations for the three-
and nine-month periods ended September 30, 2001, had we applied the
non-amortization provisions of SFAS No. 142 in those periods, are as follows
(in thousands, except per share amounts):

Three-month periods ended Nine-month periods ended
September 30, September 30,
------------------------- -------------------------
2002 2001 2002 2001
----------- ------------ ----------- ------------

Reported net loss.................................. $ (15,236) $(114,779) $ (58,382) $(449,867)
Add amortization of goodwill....................... -- 4,267 -- 28,262
--------- --------- --------- ---------
Pro forma net loss................................. $ (15,236) $(110,512) $ (58,382) $(421,605)
========= ========= ========= =========
Reported net loss per share........................ $ (0.10) $ (0.76) $ (0.38) $ (3.00)
Pro forma net loss per share....................... $ (0.10) $ (0.73) $ (0.38) $ (2.81)

6. Investments

On April 10, 2001, we announced the formation of a joint venture with
NTT-ME Corporation of Japan. During fiscal years 2001 and 2002, we made an
aggregate cash investment of $4.2 million in two installments to acquire 51%
of the common stock of the joint venture, Internap Japan Co., Ltd. We are
unable to assert control over the joint venture's operational and financial
policies and practices, due to certain minority interest protections afforded
to our joint venture partner, NTT-ME Corporation. Consequently, we are
precluded from accounting for the joint venture as a subsidiary whose assets,
liabilities, revenues and expenses would be consolidated. We are, however,
able to assert significant influence over the joint venture and, therefore,
account for our joint venture investment using the equity-method of accounting
pursuant to Accounting Principles Board Opinion No. 18 "The Equity Method of
Accounting for Investments in Common Stock" and consistent with EITF 96-16
"Investor's accounting for an investee when the investor has a majority of the
voting interest but the minority shareholder or shareholders have certain
approval or veto rights." During the three- and nine-month periods ended
September 30, 2002, we recognized our proportionate share of Internap Japan's
net losses totaling $0.3 million and $1.0 million, respectively. Since
inception of the joint venture, we have recognized our proportional share of
Internap Japan's aggregate losses totaling $2.2 million and translation gains
due to favorable exchange rates between the United States Dollar and the
Japanese Yen totaling $0.2 million, resulting in a net investment balance of
$2.2 million. Our investment in Internap Japan is reflected as a component of
investments and losses and translation gains and losses in other income
(expense) on the statements of operations.

Investments at September 30, 2002 consisted of the following (in
thousands):

Cost Recorded
Basis Value
--------- ---------

Equity Method Investment....................... $ 2,179 $ 2,179
Cost Basis Investments......................... 1,176 1,176
--------- ---------
$ 3,355 $ 3,355
========= =========

Investments at December 31, 2001 consisted of the following (in
thousands):

Costs Unrealized Unrealized Recorded
Basis Gain Gain Value
-------- ---------- ---------- --------

U.S. Government and Government Agency Debt
Securities.................................. $ 6,210 $ 3 $ -- $ 6,213
Corporate Debt Securities..................... 12,538 4 -- 12,542
Equity Method Investment...................... 1,618 -- -- 1,618
Cost Basis Investments........................ 1,176 -- -- 1,176
-------- ----- ----- --------
$ 21,542 $ 7 $ -- $ 21,549
======== ===== ===== ========

7. Capital Lease Obligations

During the second quarter of 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 terms of our master lease agreement, as amended, include
financial covenants that require us to maintain minimum liquidity balances,
periodic revenues, EBITDA levels and other covenants. Should we breach the
covenants, experience a change-of-control represented by a change in 35% of
the aggregate ordinary voting power, or should the lessor believe we have
experienced a material adverse change in our business, the lessor has the
ability to demand payment of all amounts due. As of September 30, 2002, we
were not in compliance with a non-financial covenant requiring us to provide
the lessor with documentation allowing access to our facilities. We were in
compliance with all financial covenants and have obtained a waiver through
January 31, 2003. 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 lease agreement. 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 to reflect the reduction. Interest will continue to accrue on a
periodic basis and add to the capital lease obligation during the 24-month
payment deferral period.

8. Notes Payable

During the second quarter of 2002, we completed negotiations with a
collocation space provider that resulted in a reduction of the periodic 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 collateralized by leaseholds, equipment, and customer
revenues at one of our service points. The related prepaid asset is being
amortized to direct cost of network over 36 months.

During fiscal year 2000, we entered into an integrated sales
agreement 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
million shortfall as of the expiration date of the agreement as a component of
accrued expenses. During the second 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. The
note matures October 5, 2003, is payable based on a payment schedule, bears
interest of 6.0% and is collateralized by a first position interest in certain
network equipment and a second position interest in our cash accounts.

9. Stock-Based Compensation Plans

During the nine-month period ended September 30, 2002, we terminated
employment of individuals for whom we had recognized deferred stock
compensation and had recognized related expenses on unvested options using an
accelerated amortization method. Accordingly, during the nine-month period
ended September 30, 2002, we reduced our deferred stock compensation that
would have been amortized to future expense by $1.0 million, and we reduced
our amortization to expense of deferred stock compensation by $2.4 million to
reverse previously recognized expense on unvested options.

10. Deferred Revenue

During the nine-month period ended September 30, 2002, we completed
negotiations with one of our customers that significantly reduced the term of
the customer's service contract. As a result of the reduction in the
contractual service period and other factors, we changed our estimated life of
the customer relationship over which to recognize deferred revenues from 120
months to 46 months, with 17 months remaining at September 30, 2002. The
current balance of deferred revenues attributable to the customer on the date
of completing the new service contract was increased to reflect the
amortization of the remaining balance over the remaining customer relationship

period. The reallocation resulted in $3.9 million of deferred revenues being
reclassified from the non-current to current classification at the time the
contract was executed.

11. Subsequent Events

Credit Facility

Subsequent to September 30, 2002, we entered into a revised loan and
security agreement. Under the terms of the new loan and security agreement,
$15 million outstanding under the previous facility was refinanced into a $15
million revolving line of credit and a $5 million term loan. The amount
available under the revolver is based on a percentage of eligible accounts
receivable plus a percentage of unrestricted cash and investments. The amount
available under the revolver is further restricted by the $5 million
outstanding under the term loan until the Company achieves a specified minimum
debt coverage service level for six consecutive months as detailed in the
agreement. Therefore, the amount available under the revolver at the time of
the refinancing was $10 million. The revolving line of credit is a 24-month
facility expiring in October 2004 bearing interest at a rate ranging from
prime plus 1% to prime plus 2% per year, depending on a certain balance sheet
ratio as specified in the agreement. Monthly payments are comprised only of
interest over the term of the facility. The term loan is a 36-month amortizing
facility and bears interest at a fixed rate of 8% per year. Equal monthly
payments of principal and interest are due over the term of the facility.

Both the revolving facility and the term loan are governed by a
common security agreement and the loans are collateralized by substantially
all the assets of the Company. The agreement will allow the lender to require
us to maintain cash and investment accounts with them and may allow the lender
to exercise greater control over our customer deposits if our overall cash
position falls below certain levels, as specified in the agreement. Both the
revolving credit facility 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 if there has
been a material adverse change in our business.

12. Recent Accounting Pronouncements

Statement of Financial Accounting Standard No. 143 "Accounting for
Asset Retirement Obligations" (SFAS No. 143) is effective for fiscal years
beginning after June 15, 2001. SFAS No. 143 requires that obligations
associated with the retirement of a tangible long-lived asset be recorded as a
liability when those obligations are incurred, with the amount of the
liability initially measured at fair value. Upon initially recognizing a
liability for an asset retirement obligation, an entity must capitalize the
cost by recognizing an increase in the carrying amount of the related
long-lived asset. Over time, the liability is accreted to its present value
each period, and the capitalized cost is depreciated over the useful life of
the related asset. Upon settlement of the liability, an entity either settles
the obligation for its recorded amount or incurs a gain or loss upon
settlement, results of operations and cash flows. We are assessing the
requirements of SFAS No. 143 and the effect, if any, on our financial
position, results of operations and cash flows.

Effective January 1, 2002, we adopted Statement of Financial
Accounting Standard No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets" (SFAS No. 144), which is effective for fiscal years
beginning after December 15, 2001. SFAS No. 144 develops one accounting model,
based on the model in SFAS No. 121, for long-lived assets that are to be
disposed of by sale, as well as addresses the principal implementation issues.
SFAS No. 144 requires that long-lived assets that are to be disposed of by
sale be measured at the lower of book value or fair value less cost to sell.
That requirement eliminates APB 30's requirement that discontinued operations
be measured at net realizable value or that entities include under
"discontinued operations" in the financial statements amounts for operating
losses that have not yet occurred. Additionally, SFAS No. 144 expands the
scope of discontinued operations to include all components of an entity with
operations that (1) can be distinguished from the rest of the entity and (2)
will be eliminated from the ongoing operations of the entity in a disposal
transaction. Our adoption of SFAS No. 144 did not materially impact our
financial position, results of operations or cash flows.

gains and losses on extinguishments of debt to be classified as
income or loss from continuing operations rather than as extraordinary items
as previously required under SFAS No. 4 "Reporting Gains and Losses From the
Extinguishment of Debt." Extraordinary treatment will be required for certain
extinguishments as provided in APB Opinion No. 30 "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
SFAS No. 145 also amends SFAS No. 13 "Accounting for Leases" to require
certain modifications to capital leases be treated as a sale-leaseback and
modifies the accounting for sub-leases when the original lessee remains a
secondary obligor (or guarantor). In addition, the FASB rescinded SFAS No. 44
"Accounting for Intangible Assets of Motor Carriers" which addressed the
accounting for intangible assets of motor carriers and made numerous technical
corrections. Our adoption of SFAS No. 144 did not materially impact our
financial position, results of operations or cash flows.

During June 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard (SFAS) No. 146 "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." This Statement requires that a liability for a cost
associated with an exit or disposal activity be recognized and measured at
fair value when the liability is incurred versus on the date of an entity's
commitment to an exit plan as required under EITF Issue No 94-3. The
provisions of this Statement are effective for exit or disposal activities
that are initiated after December 31, 2002. We are assessing the requirements
of SFAS No. 146 and the effects, if any, on our financial position, results of
operations and cash flows.

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

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

The forward-looking information set forth in this Quarterly Report on
Form 10-Q is as of October 31, 2002, and Internap undertakes no duty to update
this information. Should events occur subsequent to October 31, 2002, that
make it necessary to update the forward-looking information contained in this
Form 10-Q, the updated forward-looking information will be filed with the SEC
in a subsequent Quarterly Report on Form 10-Q, an Annual Report on Form 10-K
or as a press release included as an exhibit to a Form 8-K, each of which will
be available at the SEC's website at www.sec.gov. More information about
potential factors that could affect our business and financial results is
included in the section entitled "Risk Factors" beginning on page 28 of this
Form 10-Q.

Overview

Internap is a leading provider of high performance Internet
connectivity services targeted at businesses seeking to maximize the
performance of mission-critical Internet-based applications. Customers
connected to one of our service points, located within the 17 metropolitan
markets we serve, have their data intelligently routed to and from
destinations on the Internet using our overlay network, which analyzes the
traffic situation on the many networks that comprise the Internet and delivers
mission critical information and communications faster and more reliably with
lower instances of data loss and greater quality of service than services
offered by conventional Internet connectivity providers. Our customers are
primarily businesses that desire high performance Internet connectivity
services in order to run mission-critical Internet-based applications. Due to
our high quality of service, we generally price our services at a premium to
providers of conventional Internet connectivity services. We expect to remain
a premium provider of high quality Internet connectivity services and
anticipate continuing our pricing policy for premium services in the future
although we may also offer lower quality services at lower price points. We
believe the market demand for premium service will continue to grow as their
Internet connectivity needs grow and become even more complex and, as such,
customers will continue to pay a premium for high quality service.

The following discussion should be read in conjunction with the
consolidated financial statements provided under Part I, Item 1 of this amended
Quarterly Report on Form 10-Q/A. Certain statements contained herein may
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements involve a number of
risks, uncertainties and other factors that could cause actual results to
differ materially, as discussed more fully herein.

Impairment and Restructuring Costs

2001 Impairment

On June 20, 2000, we completed the acquisition of CO Space, which was
accounted for under the purchase method of accounting. The purchase price was
allocated to net tangible assets and identifiable intangible assets and
goodwill. During the first quarter of 2001, our stock price declined to a
historical low and we began experiencing larger than expected customer
attrition. As a result of these events, we revised our financial projections
including reductions in budgeted costs relating to the completion of a series
of executed but undeveloped leases acquired from CO Space. Subsequently, on
February 28, 2001, management and the board of directors approved a
restructuring plan that included ceasing development of the executed but
undeveloped leases and the termination of core collocation development
personnel.

Consequently, on February 28, 2001, pursuant to the guidance provided
by Financial Accounting Standards Board No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS 121"), management completed a cash flow analysis of the collocation
assets, including the assets acquired from CO Space. The cash flow analysis
showed that the estimated cash flows were less than the carrying value of the
collocation assets. Accordingly, pursuant to SFAS 121, management estimated
the fair value of the collocation assets to be $79.5 million based upon a
discounted future cash flow analysis. Because estimated fair value of the
collocation assets was less than recorded amounts, we recorded an impairment
charge of approximately $196.0 million as follows (in millions).

Book Accumulated Net Book Value
Asset Impaired Value Amortization Impaired
-------------- ------- ------------- --------------

Goodwill...................................... $ 229.2 $ 53.1 $ 176.1
Assembled workforce........................... 2.0 0.5 1.5
Trade name and trademarks..................... 2.8 0.6 2.2
Completed real estate leases.................. 19.3 4.5 14.8
Customer relationships........................ 1.8 0.4 1.4
------- ------- -------
Total....................................... $ 255.1 $ 59.1 $ 196.0
======= ======= =======

2001 Restructuring Charge

2002 Restructuring and Asset Impairment Charge

Due to the continuing decline and uncertainty in the telecommunications
market, we committed to 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 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 reductions. The restructuring and asset
impairment charge of $7.6 million for the three months ended September 30, 2002
was 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.

Real Estate Obligations

Network Infrastructure Obligations

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

December 31, Restructuring September 30,
2001 and Non-cash Non-cash 2002
Restructuring Impairment Cash and Write Plan Restructuring
Liability Charge reductions Downs Adjustments Liability
--------- ------ ---------- ------- ----------- -------------

Restructuring costs activity for
2001 restructuring charge--
Real estate obligations.......... $ 33.5 $ -- $ (9.5) $ (0.5) $(12.2) $ 11.3
Network infrastructure obligations 2.7 -- (1.3) -- -- 1.4
Other............................ 2.0 -- (0.9) -- -- 1.1

Restructuring costs activity for
2002 restructuring charge--
Real estate obligations.......... -- 2.2 -- -- -- 2.2
Personnel........................ -- 1.1 (1.1) -- -- --
Other............................ -- 0.2 -- -- -- 0.2
----- ------ ----- ----- ----- ------
Total restructuring costs....... 38.2 3.5 (12.8) (0.5) (12.2) 16.2
Net asset write-downs, 2001
restructuring charge............. 1.1 -- -- (1.1) -- --

Net asset write-downs for 2002
restructuring charge............ -- 4.1 -- (4.1) -- --
----- ------ ----- ------- ----- -----
Total asset impairments........ 1.1 4.1 -- (5.2) -- --
----- ------ ----- ------ ----- -----
Total.......................... $ 39.3 $ 7.6 $(12.8) $ (5.7) $(12.2) $ 16.2
====== ====== ====== ====== ====== ======

Results Of Operations

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

Three-month periods ended September 30, Nine-month periods ended
September 30,

Three-month Nine-month
period ended periods ended
September 30, September 30,
--------------------- ----------------------
2002 2001 2002 2001
---------- --------- ----------- ---------

Revenues.................................................. 100% 100% 100% 100%
Costs and expenses:
Direct cost of network................................. 53% 85% 65% 86%
Customer support....................................... 9% 16% 10% 20%
Product development.................................... 6% 9% 6% 11%
Sales and marketing.................................... 16% 26% 17% 36%
General and administrative............................. 14% 34% 16% 43%
Depreciation and amortization.......................... 38% 46% 42%
Amortization of intangible assets...................... 3% 19% 4% 37%
Amortization of deferred stock compensation............ (1%) 3% -- 4%
Restructuring costs.................................... 1% 231% (5%) 82%
Impairment of goodwill and other intangible assets..... -- -- -- 226%
Loss on sales and retirements of property and equipment 5% -- 3% --
----- ---- ----- -----
Total operating costs and expenses.................. 144% 469% 155% 587%
----- ----- ----- -----
Loss from operations...................................... (44%) (369%) (55%) (487%)
Other income (expense):
Interest income (expense), net......................... (2%) (3%) (1%) --
Loss on equity method investment....................... (1%) (2%) (1%) (1%)
Loss on investments.................................... -- (20%) -- (30%)
----- ----- ----- -----
Total other income (expense)........................ (3%) (25%) (2%) (31%)
----- ----- ----- -----
Net loss............................................ (47%) (394%) (59%) (518%)
===== ===== ===== =====

Three-month Periods Ended September 30, 2002 and 2001

Net loss. Net loss for the three-month period ended September 30,
2002 was $15.2 million, or a net loss of $0.10 per share, as compared to a net
loss of $114.8 million, or a net loss of $0.76 per share, for the same period
during the preceding year. The $99.5 million decrease in net loss was
primarily due to a $67.2 million restructuring charge recorded during the
prior year, a 12% increase in revenues and a 32% decrease in total operating
costs, net of the restructuring. The increase in revenue was driven primarily
by new customer acquisitions and a reduction in customer churn. The decrease
in operating costs was comprised of decreases in all categories of operating
costs and expenses due to the reduction of the cost of network services and
the streamlining of operations, including personnel reductions. Other income
(expense) improved due to a $6.0 million provision taken on an investment note
receivable recorded during 2001. We anticipate net losses during the next
three-month period to remain comparable with those reflected during the
three-month period ended September 30, 2002.

Revenues. Revenues increased 12% from $29.2 million for the
three-month period ended September 30, 2001 to $32.7 million for the
three-month period ended September 30, 2002. The increase of $3.5 million was
attributable to increased sales at our existing service points and sales of
complementary services such as content distribution. An increased number of
customers from 894 customers at September 30, 2001, to 1,202 customers at
September 30, 2002, resulted in increased sales. We expect quarterly revenues
to remain approximately the same for the remainder of 2002.

Direct cost of network. Direct cost of network decreased 30% from
$24.6 million for the three-month period ended September 30, 2001 to $17.3
million for the three-month period ended September 30, 2002. This decrease of
$7.3 million was primarily due to decreased costs related to renegotiated
contracts with our Internet backbone and local exchange providers during the
period. Included in the $7.3 million decrease is a one-time benefit of $2.1
million related to previously accrued commitment amounts that were reduced as
a result of vendor contract negotiations completed during the three-months
ended September 30, 2002. We anticipate recurring direct cost of network will
remain consistent with those noted during the current quarter.

Customer support. Customer support expenses decreased 40% from $4.8
million for the three-month period ended September 30, 2001 to $2.9 million
for the three-month period ended September 30, 2002. This decrease of $1.9
million was primarily due to decreased compensation and benefits costs and
facility costs of $1.3 million and $0.5 million, respectively. Customer
support costs are expected to remain consistent with those noted during the
current quarter.

Product development. Product development costs decreased 33% from
$2.8 million for the three-month period ended September 30, 2001 to $1.8
million for the three-month period ended September 30, 2002. This decrease of
$0.9 million was primarily due to decreased compensation and contract labor
and facilities costs of $0.6 million and $0.3 million, respectively. Product
development costs are expected to remain consistent with those noted during
the current quarter.

Sales and marketing. Sales and marketing costs decreased 29% from
$7.5 million for the three-month period ended September 30, 2001 to $5.3
million for the three-month period ended September 30, 2002. This decrease of
$2.2 million was primarily due to decreased compensation and advertising costs
of $2.0 million and $0.2 million, respectively. Sales and marketing expenses
are expected to remain consistent with those of the current quarter for the
foreseeable future.

General and administrative. General and administrative costs
decreased 54% from $9.8 million for the three-month period ended September 30,
2001 to $4.5 million for the three-month period ended September 30, 2002. This
decrease of $5.3 million was primarily due to decreased compensation,
facility, professional services, and bad debt tax expenses, representing $2.0
million, $1.6 million, $1.0 million and $0.6 million, respectively. General
and administrative costs are expected to remain consistent with those of the
current quarter.

Depreciation and amortization. Depreciation and amortization
decreased 8% from $13.5 million for the three-month period ended September 30,
2001 to $12.4 million for the three-month period ended September 30, 2002.
This $1.1 million decrease was primarily due to reduced depreciation of
property and equipment in service within our network infrastructure.

Amortization of intangible assets. Amortization of intangible assets
declined 79% from $5.7 million for the three-month period ended September 30,
2001 to $1.2 million for the three-month period ended September 30, 2002. This
decrease of $4.5 million is due to the cessation of goodwill amortization
associated with the VPNX.com acquisition due to our adoption of Statement of
Financial Accounting Standard No. 142 "Goodwill and Other Intangible Assets."

Other income (expense). Other income (expense), net, decreased from
$7.3 million for the three-month period ended September 30, 2001 to $1.0
million for the three-month period ended September 30, 2002. Other income
(expense) improved primarily due to a non-recurring $6.0 million loss on a
provision taken for an investment note during the three-month period ended
September 30, 2001.

Nine-month Periods Ended September 30, 2002 and 2001

Net loss. Net loss for the nine-month period ended September 30, 2002
was $58.4 million, or a net loss of $0.38 per share, as compared to a net loss
of $449.9 million, or a net loss of $3.00 per share, for the same period
during the preceding year. The $391.5 million decrease in net loss was
primarily due to a decrease in restructuring and impairment costs totaling
$272.1 million, decreased amortization of intangible assets of $28.3 million,
decreased other income (expense) of $24.0 million, and decreased operating
expenses, net of the aforementioned items, of $55.6 million and increased
revenue of $11.5 million. We anticipate net losses during fourth quarter of
2002 to remain consistent with those incurred during the third quarter of
2002.

Revenues. Revenues increased 13% from $86.9 million for the
nine-month period ended September 30, 2001 to $98.4 million for the nine-month
period ended September 30, 2002. The increase of $11.5 million was
attributable to increased sales at our existing service points and sales of
complementary services such as content distribution. An increased number of
customers, from 894 customers at September 30, 2001, to 1,202 customers at
September 30, 2002, resulted in increased sales. We expect revenues to remain
approximately the same during the fourth quarter of 2002 as were noted during
the first three quarters of 2002.

Direct cost of network. Direct cost of network decreased 14% from
$74.4 million for the nine-month period ended September 30, 2001 to $64.0
million for the nine-month period ended September 30, 2002. This decrease of
$10.4 million was primarily due to reduced costs related to renegotiated
contracts with our Internet backbone and local exchange providers during the
period. Included in the decrease of $11.3 million is a one time benefit of
$2.1 million related to previously accrued commitment amounts that were
reduced as a result of network vendor contract negotiations completed during
the three-month period ended September 30, 2002. This decrease was offset by
increased content distribution costs of $2.0 million and service point
facility costs of $1.8 million. We anticipate direct cost of network to remain
consistent with third quarter costs during the next quarter.

Customer support. Customer support expenses decreased 41% from $17.5
million for the nine-month period ended September 30, 2001 to $10.4 million
for the nine-month period ended September 30, 2002. This decrease of $7.1
million was primarily due to decreased compensation and benefits costs,
facility costs and travel and entertainment costs that decreased $4.5 million,
$1.9 million and $0.4 million, respectively. Customer support costs are
expected to remain consistent with those noted during the current quarter.

Product development. Product development costs decreased 42% from
$10.0 million for the nine-month period ended September 30, 2001 to $5.8
million for the nine-month period ended September 30, 2002. This decrease of
$4.2 million was due primarily to decreased compensation, contract labor and
facility costs, representing $1.9 million, $1.2 million and $0.9 million of
the decrease, respectively. Product development costs are expected to remain
consistent with those noted during the current quarter.

Sales and marketing. Sales and marketing costs decreased 46% from
$31.6 million for the nine-month period ended September 30, 2001 to $17.2
million for the nine-month period ended September 30, 2002. This decrease of
$14.4 million was primarily due to decreases in compensation costs,
advertising costs, and travel and entertainment costs, of $7.2 million, $5.8
million and $0.5 million of the decrease, respectively. Sales and marketing
expenses are expected to remain consistent with those of the current period
for the foreseeable future.

General and administrative. General and administrative costs
decreased 57% from $37.3 million for the nine-month period ended September 30,
2001 to $16.1 million for the nine-month period ended September 30, 2002. This
decrease of $21.2 million was primarily due to decreased facility,
compensation, bad debt, and consulting and professional services costs,
representing $7.6 million, $6.0 million, $2.2 million and $1.5 million of the
decrease, respectively. General and administrative costs are expected to
remain consistent with those of the current quarter for the foreseeable
future.

Depreciation and amortization. Depreciation and amortization
increased 7% from $36.1 million for the nine-month period ended September 30,
2001 to $38.7 million for the nine-month period ended September 30, 2002. This
$2.6 million increase was primarily due to depreciation of property and
equipment in service within our network infrastructure.

Amortization of intangible assets. Amortization of intangible assets
declined 87% from $32.5 million for the nine-month period ended September 30,
2001 to $4.2 million for the nine-month period ended September 30, 2002. This
decrease of $28.3 million is primarily due to the impairment write-off of the
goodwill associated with the acquisition of CO Space, representing
approximately 55% of the decrease, and the cessation of amortization of
goodwill associated with the VPNX.com acquisition due to our adoption of
Statement of Financial Accounting Standard No. 142 "Goodwill and Other
Intangible Assets," representing approximately 45% of the decrease.

Other income (expense). Other income (expense), net, decreased from
$26.3 million for the nine-month period ended September 30, 2001 to $2.3
million for the nine-month period ended September 30, 2002. Other income
(expense) improved due to a non-recurring $14.5 million loss on the sale of an
investment in 360 networks,

Inc., a non-recurring provision taken on an investment note receivable of $6.0
million and a non-recurring $4.8 million impairment charge taken on an
investment in Aventail Corporation, all occurring during the nine-month period
ended September 30, 2001.

Goodwill

Based on our initial impairment test performed upon adoption of SFAS
No. 142, we determined that none of the recorded goodwill was impaired as of
January 1, 2002. During the period ended September 30, 2002, we performed our
annual impairment testing. This test was performed by comparing the adjusted
book value of the consolidated company to its fair value based on an
independent appraisal. In determining Internap's fair value we considered both
market-based and income-based approaches to estimate value.

Based on the results of the analysis performed we concluded that
goodwill was not impaired as of September 30, 2002. 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 was performed. The use of different assumptions, inputs and
judgments, or changes in circumstances, could materially impact the results of
the valuation. Adverse changes in the valuation would necessitate an
impairment charge for the goodwill held by Internap. As of September 30, 2002,
goodwill totaled $27.0 million.

Liquidity and Capital Resources

Cash Flow for the Nine-month periods ended September 30, 2002 and 2001

Net Cash Used in Operating Activities. Net cash used in operating
activities was $34.5 million for the nine-month period ended September 30,
2002 and was primarily due to the loss from continuing operations (adjusted
for non-cash items) of $14.6 million, a decrease in accrued restructuring
charge of $12.8 million, decrease in accrued liabilities of $4.7 million,
decrease in deferred revenues of $2.8 million and decrease in accounts payable
of $0.9 million. These uses of cash were partially offset by a decrease in
prepaid expenses, deposits and other assets of $1.2 million. The decrease in
the accrued restructuring charge reflects the restructuring payments made
during the period, primarily relating to real estate obligations and non-cash
plan adjustments and asset write downs. The fluctuations noted within the
other balance sheet accounts reflect the reduction of our sales outstanding
from 45 days at December 31, 2001 to 37 days at September 30, 2002 and
fluctuations in the ordinary course of business.

Net cash used in operating activities was $92.5 million for the
nine-month period ended September 30, 2001 and was primarily due to the loss
from continuing operations (adjusted for non-cash items) of $152.2 million,
decreased accrued liabilities of $7.9 million, decreased deferred revenues of
$1.9 million and decreased accounts payable of $1.5 million. These uses of
cash were partially offset by an increase in the accrued restructuring
liability of $63.8 million, a decrease in prepaid expenses, deposits and other
assets of $6.0 million and a decrease in accounts receivable of $1.3 million.
The increase in accounts payable reflects timing variances in payments to
vendors. The decrease in accrued liabilities reflects the decrease of capital
asset acquisitions that were previously accrued.

Net Cash Provided by Investing Activities. Net cash provided by
investing activities was $10.2 million for the nine-month ended September 30,
2002 and was primarily from proceeds of $18.7 million received from the
maturity of investments, offset by $7.9 million in purchases of property and
equipment and $1.3 million invested in our Japanese joint venture Internap
Japan. The purchases of property and equipment primarily represent payments

made in conjunction with an amendment to our master lease agreement,
capitalized labor for the development of internal use software and equipment
to be used within our network infrastructure.

On April 10, 2001, we announced the formation of a joint venture with
NTT-ME Corporation of Japan. The formation of the joint venture involved our
cash investment of $2.8 million to acquire 51% of the common stock of the
newly formed entity, Internap Japan. The investment in the joint venture is
being accounted for as an equity-method investment under Accounting Principles
Board Opinion No. 18 "The Equity Method of Accounting for Investments in
Common Stock." During the nine-month period ended September 30, 2002, the
joint venture authorized a second capital call, and we invested an additional
$1.3 million into the partnership in proportion to our ownership interest. We
expect this additional capital contribution to fund the partnership through
the remainder of 2002.

Net cash provided by investing activities was $16.5 million for the
nine-month period ended September 30, 2001 and was primarily related to the
redemption or maturity of investment securities, net of new investments, of
$54.8 million, offset by purchases of property and equipment of $29.8 million.
The purchases of property are primarily comprised of expenditures relating to
leasehold improvements on collocation facilities and corporate offices and
equipment to be deployed within our network infrastructure. Subsequent to
February 28, 2001, the point at which we restructured our collocation
activities, purchases of property and equipment for leasehold improvements
began to decline.

Net Cash Used in Financing Activities. Since our inception, we have
financed our operations primarily through the issuance of our equity
securities, capital leases and bank loans. As of September 30, 2002, we have
raised an aggregate of approximately $499.6 million, net of offering expenses,
through the sale of our securities.

Net cash used in financing activities for the nine-month period ended
September 30, 2002 was $6.8 million, and related primarily to the payments on
notes payable and capital leases, totaling $12.8 million offset by the
proceeds from our line of credit of $5.0 million and employee stock purchase
plan stock purchases and the exercise of options and warrants, totaling $1.0
million.

Net cash provided by financing activities for the nine-month period
ended September 30, 2001 was $80.6 million, related primarily to proceeds from
the issuance of Series A preferred stock offering and shares of common stock
of $97.4 million. These proceeds were offset by payments on notes payable and
capital lease obligations totaling $17.1 million.

Liquidity

We have experienced significant net operating losses since inception.
During the three-month period ended September 30, 2002, we incurred net losses
of $15.2 million and used $8.6 million of cash in operating activities. During
the nine-month period ended September 30, 2002, we incurred net losses of
$58.4 million and used $34.5 million of cash in operating activities.
Management expects net losses and negative cash flows will continue for
several more quarters. We have decreased the size of our workforce by 194
employees during 2002 in addition to the reduction of 313 employees during the
prior fiscal year, and terminated certain real estate leases, network and
other vendor commitments in order to control costs. Our plans indicate our
existing cash is adequate to fund our operations for several more quarters.
However, our capital requirements depend on several factors, including the
rate of market acceptance of our services, the ability to expand, the ability
to maintain compliance with covenants, the ability to retain our customer base
and other factors. If we fail to realize our planned revenues or costs,
management believes it has the ability to curtail spending and reduce
expenses. If, however, our cash requirements vary materially from those
currently planned, or if we fail to generate sufficient cash flow from the
sales of our services, we may require additional financing sooner than
anticipated. We cannot assure you such financing will be available on
acceptable terms, if at all.

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

With the slowdown in the macroeconomic environment during fiscal year
2001, we focused on significantly reducing the cost structure of the business
while maintaining a continued focus on growing revenues. On February 28, 2001
and September 24, 2001, we announced two restructurings of the business. Under
the restructuring programs, management made decisions to exit certain
non-strategic real estate lease and license arrangements, consolidate and exit
redundant network connections and to streamline the operating cost structure.
The total charges include restructuring costs of $71.6 million and a charge
for asset impairment of $196.0 million. We expect to complete the majority of
our restructuring activities during 2002, although certain remaining
restructured real estate and network obligations represent long-term
contractual obligations that extend through 2015. In July 2002 we announced
our decision to further restructure the business by eliminating an additional
135 positions and relocate our corporate headquarters to Atlanta, Georgia.
Certain of the 135 positions were eliminated during July 2002 and the
restructuring of all positions is expected to be completed by March 2003. For
accounting purposes, a restructuring charge was recorded during the third
quarter of 2002 to reflect management's decision.

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

Commitments and Other Obligations.

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

The following table summarizes our credit obligations and contractual
commitments for the fiscal years indicated. Amounts shown reflect new and
amended credit obligations and contractual commitments entered into during the
current year.

Payment due by period (in thousands)
------------------------------------------------------------------

Total Current Year 2003 through 2004 2005 through 2006 Beyond 2006
----------- ------------ ----------------- ----------------- -----------

Line of credit...................... $ 10,000 $ -- $10,000 $ -- $ --
Notes payable....................... 10,604 4,254 4,839 1,511 --
Capital lease obligations, including
interest.......................... 43,975 3,034 18,262 11,999 10,680
Operating leases commitments........ 156,867 17,068 30,475 20,453 88,871
Network commitments................. 75,785 12,714 32,629 15,206 15,236
-------- ------- ------- ------- -------
Total............................ $297,231 $37,070 $96,205 $49,169 $114,787
======== ======= ======= ======= ========

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

Credit Facilities.

At September 30, 2002, we had a revolving line of credit of $15.0
million and had drawn $15.0 million under the facility. Our ability to
maintain the drawn amount under the line of credit at current levels depended
on a number of factors, including the level of eligible receivable balances
and liquidity. The facility also contained financial covenants that required
us to grow revenues, limit cash losses, and require minimum levels of
liquidity and tangible net worth as defined in the agreement. The lender also
had the ability to demand repayment if there had

been a material adverse change in our business. At September 30, 2002, we were
in compliance with covenants relating to revenue growth, as defined in the
agreement.

Subsequent to September 30, 2002, we entered into a revised loan and
security agreement. Under the terms of the new loan and security agreement $15
million outstanding under the previous facility was refinanced into a $15
million revolving line of credit and a $5 million term loan. The amount
available under the revolver is based on a percentage of eligible accounts
receivable plus a percentage of unrestricted cash and investments. The amount
available under the revolver is further restricted by the $5 million
outstanding under the term loan until the Company achieves a specified minimum
debt coverage service level for six consecutive months as detailed in the
agreement. Therefore, the amount available under the revolver at the time of
the refinancing was $10 million and we do not expect the additional $5 million
to be available for several more quarters.

The revolving line of credit is a 24-month facility expiring in
October 2004 bearing interest at a rate ranging from prime plus 1% to prime
plus 2% per year, depending on a certain balance sheet ratio as specified in
the agreement. Monthly payments are comprised only of interest over the term
of the facility. The term loan is a 36-month amortizing facility and bears
interest at a fixed rate of 8% per year. Equal monthly payments of principal
and interest are due over the term of the facility.

Both the revolving facility and the term loan are governed by a
common security agreement and the loans are collateralized by substantially
all the assets of the Company. The agreement will allow the lender to require
us to maintain cash and investment accounts with them and may allow the lender
to exercise greater control over our customer deposits if our overall cash
position falls below certain levels, as specified in the agreement. Both the
revolving credit facility 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 if, at its
option, there has been a material adverse change in our business.

Series A Preferred Stock.

3,171,000 shares of Series A preferred stock were issued and
outstanding at September 30, 2002. Among other things, the Series A preferred
stock designation contains restrictions on the amount of new debt or preferred
equity that we can incur without specific preferred stockholder approval.
Should we in the future decide to obtain additional debt or preferred equity
to improve our liquidity, there can be no assurance that preferred stockholder
approval can be obtained.

Lease facilities.

Since our inception, we have financed the purchase of network routing
equipment using capital leases. The present value of future capital lease
payments was $35.1 million at March 31, 2002. During the second quarter of
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 for 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 terms of our master lease
agreement, as amended, contain financial covenants that require us to maintain
minimum liquidity balances, periodic revenues, EBITDA levels and other
covenants. Should we breach the covenants, experience a change-of-control
represented by a change in 35% of the aggregate ordinary voting power of our
capital stock, or should the lessor believe we have experienced a material
adverse change in our business, the lessor has the ability to demand payment
of all amounts due. As of September 30, 2002, we were not in compliance with a
non-financial covenant requiring us to provide the lessor with documentation
allowing access to our facilities. We were in compliance with all financial
covenants and have obtained a waiver through January 31, 2003.

We have fully utilized available funds under our existing lease
facilities. While we intend to pursue additional lease financing to
accommodate expected network equipment purchases but there can be no assurance
that additional lease financing will be available. See "Liquidity--Commitments
and Other Obligations" for a summary of lease obligations.

Recent Accounting Pronouncements

Effective May 15, 2002, we adopted Statement of Financial Accounting
Standard No. 145 (SFAS No. 145) "Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections," which is
effective for all affected transactions occurring after May 15, 2002. SFAS No.
145 requires gains and losses on extinguishments of debt to be classified as
income or loss from continuing operations rather than as extraordinary items
as previously required under SFAS No. 4 "Reporting Gains and Losses From the
Extinguishment of Debt." Extraordinary treatment will be required for certain
extinguishments as provided in APB Opinion No. 30 "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
SFAS No. 145 also amends SFAS No. 13 "Accounting for Leases" to require
certain modifications to capital leases be treated as a sale-leaseback and
modifies the accounting for sub-leases when the original lessee remains a
secondary obligor (or guarantor). In addition, the FASB rescinded SFAS No. 44
"Accounting for Intangible Assets of Motor Carriers" which addressed the
accounting for intangible assets of motor carriers and made numerous technical
corrections. Our adoption of SFAS No. 144 did not materially impact our
financial position, results of operations or cash flows.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have a $1.2 million equity investment in Aventail Corporation, an
early stage, privately held company. Our $1.2 million equity investment is net
of a $4.8 million investment write down recorded during 2001. This strategic
investment is inherently risky, in part because the market for the products or
services being offered or developed by Aventail has not been proven and may
never materialize. Because of risk associated with this

investment, we could lose our entire initial investment in Aventail.
Furthermore we have invested $4.2 million in a Japan based joint venture with
NTT-ME Corporation, Internap Japan. This investment is accounted for using the
equity method and is subject to foreign currency exchange rate risk. In
addition, the market for services being offered by Internap Japan has not been
proven and may never materialize. As of September 30, 2002, our cash
equivalents mature within three months. Therefore, as of September 30, 2002, we
believe the reported amounts of cash and cash equivalents, investments, notes
payable and lease obligations to be reasonable approximations of fair value and
the market risk arising from our holdings to be minimal.

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

ITEM 4. CONTROLS AND PROCEDURES

Our chief executive officer and chief financial officer, have
evaluated the effectiveness of our disclosure controls and procedures pursuant
to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as of a
date within 90 days prior to the filing of this amended quarterly report on
Form 10-Q/A, which we refer to as the "Evaluation Date." Based on that
evaluation, our chief executive officer and chief financial officer concluded
that, as of the Evaluation Date, the disclosure controls and procedures are
effective in ensuring that all material information required to be filed in
this amended quarterly report on Form 10-Q/A has been made known to them in a
timely fashion. There have been no significant changes in internal controls or
in other factors that could significantly affect our internal controls, nor
were any corrective actions required with regard to significant deficiencies
and material weaknesses, subsequent to the Evaluation Date.

RISK FACTORS

Risks Related to Our Business

We Have a History of Losses, Expect Future Losses and May Not Achieve
or Sustain Annual Profitability. We have incurred net losses in each quarterly
and annual period since we began operations. We incurred net losses of $49.9
million, $185.5 million and $479.2 million for the years ended December 31,
1999, 2000 and 2001, respectively. Our net loss for the three-month period
ended September 30, 2002 was $15.2 million and at September 30, 2002 our
accumulated deficit was $782.5 million. We expect to incur net losses and
negative cash flows from operations on a quarterly and annual basis for
several more quarters, and we may never become profitable. Moreover, our
failure to meet certain financial covenants contained in material agreements
with our lender or the lessor of our master equipment lease may negatively
impact our financial position and our cash flow and, as a result, we would be
in material default under those agreements. A material default under those
agreements could result in the entire amounts due thereunder becoming due and
payable.

We May Be Unable to Maintain Our Listing on The Nasdaq SmallCap
Market, Which Could Have a Negative Impact on the Price and Liquidity of Our
Common Stock. Our common stock currently is quoted on The Nasdaq SmallCap
Market. Nasdaq has certain compliance requirements for continued listing of
common stock, including a requirement that our common stock have a minimum bid
price of $1.00 per share. On April 24, 2002, we were initially notified of our
failure to comply with the minimum bid price requirement. Nasdaq granted us 90
calendar days, or until July 23, 2002, to regain compliance with the minimum
bid price requirement. Subsequently, we were unable to demonstrate compliance
with the minimum bid requirement on or before July 23, 2002, and we received a
formal notice of de-listing from The Nasdaq National Market on July 24, 2002.
This automatic de-listing was temporarily stayed during our appeal of the
de-listing before the Nasdaq Listing Qualifications Panel, or the "Panel". At
our hearing with the Panel, which occurred on August 29, 2002, we petitioned
to maintain our listing on The Nasdaq National Market pending stockholder
approval and implementation of a reverse stock split to increase our share
price, in order to maintain compliance with the Nasdaq listing requirements.

On October 2, 2002, the Panel denied our petition for continued
inclusion on The Nasdaq National Market and transferred our common stock
listing to The Nasdaq SmallCap Market, effective October 4, 2002.
Subsequently, on October 21, 2002, the Panel granted us an additional 180-day
grace period, until April 21, 2003, to satisfy the $1.00 bid price
requirement. The Panel also stated that our listing on The Nasdaq SmallCap
Market was pursuant to the terms of the following exception:

1. We were required to provide documentation to the Panel on
or before November 14, 2002 evidencing that the terms of at
least $45 million of our outstanding Series A preferred
stock had been modified such that the Series A preferred
stock would be classified as equity under GAAP. Further, we
were required to file a quarterly report on Form 10-Q on or
before November 14, 2002 for the quarter ended September 30,
2002 evidencing stockholders' equity of at least $12
million. This quarterly report was also required to include
a second balance sheet with pro forma adjustments for any
significant events or transactions occurring on or before
the filing date, evidencing stockholders' equity of at least
$52 million. As of September 30, 2002, we had approximately
$14.8 million of stockholders' equity on our balance sheet,
which we reported in our Form 10-Q for the period ended
September 30, 2002. In addition, as of that date, our
balance sheet reflected approximately $80.3 million of
Series A preferred stock, classified as a mezzanine item
under U.S. GAAP rather than as a component of stockholders'
equity. In November 2002, we indicated to Nasdaq that we had
converted the entire $80.3 million of our Series A preferred
stock into equity and we filed a pro forma balance sheet
with our quarterly report on Form 10-Q reflecting the
reclassification. However, we recently became aware that the
charter amendment that purported to effect the
reclassification of our Series A preferred is invalid for
technical reasons. Therefore, we do not actually satisfy the
terms of this element of the exception.

The Panel's letter also provided as a possible alternative
to the minimum equity requirement that we be in compliance
with the $35 million market value of listed securities
standard for a minimum of ten consecutive trading days prior
to November 14, 2002. As of November 14, 2002, we had been
in compliance with the $35 million market value test for ten
consecutive trading days and we

have continued to be in compliance with this element of the
exception at all times subsequent to that date. We notified
Nasdaq of this fact when we became aware that we no longer
qualified for the stockholders' equity exception.
Accordingly, we believe that the invalidity of the amendment
to reclassify the Series A preferred stock does not affect
our eligibility for listing.

2. On or before April 21, 2003, we must demonstrate a
closing bid price of at least $1.00 per share and
immediately thereafter, we must evidence a closing bid price
of at least $1.00 per share for a minimum of ten consecutive
trading days.

If we fail to comply with the foregoing conditions, Nasdaq has
notified us that our listing will be terminated immediately. Further, the
Panel's written decision stated that the Panel expressly reserves the right to
modify, alter or extend the terms of the foregoing conditions upon a review of
our reported financial results for the quarter ended September 30, 2002, which
we announced on October 29, 2002.

Nasdaq has informed us that we may be eligible to transfer back to
The Nasdaq National Market, without paying the initial listing fees, if, on or
prior to April 21, 2003, we have been in compliance with the minimum bid price
requirement for 30 consecutive trading days and we otherwise comply with the
The Nasdaq National Market Continued Listing Requirements. On the other hand,
if, on or before April 21, 2003, the closing price of our common stock has not
met or exceeded $1.00 for at least 10 consecutive trading days, we would be
subject to de-listing from The Nasdaq SmallCap Market. In addition, we will
need to maintain compliance with all continued listing requirements of The
Nasdaq SmallCap Market (other than the $1.00 minimum bid price requirement),
in addition to the conditions specified by the Panel in its letter, in order
to continue our grace period on The Nasdaq SmallCap Market. These continued
listing requirements require, among other things, that we maintain a minimum
stockholders' equity of $2.5 million. We cannot assure you that we will
maintain compliance with these or any other of the continued listing
requirements, including the conditions specified in the Panel's decision on
October 2, 2002 discussed above. Therefore, even if we were to regain
compliance with the $1.00 minimum bid price requirement, we may still be
unable to transfer our listing back to The Nasdaq National Market. If we fall
out of compliance with the Panel's conditions or any of the other continued
listing requirements of The Nasdaq SmallCap Market, we may be subject to
immediate de-listing. If our common stock is delisted from trading on The
Nasdaq SmallCap Market, trading in our common stock may continue to be
conducted on the OTC Bulletin Board or in a non-Nasdaq over-the-counter
market, such as the "pink sheets". Delisting of our common stock would result
in limited release of the market price of the common stock and limited news
coverage of our company and could restrict investors' interest in our common
stock. Also, a delisting could materially and adversely affect the trading
market and prices for our common stock and our ability to issue additional
securities or to secure additional financing. In addition, if our common stock
were not listed and the trading price of the common stock was less than $5 per
share, our common stock could be subject to Rule 15g-9 under the Securities
Exchange Act of 1934, as amended, which, among other things, requires that
broker/dealers satisfy special sales practice requirements, including making
individualized written suitability determinations and receiving a purchaser's
written consent prior to any transaction. In such case, our common stock could
also be deemed to be a "penny stock" under the Securities Enforcement and
Penny Stock Reform Act of 1990, as amended, which would require additional
disclosure in connection with trades in the common stock, including the
delivery of a disclosure schedule explaining the nature and risks of the penny
stock market. Such requirements could severely limit the liquidity of our
common stock.

Our Board of Directors May Decide to Implement a Reverse Stock Split,
Which Could Have a Negative Impact on the Price and Liquidity of Our Common
Stock. On October 28, 2002, we filed a preliminary proxy statement and on
November 8, 2002, we filed a definitive proxy statement with the SEC,
requesting that our stockholders approve several amendments to our certificate
of incorporation providing for a reverse stock split and that, if approved by
our stockholders, would allow our board of directors, in its sole discretion,
to implement a reverse stock split. We held a special meeting of our
stockholders on December 17, 2002 at which our stockholders approved the
amendments. If our board of directors effects a reverse stock split in order
to attempt to achieve compliance with the Nasdaq $1.00 minimum bid price
requirement, our market capitalization could significantly decline as a result
of the stock split and/or our announcement of the reverse stock split. In
addition, we cannot assure you that a reverse stock split would increase our
stock price sufficiently to satisfy the Nasdaq $1.00 minimum bid price
requirement. A reverse stock split could result in a significant devaluation
of our market capitalization and our share price, on an actual or an
as-adjusted basis, based on the experience of other companies that have
effected

reverse stock splits in an effort to maintain their Nasdaq listings. The
reduced number of shares of our common stock resulting from a reverse
stock split could also adversely affect the liquidity of our common stock.

Further, a reverse stock split may leave certain stockholders with
one or more "odd lots," which are stock holdings in amounts of less than 100
shares of our common stock. These odd lots may be more difficult for our
stockholders to sell than shares of our common stock in even multiples of 100
and can result in increased brokerage commissions. Similarly, a reverse stock
split could reduce our number of "round lot" stockholders, which are holders
of 100 or more shares of our common stock. Nasdaq continued inclusion
requirements require us to maintain a specified minimum number of round lot
stockholders. Also, because a reverse stock split would result in an increased
number of authorized but unissued shares of our common stock, it may be
construed as having an anti-takeover effect, although neither the board of
directors nor our management views the possible reverse stock split in that
perspective. However, the board of directors, subject to its fiduciary duties
and applicable law, could use this increased number of authorized but unissued
shares of our common stock to frustrate persons seeking to take over or
otherwise gain control of us by, for example, privately placing shares of our
common stock with purchasers who might side with the board of directors in
opposing a hostile takeover bid. Shares of our common stock could also be
issued to a holder that would thereafter have sufficient voting power to
assure that any proposal to amend or repeal our by-laws or certain provisions
of our certificate of incorporation would not receive the requisite vote. Such
uses of our common stock could render more difficult, or discourage, an
attempt to acquire control of us if such transaction were opposed by the board
of directors. Further, subject to Nasdaq rules on stock issuances, the
increased number of authorized but unissued shares of our common stock could
be issued by the board of directors without further stockholder approval,
which could result in dilution to the holders of our common stock.

Our Limited Operating History, Together with our Recent Decision to
Move our Headquarters to Atlanta in the Fourth Quarter of 2002, Makes It
Difficult to Evaluate Our Prospects. The revenue and income potential of our
business and market is unproven, and our limited operating history makes it
difficult to evaluate our prospects. We have only been in existence since
1996, and our services are only offered in limited regions. Investors should
consider and evaluate our prospects in light of the risks and difficulties
frequently encountered by relatively new companies, particularly companies in
the rapidly evolving Internet infrastructure, connectivity and collocation
markets. Further, we announced on July 17, 2002 that we plan to move our
company's headquarters from Seattle, Washington to Atlanta, Georgia, in the
fourth quarter of 2002. There are many risks inherent in this decision,
including without limitation, the risks:

o that certain key employees who were requested to assist during the
transition period may resign their positions prior to the end of the
transition period;

o that we may not be able to recruit appropriate candidates to fill key
executive positions in Atlanta;

o that many of our key employees will decide not to move to Atlanta and
will therefore resign their positions with us;

o that the costs savings that we expect to achieve as a result of our
decision to move will not be successful or will not be as successful
as we had projected;

o that our customers may be unwilling to do continued business with us,
given the uncertainty that our move to Atlanta will prove successful;

o that we will be less successful than we currently anticipate in
attracting new customers in our new region; and

o that we will lose customers in the Northwest because of the departure
of our senior management team from that region.

If our move to Atlanta does not result in our reducing our operating
expenses to the levels that we have predicted, and if our revenues do not
increase proportionately to make up any such shortfall, then our operating
results, liquidity and financial position could be seriously harmed.

We May Require Additional Cash in the Future and May Not Be Able to
Secure Adequate Funds on a Timely Basis or on Terms Acceptable to Us. The
continued operation of our business requires cash for ongoing capital and
operations expenditures. We expect to meet our cash requirements for several
more quarters with existing cash and cash equivalents, and cash flows from
sales of our services. If, however, our cash requirements vary materially from
those currently planned, or if we fail to generate sufficient cash flow from
the sales of our services, management believes it has the ability to curtail
spending and reduce expenses to ensure our cash will be sufficient to meet our
cash requirements. We may, however, require additional financing sooner than
anticipated. In that event, we might not be able to obtain equity or debt
financing on acceptable terms, if at all. Also, future borrowing instruments,
such as credit facilities and lease agreements, will likely contain covenants
restricting, among other things, our ability to incur further indebtedness and
will likely require us to pledge assets as security for borrowings thereunder.
Given our recent efforts to reduce our capital and operations expenditures, we
do not currently contemplate any expansion of our business in the immediate
future. Any such expansion would require significant new capital, and we may
be unable to obtain additional financing.

Our Actual Quarterly Operating Results May Disappoint Analysts'
Expectations, Which Could Have a Negative Impact on Our Stock Price. Our stock
price could suffer in the future, as it has in the past, as a result of any
failure to meet the expectations of public market analysts and investors about
our results of operations from quarter to quarter. Any significant
unanticipated shortfall of revenues or increase in expenses could negatively
impact our expected quarterly results of operations should we be unable to
make timely adjustments to compensate for them. Furthermore, a failure on our
part to estimate accurately the timing or magnitude of particular anticipated
revenues or expenses could also negatively impact our quarterly results of
operations. Because our quarterly results of operations have fluctuated in the
past and will continue to fluctuate in the future, investors should not rely
on the results of any past quarter or quarters as an indication of future
performance in our business operations or stock price. For example, increases
(decreases) in our quarterly revenues for the quarters ended September 30,
2001 through September 30, 2002, have varied between (1.0)% and 6.9%, and
total operating costs and expenses, as a percentage of revenues, have
fluctuated between 143.6% and 468.6%. Fluctuations in our quarterly operating
results depend on a number of factors. Some of these factors are industry and
economic risks over which we have no control, including the introduction of
new services by our competitors, fluctuations in the demand and sales cycle
for our services, fluctuations in the market for qualified sales and other
personnel, changes in the prices for Internet connectivity we pay backbone
providers, our ability to obtain local loop connections to our service points
at favorable prices, integration of people, operations, products and
technologies of acquired businesses and general economic conditions. Other
factors that may cause fluctuations in our quarterly operating results arise
from strategic decisions we have made or may make with respect to the timing
and magnitude of capital expenditures such as those associated with the
deployment of additional service points and the terms of our Internet
connectivity purchases. For example, our practice is to purchase Internet
connectivity from backbone providers at new service points and license
collocation space from providers before customers are secured. We also have
agreed to purchase Internet connectivity from some providers without regard to
the amount we resell to our customers.

Pricing Pressure Could Decrease Our Market Share and Threaten the
Profitability of Our Business Model. We face competition from competitors
along several fronts (more fully described below), including price
competition. Increased price competition and other related competitive
pressures could erode our market share, and significant price deflation could
threaten the profitability of our business model. We currently charge, and
expect to continue to charge, more for our Internet connectivity services than
our competitors. By bundling their services and reducing the overall cost of
their solutions, telecommunications companies that compete with us may be able
to provide customers with reduced communications costs in connection with
their Internet connectivity services or private network services, thereby
significantly increasing the pressure on us to decrease our prices. Because we
rely on Internet backbone providers in delivering our services and have agreed
with some of these providers to purchase their services without regard to the
amount we resell to our customers, we may not be able to offset the effects of
competitive price reductions even with an increase in the number of our
customers, higher revenues from enhanced services, cost reductions or
otherwise. In addition, we believe the Internet connectivity industry is
likely to encounter further consolidation in the future. Consolidation could
result in increased pressure on us to decrease our prices. Furthermore, the
recent downturn in the U.S. economy has resulted in many companies who require
Internet connectivity to reevaluate the cost of such services. We believe that
a prolonged economic downturn could result in existing and potential customers
being unwilling to pay for premium Internet connectivity services, which would
harm our business.

If We Are Unable to Continue to Receive Services from Our Backbone
Providers, or Receive Their Services on a Cost-Effective Basis, We May Not Be
Able to Provide Our Internet Connectivity Services on Profitable Terms. In
delivering our services, we rely on Internet backbones, which are built and
operated by others. In order to be able to provide high performance routing to
our customers through our service points, we must purchase connections from
several Internet backbone providers. There can be no assurance that these
Internet backbone providers will continue to provide service to us on a
cost-effective basis or on otherwise favorable terms, if at all, or that these
providers will provide us with additional capacity to adequately meet customer
demand. Furthermore, it is very unlikely that we could replace our Internet
backbone providers on comparable terms. Currently, in each of our domestic
service points, we have connections to some combination of the following nine
backbone providers: AT&T, Cable & Wireless USA, Genuity, Global Crossing,
Level 3, Qwest, Sprint, Worldcom and Verio. We may be unable to maintain
relationships with, or obtain necessary additional capacity from, these
backbone providers. Furthermore, we may be unable to establish and maintain
relationships with other backbone providers that may emerge or that are
significant in geographic areas, such as Asia and Europe, in which we locate
our service points.

Competition from More Established Competitors Who Have Greater
Revenues Could Decrease Our Market Share. The Internet connectivity services
market is extremely competitive, and there are few substantial barriers to
entry. We expect competition from existing competitors to intensify in the
future, and we may not have the financial resources, technical expertise,
sales and marketing abilities or support capabilities to compete successfully
in our market. Many of our existing competitors have greater market presence,
engineering and marketing capabilities, and financial, technological and
personnel resources than we do. As a result, our competitors may have several
advantages over us as we seek to develop a greater market presence. Our
competitors currently include backbone providers that provide connectivity
services to us, regional Bell operating companies which offer Internet access,
and global, national and regional Internet service providers and other
Internet infrastructure providers and manufacturers. In addition, Internet
backbone providers may make technological developments, such as improved
router technology or the introduction of improved routing protocols that will
enhance the quality of their services. We also expect to encounter additional
competition from international Internet service providers as well as
international telecommunications companies in the countries where we provide
services.

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

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

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

We Have Limited Experience Operating Internationally, and Our
International Operations May Not Be Successful. Although we currently have a
service point in London and a joint venture with NTT-ME Corporation

operating a service point in Tokyo, we have limited experience operating
internationally. We may not be able to adapt our services to international
markets or market and sell these services to customers abroad. In addition to
general risks associated with international business operations, we face the
following specific risks in our international business operations:

o difficulties in establishing and maintaining relationships with
foreign customers as well as foreign backbone providers and
local vendors, including collocation and local loop providers;

o difficulties in locating, building and deploying network
operations centers and service points in foreign countries, and
managing service points and network operations centers across
disparate geographic areas; and

o exposure to fluctuations in foreign currency exchange rates.

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

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

We Are Dependent Upon Our Key Employees and May Be Unable to Attract
or Retain Sufficient Numbers of Qualified Personnel. In light of moving our
corporate headquarters to Atlanta, Georgia, our future performance depends to
a significant degree upon the continued contributions of our executive
management team and key technical personnel. The loss of members of our
executive management team or key technical employees could significantly harm
us. Any of our officers or employees can terminate his or her relationship
with us at any time. To the extent we are able to expand our operations and
deploy additional service points, our workforce will be required to grow.
Accordingly, our future success depends on our ability to attract, hire, train
and retain a substantial number of highly skilled management, technical,
sales, marketing and customer support personnel. Competition for qualified
employees is intense. In addition, we may lose a number of our key employees
as a result of our plan to relocate our corporate headquarters to Atlanta,
Georgia during the second half of 2002.

Consequently, we may not be successful in attracting, hiring,
training and retaining the people we need, which would seriously impede our
ability to implement our business strategy.

If We Are Not Able to Support Our Growth Effectively, Our Expansion
Plans May Be Frustrated or May Fail. Our inability to manage growth
effectively would seriously harm our plans to expand our Internet connectivity
services into new markets. Since the introduction of our Internet connectivity
services, we have experienced a period of growth and expansion, which has
placed, and continues to place, a significant strain on all of our resources.
For example, as of December 31, 1996, we had one operational service point,
serving one metropolitan market and nine employees compared to 34 operational
service points serving 17 metropolitan markets and 359 full-time employees as
of September 30, 2002. In addition, we had $29.2 million in revenues for the
three-month period ended September 30, 2001, compared to $32.7 million in
revenues for the three-month period ended September 30, 2002. Furthermore, we
currently offer our services in Europe and Japan, through our joint venture,
Internap Japan. We also resell certain products and services of Akamai
Technologies, Inc., Cisco Systems, Inc. and others. We expect our recent
growth to continue to strain our management, operational and financial
resources. For example, we may not be able to install adequate financial
control systems in an efficient and timely manner, and our current or planned
information systems, procedures and controls may be inadequate to support our
future operations. The difficulties associated with installing and
implementing new systems, procedures and controls may place a significant
burden on our management and our internal resources.

If We Fail to Adequately Protect Our Intellectual Property, We May
Lose Rights to Some of Our Most Valuable Assets. We rely on a combination of
patent, copyright, trademark, trade secret and other intellectual property
law, nondisclosure agreements and other protective measures to protect our
proprietary technology. Internap and P-NAP are trademarks of Internap that are
registered in the United States. In addition, we have three patents that have
been issued by the United States Patent and Trademark Office, or USPTO. The
dates of issuance for these patents range from September 1999 through December
1999, and each of these patents is enforceable for a period of 20 years after
the date of its filing. We cannot assure you that these patents or any future
issued patents will provide significant proprietary protection or commercial
advantage to us or that the USPTO will allow any additional or future claims.
We have nine additional applications pending, two of which are continuation in
patent filings. We may file additional applications in the future. Our patents
and patent applications relate to our service point technologies and other
technical aspects of our services. In addition, we have filed corresponding
international patent applications under the Patent Cooperation Treaty. It is
possible that any patents that have been or may be issued to us could still be
successfully challenged by third parties, which could result in our loss of
the right to prevent others from exploiting the inventions claimed in those
patents. Further, current and future competitors may independently develop
similar technologies, duplicate our services and products or design around any
patents that may be issued to us. In addition, effective patent protection may
not be available in every country in which we intend to do business. In
addition to patent protection, we believe the protection of our copyrightable
materials, trademarks and trade secrets is important to our future success. We
rely on a combination of laws, such as copyright, trademark and trade secret
laws and contractual restrictions, such as confidentiality agreements and
licenses, to establish and protect our proprietary rights. In particular, we
generally enter into confidentiality agreements with our employees and
nondisclosure agreements with our customers and corporations with whom we have
strategic relationships. In addition, we generally register our important
trademarks with the USPTO to preserve their value and establish proof of our
ownership and use of these trademarks. Any trademarks that may be issued to us
may not provide significant proprietary protection or commercial advantage to
us. Despite any precautions that we have taken, intellectual property laws and
contractual restrictions may not be sufficient to prevent misappropriation of
our technology or deter others from developing similar technology.

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

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

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

o difficulties in integrating the operations, personnel, technologies,
products and services of the acquired companies in a timely and
efficient manner;

o diversion of management's attention from normal daily operations;

o insufficient revenues to offset significant unforeseen costs and
increased expenses associated with the acquisitions;

o difficulties in completing projects associated with in-process
research and development being conducted by the acquired businesses;

o risks associated with our entrance into markets in which we have
little or no prior experience and where competitors have a
stronger market presence;

o deferral of purchasing decisions by current and potential customers
as they evaluate the likelihood of success of the acquisitions;

o difficulties in pursuing relationships with potential strategic
partners who may view the combined company as a more direct
competitor than our predecessor entities taken independently;

o issuance by us of equity securities that would dilute ownership of
existing stockholders;

o incurrence of significant debt, contingent liabilities and
amortization expenses; and

o loss of key employees of the acquired companies.

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

Risks Related to Our Industry

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

Internet may, for cost reduction purposes during difficult economic times,
decrease future investment in the use of the Internet. The failure of the
market for business related Internet solutions to further develop could cause
our revenues to grow more slowly than anticipated and reduce the demand for
our services.

Because the Internet Connectivity Market Is New and Its Viability Is
Uncertain, There Is a Risk Our Services May Not Be Accepted. We face the risk
that the market for high performance Internet connectivity services might fail
to develop, or develop more slowly than expected, or that our services may not
achieve widespread market acceptance. This market has only recently begun to
develop, is evolving rapidly and likely will be characterized by an increasing
number of entrants. There is significant uncertainty as to whether this market
ultimately will prove to be viable or, if it becomes viable, that it will
grow. Furthermore, we may be unable to market and sell our services
successfully and cost-effectively to a sufficiently large number of customers.
We typically charge more for our services than do our competitors, which may
affect market acceptance of our services. We believe the danger of
nonacceptance is particularly acute during economic slowdowns and when there
is significant pricing pressure across the Internet connectivity industry.
Finally, if the Internet becomes subject to a form of central management, or
if the Internet backbone providers establish an economic settlement
arrangement regarding the exchange of traffic between backbones, the problems
of congestion, latency and data loss addressed by our Internet connectivity
services could be largely resolved, and our core business rendered obsolete.

If We Are Unable to Respond Effectively and on a Timely Basis to
Rapid Technological Change, We May Lose or Fail to Establish a Competitive
Advantage in Our Market. The Internet connectivity industry is characterized
by rapidly changing technology, industry standards, customer needs and
competition, as well as by frequent new product and service introductions. We
may be unable to successfully use or develop new technologies, adapt our
network infrastructure to changing customer requirements and industry
standards, introduce new services, such as virtual private networking and
video conferencing, or enhance our existing services on a timely basis.
Furthermore, new technologies or enhancements we use or develop may not gain
market acceptance. Our pursuit of necessary technological advances may require
substantial time and expense, and we may be unable to successfully adapt our
network and services to alternate access devices and technologies. If our
services do not continue to be compatible and interoperable with products and
architectures offered by other industry members, our ability to compete could
be impaired. Our ability to compete successfully is dependent, in part, upon
the continued compatibility and interoperability of our services with products
and architectures offered by various other industry participants. Although we
intend to support emerging standards in the market for Internet connectivity,
there can be no assurance that we will be able to conform to new standards in
a timely fashion, if at all, or maintain a competitive position in the market.

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

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

Capacity Constraints Could Cause Service Interruptions and Harm
Customer Relations. Failure of the backbone providers and other Internet
infrastructure companies to continue to grow in an orderly manner or failure
to maintain their financial viability could result in capacity constraints
leading to service interruptions to our customers. Although the national
telecommunications networks and Internet infrastructures have historically
developed in an orderly manner, there have been major shifts in the
telecommunications industry that have adversely impacted the financial
viability of certain backbone providers and there is no guarantee that such
providers will be able to continue to provide services as more services, users
and equipment connect to the networks. Failure by our telecommunications and
Internet service providers to provide us with the data communications capacity
we require could cause service interruptions.

Our Network and Software Are Vulnerable to Security Breaches and
Similar Threats Which Could Result in Our Liability for Damages and Harm Our
Reputation. Despite the implementation of network security measures, the core
of our network infrastructure is vulnerable to computer viruses, break-ins,
attacks and similar disruptive problems. This could result in our liability
for damages, and our reputation could suffer, thereby deterring potential
customers from working with us. Security problems or other attack caused by
third parties could lead to interruptions and delays or to the cessation of
service to our customers. Furthermore, inappropriate use of the network by
third parties could also jeopardize the security of confidential information
stored in our computer systems and in those of our customers. Although we
intend to continue to implement industry-standard security measures, in the
past some of these industry-standard measures have occasionally been
circumvented by third parties, although not in our system. Therefore, there
can be no assurance that the measures we implement will not be circumvented.
The costs and resources required to eliminate computer viruses and alleviate
other security problems may result in interruptions, delays or cessation of
service to our customers, which could hurt our business.

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

PART II. OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None.

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

None.

ITEM 5. MISCELLANEOUS

(a) November 13, 2002, we sent out to our stockholders a definitive
proxy statement requesting that our stockholders consider and vote upon one
proposal to approve six separate amendments to our certificate of incorporation
to authorize the board of directors in its sole discretion to effect a reverse
stock split, ranging from a one-for-five reverse stock split to a
one-for-thirty reverse stock split, of all the issued and outstanding shares
of our common stock, par value $0.001 per share, in order to maintain our
listing on The Nasdaq SmallCap Market and seek to transfer our listing back to
The Nasdaq National Market. Our stockholders approved the amendments at a
special meeting of our stockholders held for that purpose on December 17,
2002. The board of directors may abandon any of the amendments or make one of
the amendments effective by filing such amendment with the Secretary of State
of the State of Delaware at such time or times as the board of directors
determines to be necessary in order to maintain our listing on The Nasdaq
SmallCap Market and seek to transfer our listing back to The Nasdaq National
Market, on or prior to the nine month anniversary of the special meeting held
on December 17, 2002.

(b) At September 30, 2002, we had a revolving line of credit of $15.0
million and had drawn $15.0 million under the facility. Our ability to maintain
the drawn amount under the line of credit at current levels depended on a number
of factors, including the level of eligible receivable balances and liquidity.
The facility also contained financial covenants that required us to grow
revenues, limit cash losses, and require minimum levels of liquidity and
tangible net worth as defined in the agreement. The lender also had the
ability to demand repayment if there had been a material adverse change in our
business. At September 30, 2002, we were in compliance with covenants relating
to revenue growth, as defined in the agreement.

tangible net worth as defined in the agreement. Further, the lender has the
ability to demand repayment if there has been a material adverse change in our
business.

ITEM 6. EXHIBITS

(a) Exhibits:

Exhibit
Number Description
------- -----------

3.1 Certificate of Incorporation of the Registrant

3.2* Bylaws of the Registrant

10.1** Loan and Security Agreement and Amendments to Loan Documents
between Silicon Valley Bank and the Registrant

99.1 Certification of Gregory A. Peters, President and Chief
Executive Officer of Registrant, Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

99.2 Certification of John M. Scanlon, Vice President of Finance
and Administration and Chief Financial Officer of Registrant,
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

* Incorporated by reference to designated exhibit to Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
2001

** Incorporated by reference to designated exhibit to Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2002

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on this 9th day of
January, 2003.

INTERNAP NETWORK SERVICES CORPORATION
(Registrant)

By: /s/ JOHN M. SCANLON
----------------------------------------
John M. Scanlon
Chief Financial Officer and Vice President
of Finance and Administration
(Principal Financial and Accounting Officer)

CERTIFICATION

I, Gregory A. Peters, President and Chief Executive Officer of
Internap Network Services Corporation, certify that:

1. I have reviewed this quarterly report on Form 10-Q/A (Amendment No.1)
for the period ending September 30, 2002, of Internap Network
Services Corporation;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:

a. Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;

b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and

c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors:

a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and

b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

January 9, 2003

By: /s/ GREGORY A. PETERS
-------------------------------------
Gregory A. Peters
President and Chief Executive Officer

CERTIFICATION

I, John M. Scanlon, Vice President of Finance and Administration and
Chief Financial Officer of Internap Network Services Corporation, certify that:

1. I have reviewed this quarterly report on Form 10-Q/A (Amendment No.1)
for the period ending September 30, 2002, of Internap Network
Services Corporation;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this quarterly report;

b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and

c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors:

b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and

January 9, 2003

By: /s/ JOHN M. SCANLON
----------------------------------------
John M. Scanlon
Vice President of Finance and
Administration and Chief Financial Officer