As filed with the Securities and Exchange Commission on January 9, 2007

Registration No. 333-138993

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

Amendment No. 1

to

Form S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

 

 

INTERNAP NETWORK SERVICES CORPORATION

(Exact name of Registrant as specified in its charter)

 

 

 

 

 

250 Williams Street

Atlanta, Georgia 30303

(404) 302-9700

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

 

 

James P. DeBlasio

President and Chief Executive Officer

Internap Network Services Corporation

250 Williams Street

Atlanta, Georgia 30303

(404) 302-9700

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

 

 

Copies to:

 

 

 

 

 

Approximate date of commencement of proposed sale to the public:  As soon as practicable after the effectiveness of this registration statement and the satisfaction or waiver of all other conditions under the merger agreement described herein.

 

If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.  o

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

 

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

SUBJECT TO COMPLETION, DATED JANUARY 9, 2007.

 

 

SPECIAL MEETINGS OF STOCKHOLDERS
MERGER PROPOSED — YOUR VOTE IS VERY IMPORTANT

 

The boards of directors of Internap Network Services Corporation and VitalStream Holdings, Inc. have unanimously approved a merger combining Internap and VitalStream.

 

If the merger is consummated, holders of VitalStream common stock will receive 0.5132 shares of Internap common stock for each share of VitalStream common stock they own. This is a fixed exchange ratio that will not be adjusted for changes in the stock price of either company before the merger is consummated. Internap common stock is listed on the NASDAQ Global Market under the symbol “INAP”. On January   , 2007, the last trading day before the date of this joint proxy statement/prospectus, the closing price of Internap common stock was $      per share. VitalStream common stock is listed on the NASDAQ Global Market under the symbol “VSTH”.

 

Stockholders of Internap will be asked, at Internap’s special meeting of stockholders, to (a) approve the issuance of shares of Internap common stock to the stockholders of VitalStream in the merger and (b) adopt the merger agreement and approve the proposed merger. Stockholders of VitalStream will be asked, at VitalStream’s special meeting of stockholders, to adopt the merger agreement and approve the proposed merger.

 

The dates, times and places of the special meetings are as follows:

 

 

This joint proxy statement/prospectus provides you with information about Internap, VitalStream and the proposed merger. You may obtain other information about Internap and VitalStream from documents filed with the Securities and Exchange Commission. We encourage you to read the entire joint proxy statement/prospectus carefully.

 

 

FOR A DISCUSSION OF SIGNIFICANT MATTERS THAT SHOULD BE CONSIDERED BEFORE VOTING AT THE SPECIAL MEETINGS, SEE “RISK FACTORS” BEGINNING ON PAGE 19.

 

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES REGULATORS HAVE APPROVED OR DISAPPROVED THE INTERNAP COMMON STOCK TO BE ISSUED IN THE MERGER OR DETERMINED WHETHER THIS JOINT PROXY STATEMENT/PROSPECTUS IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

 

This joint proxy statement/prospectus is dated January   , 2007, and is first being mailed to stockholders of Internap and VitalStream on or about January   , 2007.

 

THIS JOINT PROXY STATEMENT/PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

 

 

INTERNAP NETWORK SERVICES CORPORATION
250 Williams Street
Atlanta, Georgia 30303
(404) 302-9700

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD ON FEBRUARY 20, 2007

 

 

 

 

To the Stockholders of Internap Network Services Corporation:

 

On behalf of the board of directors of Internap Network Services Corporation, a Delaware corporation, we are pleased to deliver this joint proxy statement/prospectus for the proposed merger combining Internap and VitalStream Holdings, Inc., a Nevada corporation. A special meeting of stockholders of Internap will be held at 3 p.m., local time on February 20, 2007, at the principal executive offices of Internap located at 250 Williams Street, Atlanta, Georgia 30303, for the following purposes:

 

1. To consider and vote upon the issuance of shares of Internap common stock in the merger contemplated by the Agreement and Plan of Merger, dated as of October 12, 2006, by and among Internap, Ivy Acquisition Corp., a Nevada corporation and a wholly owned subsidiary of Internap, and VitalStream, and the adoption of that Agreement and Plan of Merger.

 

2. To consider and vote upon an adjournment of the special meeting, if a quorum is present, if necessary to solicit additional proxies in favor of Proposal No. 1.

 

3. To transact such other business as may properly come before the special meeting or any adjournment or postponement thereof.

 

The board of directors of Internap has fixed December 29, 2006 as the record date for the determination of stockholders entitled to notice of, and to vote at, the special meeting and any adjournment or postponement thereof. Only holders of record of shares of Internap common stock at the close of business on the record date are entitled to notice of, and to vote at, the special meeting. At the close of business on the record date, Internap had outstanding and entitled to vote 35,875,746 shares of common stock.

 

Your vote is important. The affirmative vote of the holders of a majority of the votes cast in person or by proxy at the Internap special meeting is required for approval of each of Proposal No. 1 regarding the issuance of shares of Internap common stock in the merger and adoption of the merger agreement and Proposal No. 2 regarding adjournment of the special meeting, if necessary, if a quorum is present to solicit additional proxies if there are not sufficient votes in favor of Proposal No. 1. Even if you plan to attend the special meeting in person, we request that you sign and return the enclosed proxy and thus ensure that your shares will be represented at the special meeting if you are unable to attend. If you sign, date and mail your proxy card without indicating how you wish to vote, your proxy will be counted as a vote in favor of the issuance of shares of Internap common stock in the merger and adoption of the merger agreement and an adjournment of the Internap special meeting, if necessary, if a quorum is present, to solicit additional proxies if there are not sufficient votes in favor of Proposal No. 1. If you fail to return your proxy card, the effect will be that your shares will not be counted for purposes of determining whether a quorum is present at the special meeting. If you do attend the Internap special meeting and wish to vote in person, you may withdraw your proxy and vote in person.

 

By Order of the Board of Directors,

 

James P. DeBlasio

President and Chief Executive Officer

 

Atlanta, Georgia

January   , 2007

 

Internap’s board of directors unanimously recommends that Internap stockholders vote “FOR” Proposal No. 1 to approve the issuance of shares of Internap common stock in the merger and adoption of the merger agreement and “FOR” Proposal No. 2 to adjourn the special meeting, if a quorum is present, if necessary to solicit additional proxies if there are not sufficient votes in favor of Proposal No. 1.

 

VITALSTREAM HOLDINGS, INC.
555 Anton Blvd., Suite 400
Costa Mesa, California 92626
(714) 549-5300

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD ON FEBRUARY 20, 2007

 

 

 

 

To the Stockholders of VitalStream Holdings, Inc.:

 

On behalf of the board of directors of VitalStream Holdings, Inc., a Nevada corporation, we are pleased to deliver this joint proxy statement/prospectus for the proposed merger combining Internap Network Services Corporation, a Delaware corporation, and VitalStream. A special meeting of stockholders of VitalStream will be held on February 20, 2007, at 12 p.m., local time, at the principal executive offices of VitalStream located at 555 Anton Blvd., Suite 400, Costa Mesa, California, 92626 for the following purposes:

 

1. To consider and vote upon the adoption of the Agreement and Plan of Merger, dated as of October 12, 2006, by and among Internap, Ivy Acquisition Corp., a Nevada corporation and a wholly owned subsidiary of Internap, and VitalStream.

 

2. To consider and vote upon an adjournment of the special meeting, if necessary to solicit additional proxies in favor of Proposal No. 1.

 

3. To transact such other business as may properly come before the special meeting or any adjournment or postponement thereof.

 

The board of directors of VitalStream has fixed December 29, 2006 as the record date for the determination of stockholders entitled to notice of, and to vote at, the special meeting and any adjournment or postponement thereof. Only holders of record of shares of VitalStream common stock at the close of business on the record date are entitled to notice of, and to vote at, the special meeting. At the close of business on the record date, VitalStream had outstanding and entitled to vote 23,774,014 shares of common stock.

 

Your vote is important. The affirmative vote of the holders of a majority of the voting power of the shares of VitalStream common stock outstanding on the record date for the VitalStream special meeting is required for approval of Proposal No. 1 regarding adoption of the merger agreement. The affirmative vote of the holders of a majority of the votes cast in person or by proxy at the VitalStream special meeting is required to approve Proposal No. 2 regarding adjournment of the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposal No. 1. Even if you plan to attend the special meeting in person, we request that you sign and return the enclosed proxy and thus ensure that your shares will be represented at the special meeting if you are unable to attend. If you sign, date and mail your proxy card without indicating how you wish to vote, your proxy will be counted as a vote in favor of the adoption of the merger agreement and an adjournment of the VitalStream special meeting, if necessary to solicit additional proxies if there are not sufficient votes in favor of Proposal No. 1. If you fail to return your proxy card, the effect will be a vote against the adoption of the merger agreement and your shares will not be counted for purposes of determining whether a quorum is present at the VitalStream special meeting. If you do attend the VitalStream special meeting and wish to vote in person, you may withdraw your proxy and vote in person.

 

Please do not send any certificates representing your VitalStream common stock at this time.

 

By Order of the Board of Directors,

 

Jack Waterman

Chairman and Chief Executive Officer

 

Costa Mesa, California

January   , 2007

 

The VitalStream board of directors has unanimously determined and believes that the merger is advisable to, and in the best interests of, VitalStream and its stockholders, and unanimously recommends that VitalStream stockholders vote “FOR” Proposal No. 1 to adopt the merger agreement and “FOR” Proposal No. 2 to adjourn the special meeting, if necessary to solicit additional proxies if there are not sufficient votes in favor of Proposal No. 1.

 

ADDITIONAL INFORMATION

 

This joint proxy statement/prospectus “incorporates by reference” important business and financial information about Internap and VitalStream from documents that are not included in or delivered with this joint proxy statement/prospectus. For a more detailed description of the information incorporated by reference in this joint proxy statement/prospectus and how you may obtain it, refer to “Where You Can Find More Information” on page 113.

 

If you are a stockholder, you may have received some of the documents incorporated by reference. You may also obtain any of those documents from the appropriate company or the U.S. Securities and Exchange Commission, or the SEC, or the SEC’s Internet web site at www.sec.gov. Documents incorporated by reference are available from the appropriate company without charge, excluding all exhibits unless specifically incorporated by reference in such documents. Stockholders may obtain documents incorporated by reference in this joint proxy statement/prospectus by requesting them in writing or by telephone from the appropriate company at the following addresses:

 

Internap Network Services Corporation
Attn: Investor Relations
250 Williams Street
Atlanta, Georgia 30303
Telephone: (404) 302-9841
E-mail: ir@internap.com

 

VitalStream Holdings, Inc.
Attn: Investor Relations
555 Anton Blvd., Suite 400
Costa Mesa, California 92626
Telephone: (415) 217-7722
E-mail: ir@VitalStream.com

 

If you would like to request documents, please do so by February 13, 2007 to receive them before the special meetings. If you request any incorporated documents, the appropriate company will strive to mail them to you by first-class mail, or other equally prompt means, within one business day of receipt of your request.

TABLE OF CONTENTS

 

 

ANNEXES:

 

 

 

 

 

Internap Network Services Corporation
Attn: Investor Relations
250 Williams Street, Suite E-100
Atlanta, Georgia 30303
Telephone: (404) 302-9841
E-mail: ir@internap.com

 

OR

 

Morrow & Co., Inc.
470 West Avenue — 3^rd Floor
Stamford, Connecticut 06902

 

If you are a VitalStream stockholder, and would like additional copies of this joint proxy statement/prospectus without charge, or if you have questions about the merger, including the procedures for voting your shares, you should contact:

 

VitalStream Holdings, Inc.
Attn: Investor Relations
555 Anton Blvd., Suite 400
Costa Mesa, California 92626
Telephone: (415) 217-7722
E-mail: ir@VitalStream.com

 

OR

 

Morrow & Co., Inc.
470 West Avenue — 3^rd Floor
Stamford, Connecticut 06902

 

SUMMARY

	•	the complementary nature of Internap’s and VitalStream’s product lines;
	•	the potential opportunity for the two companies to integrate their solutions to meet a wider set of customer needs and to combine their technological resources to develop new products with increased functionality and bring them to market faster;
	•	the board’s and management’s assessment that the merger and VitalStream’s operating strategy are consistent with Internap’s long-term strategic objectives to grow into new markets;
	•	the competitive and market environments in which Internap and VitalStream operate;
	•	historical and current information about each of the combining companies and their businesses, prospects, financial performance and condition, operations, technology, management and competitive position, before and after giving effect to the merger and the merger’s potential effect on stockholder value, including public reports filed with the SEC, analyst estimates, market data and management’s knowledge of the industry;

	•	the opinion of Thomas Weisel Partners LLC, or TWP, Internap’s financial advisor, that, as of October 12, 2006 and based on and in reliance on the factors and assumptions set forth in the opinion, the consideration to be paid by Internap pursuant to the merger agreement was fair to Internap from a financial point of view, and the related financial analyses and presentations (a copy of TWP’s written opinion is attached as Annex C to this joint proxy statement/prospectus);
	•	the results of the due diligence review of VitalStream’s businesses and operations by Internap’s management, financial advisors, accountants and legal counsel;
	•	the judgment of the Internap board of directors, based on arm’s length negotiations with VitalStream, that the merger consideration of 0.5132 shares of Internap common stock for each share of VitalStream common stock represented the lowest price that could be negotiated with VitalStream; and
	•	the terms and conditions of the merger agreement.

	•	the ability to better serve the customer base and partners of each company with the combination of a comprehensive portfolio of technologies, applications and expertise that will enable customers to store, download and broadcast digital media more effectively;
	•	the belief that VitalStream’s ability to attract and retain customers would be enhanced by the scale and reliability of Internap’s network;
	•	the belief that a merger with Internap could enhance the combined company’s ability to compete with larger competitors by bringing together the network and technologies of Internap with the streaming, ad-insertion and other capabilities of VitalStream, in addition to both of their management and sales teams;
	•	the opportunity for each company to introduce its complementary product lines into the customer base of the other company;
	•	the greater global presence of the combined company;
	•	the expected synergies and cost-saving opportunities that should result from headcount reductions, office site consolidations and eliminating redundant operating expenses;
	•	the belief that the combined company’s larger size, increased public stock float and broadened capabilities would lead to expanded research coverage and may lead to increased institutional investor interest than that of VitalStream alone; and
	•	the belief that the merger would combine two experienced and respected management teams, resulting in a combined management team that is stronger than the management teams of each of the individual companies.

	•	the merger consideration relative to the current market prices of VitalStream common stock, and in particular the fact that, based on the closing price of Internap common stock on October 11, 2006, the merger consideration of 0.5132 shares of Internap common stock for each share of VitalStream common stock represented a 36.7% premium over the closing price of VitalStream common stock on October 11, 2006 and a 23.8% premium over the average closing price of VitalStream common stock for the week preceding October 11, 2006; VitalStream’s market price at such time was after its announcement that MySpace Inc., which accounted for over 30% of VitalStream’s revenue between January 1, 2006 and September 30, 2006, informed VitalStream that it intends to develop its own in-house streaming capabilities and to significantly

		reduce its use of VitalStream services and also VitalStream’s release of projections regarding third quarter 2006 and certain future revenues following the announcement related to MySpace;

	•	the merger consideration relative to the historical market prices of VitalStream common stock, and in particular the belief that, notwithstanding the fact that, based on the closing price of Internap common stock on October 11, 2006, the per-share merger consideration of 0.5132 share of common stock represented a discount of 9.1% from the average closing price of VitalStream common stock for the preceding six months and a 7.9% premium over the average closing price of VitalStream common stock for the preceding year, the six-month and one-year average stock price numbers did not reflect the market’s reaction to the above-referenced MySpace announcement and subsequent revenue projections and that the recent stock price information represented a more accurate benchmark as to what VitalStream stockholders could expect if VitalStream were to continue to operate on a stand-alone basis;
	•	the fact that the merger consideration consists almost entirely of Internap common stock (excepting only that partial Internap shares will be paid in cash), which will allow VitalStream stockholders to participate in the growth and opportunities of the combined company;
	•	the financial analyses reviewed with the VitalStream board of directors on October 11, 2006 and prior dates by RBC and the opinion of RBC to the VitalStream board of directors on October 11, 2006 to the effect that, as of that date, and based upon and subject to the factors, qualifications, assumptions and limitations set forth in RBC’s opinion, the total consideration to be paid pursuant to the merger agreement was fair, from a financial point of view, to the holders of VitalStream common stock (a copy of RBC’s written opinion is attached as Annex D to this joint proxy statement/prospectus);
	•	the judgment of the VitalStream board of directors, based on arm’s length negotiations with Internap, that the merger consideration of 0.5132 shares of Internap common stock for each share of VitalStream common stock represented the highest price that could be negotiated with Internap;
	•	the absence of other serious potential bidders for VitalStream following a targeted marketing effort by RBC and management of VitalStream and the judgment of the VitalStream board of directors that continued searching for an alternative acquirer would unlikely yield a superior proposal;
	•	the prospects for VitalStream’s business and the potential stockholder value that could be expected to be generated if VitalStream were to remain an independent, publicly traded company, including its business strategy going forward, its cash reserves, uncertainties regarding the success of a proposed financing transaction, uncertainties regarding VitalStream’s ability to retain certain customers, attract additional significant customers and expand its product lines and sales channels, and continued consolidation in the industry and increased competition, especially from competitors with greater name recognition and financial and other resources;
	•	the terms and conditions of the merger agreement, including:

	•	the fact that the merger agreement enables the VitalStream board of directors, in the exercise of its fiduciary duties, to authorize VitalStream to participate in discussions and negotiations with and furnish non-public information to a third party in connection with an unsolicited bid to acquire VitalStream, change its recommendation in favor of the merger with Internap, and potentially enter into a transaction with another acquirer, subject to certain limitations as set forth in the merger agreement, and in certain circumstances, subject to the payment of a termination fee of $8 million, which constituted approximately 3.7% of the merger consideration based on the closing price of Internap common stock on October 11, 2006, plus transaction expenses of Internap incurred theretofore;
	•	the fact that VitalStream is not obligated to pay the $8 million termination fee plus transaction expenses of Internap incurred theretofore upon a termination of the merger agreement due to the VitalStream stockholders failing to approve the merger absent a change in recommendation by the VitalStream board of directors unless prior to such termination there has been public disclosure of an acquisition proposal and within 12 months following the termination of the merger agreement, VitalStream consummates an acquisition or enters into an agreement providing for an acquisition of VitalStream;

	•	the limited number and nature of the conditions to Internap’s obligation to close the proposed merger and the risk of non-satisfaction of such conditions;
	•	the condition to the closing of the proposed merger that the merger consideration be tax-free to VitalStream’s U.S. stockholders;

	•	the competitive and market environments in which VitalStream and Internap operate;
	•	the results of the due diligence investigation of Internap conducted by VitalStream’s management, financial advisors, accountants and legal counsel;
	•	the VitalStream board of directors’ own understanding of VitalStream, Internap and their respective businesses; and
	•	the likelihood the merger will be completed on a timely basis, including the likelihood that the merger will be approved by the appropriate regulatory authorities.

	•	authorize VitalStream to participate in discussions and negotiations with and furnish non-public information to a third party in connection with an unsolicited bid to acquire VitalStream;
	•	withhold, withdraw, amend or change its recommendation in favor of the merger with Internap; and
	•	potentially enter into a transaction with another acquirer, subject to certain limitations as set forth in the merger agreement, and in certain circumstances, subject to the payment of a termination fee of $8 million, which constituted approximately 3.7% of the merger consideration based on the closing price of Internap common stock on October 11, 2006, plus transaction expenses of Internap incurred theretofore.

	•	the holders of a majority of the issued and outstanding shares of Internap and VitalStream common stock must have voted in favor of adopting the merger agreement;
	•	no statute, rule, regulation, executive order, decree, injunction or other order (whether temporary, preliminary or permanent) that has the effect of making the merger illegal or otherwise prohibits the completion of the merger is in effect; and
	•	all approvals from each governmental entity necessary for the completion of the merger have been obtained, and any waiting period applicable to the completion of the merger under the HSR Act has expired or been terminated and there is no instituted, pending or threatened action, proceeding or hearing by any governmental entity that adversely impacts the merger in a particular manner.

	•	the representations and warranties of Internap and Ivy Acquisition Corp. set forth in the merger agreement must be true and correct in all material respects; provided, however, this condition will be satisfied as long as any failure of Internap’s and Ivy Acquisition Corp.’s representations and warranties to be true and correct does not result in a material adverse effect on Internap;
	•	Internap and Ivy Acquisition Corp. must have performed or complied with in all material respects all obligations required to be performed or completed by them under the merger agreement at or prior to the closing of the merger;
	•	no material adverse effect on Internap has occurred since the date of the merger agreement;
	•	Internap and Ivy Acquisition Corp. must have obtained a limited number of consents, waivers, and approvals of governmental entities or third parties required in connection with the merger; and
	•	VitalStream must have received a written opinion of Parr Waddoups Brown Gee & Loveless, PC that the merger will be treated for Federal income tax purposes as a tax-free reorganization.

	•	the representations and warranties of VitalStream set forth in the merger agreement must be true and correct in all material respects; provided, however, this condition will be satisfied as long as any failure of VitalStream’s representations and warranties to be true and correct does not result in a material adverse effect on VitalStream;
	•	VitalStream must have performed or complied with in all material respects all obligations required to be performed by it under the merger agreement at or prior to the closing of the merger;
	•	no material adverse effect on VitalStream has occurred since the date of the merger agreement;
	•	Internap must have received the written legal opinion of Morris, Manning & Martin, LLP that the merger will be treated for Federal income tax purposes as a tax-free reorganization; and
	•	VitalStream must have obtained a limited number of consents, waivers, and approvals of governmental entities or third parties required in connection with the merger.

	•	the VitalStream board of directors has changed its recommendation of the merger;
	•	VitalStream failed to include in this joint proxy statement/prospectus the recommendation of its board of directors in favor of the adoption and approval of the merger agreement and the approval of the merger;
	•	the VitalStream board of directors fails to reaffirm its recommendation of the merger after Internap requests that it do so;
	•	the VitalStream board of directors approves or recommends any other acquisition proposal;
	•	VitalStream enters into any letter of intent or contract with respect to any other acquisition proposal;
	•	VitalStream materially breaches specified provisions of the merger agreement; or
	•	a third-party tender or exchange offer for VitalStream securities is commenced, and VitalStream does not, within 10 business days, send its security holders its recommendation that the tender or exchange offer be rejected.

	•	the merger agreement is terminated:

	•	by either VitalStream or Internap if the merger is not consummated by the outside closing date, except for a termination by VitalStream if any action or failure to act by Internap or Ivy Acquisition Corp. is the principal cause of the failure of the merger to occur on or before the outside closing date;
	•	by either VitalStream or Internap, if the approval and adoption of the merger agreement and the approval of the merger by VitalStream’s stockholders has not been obtained by reason of the failure to obtain the required vote at a meeting of VitalStream’s stockholders duly convened therefor or at any adjournment thereof, provided, however, that this right to terminate the merger agreement is not available to

		VitalStream where the failure to obtain approval by VitalStream’s stockholders has been caused by the action or failure to act of VitalStream and such action or failure to act constitutes a material breach by VitalStream of the merger agreement; or

	•	by Internap, either (a) upon a breach of any representation, warranty, covenant or agreement on the part of VitalStream set forth in the merger agreement or if any representation or warranty of VitalStream has become untrue, in either case such that the conditions to consummate the merger would not be satisfied as of the time of such breach or as of the time such representation or warranty has become untrue, or (b) if a material adverse effect with respect to VitalStream has occurred; provided that if such inaccuracy in VitalStream’s representations and warranties or breach by VitalStream, or if such material adverse effect with respect to VitalStream, is curable by VitalStream through the exercise of its commercially reasonable efforts, then Internap may not terminate the merger agreement for 20 days after delivery of written notice from Internap to VitalStream of such breach, provided VitalStream continues to exercise commercially reasonable efforts to cure such breach or material adverse effect with respect to VitalStream (it being understood that Internap may not terminate the merger agreement if such breach by VitalStream or material adverse effect with respect to VitalStream is cured during such 20-day period, or if Internap has materially breached the merger agreement); and

	•	at or prior to a termination of the merger agreement, but after the date of the merger agreement, there exists or has been publicly proposed a bona fide acquisition proposal relating to an acquisition and within 12 months after such termination, VitalStream enters into a letter of intent or definitive agreement with respect to any acquisition or any acquisition is consummated.

Internap Network Services Corporation		High				Low
2004
First quarter		$	27.50			$	13.00
Second quarter			21.20				10.50
Third quarter			12.60				4.80
Fourth quarter			11.40				5.00
2005
First quarter		$	11.00			$	5.10
Second quarter			6.30				4.10
Third quarter			5.90				4.20
Fourth quarter			5.20				3.60
2006
First quarter		$	10.60			$	4.20
Second quarter			15.50				9.00
Third quarter			16.80				9.30
Fourth quarter			21.25				14.10
2007
First quarter (through January 8)			20.63				19.60

VitalStream Holdings, Inc.		High				Low
2004
First quarter		$	6.20			$	2.40
Second quarter			5.08				2.40
Third quarter			3.20				2.12
Fourth quarter			3.40				1.68
2005
First quarter		$	4.16			$	2.04
Second quarter			3.04				1.84
Third quarter			4.88				2.68
Fourth quarter			7.76				3.44
2006
First quarter		$	11.00			$	5.24
Second quarter			13.70				9.01
Third quarter			10.84				7.60
Fourth quarter			10.64				6.35
2007
First quarter (through January 8)		$	10.37			$	9.91

										Estimated
										Equivalent
		Internap				VitalStream				VitalStream per
		Common Stock				Common Stock				Share Price
October 11, 2006		$	17.05			$	6.40			$	8.75
January 8, 2007		$	20.50			$	10.31			$	10.52

		Nine Months Ended
		September 30,				September 30,				Year Ended December 31,
		2006(3)				2005				2005				2004				2003(1)				2002(2)				2001
		(Unaudited)
Historical Consolidated Statement of Operations Data:
Revenue		$	132,404			$	113,425			$	153,717			$	144,546			$	138,580			$	132,487			$	117,404
Income (loss) from operations			426				(4,837	)			(5,134	)			(16,900	)			(31,616	)			(68,907	)			(451,545	)
Income (loss) before income taxes			1,548				(4,837	)			(5,134	)			(16,900	)			(31,616	)			(73,369	)			(453,463	)
Net income (loss)			1,448				(4,787	)			(4,964	)			(18,062	)			(34,601	)			(75,668	)			(479,928	)
Net income (loss) attributable to common shareholders			1,448				(4,787	)			(4,964	)			(18,062	)			(69,177	)			(75,668	)			(479,928	)
Net income (loss) per share: basic(4)			0.04				(0.14	)			(0.15	)			(0.63	)			(3.96	)			(4.87	)			(31.93	)
Net income (loss) per share: diluted(4)			0.04				(0.14	)			(0.15	)			(0.63	)			(3.96	)			(4.87	)			(31.93	)
Shares used in per share calculations:
Basic(4)			34,537				33,933				33,939				28,732				17,460				15,555				15,033
Diluted(4)			35,343				33,933				33,939				28,732				17,460				15,555				15,033

		As of September 30,								As of December 31,
		2006(3)				2005				2005				2004				2003(1)				2002(2)				2001
		(Unaudited)
Historical Consolidated Balance Sheet Data:
Cash, cash equivalents, and short-term marketable investments		$	41,389			$	22,549			$	40,494			$	45,985			$	18,885			$	25,219			$	82,306
Non-current marketable investments			—				—				—				4,656				—				—				—
Total assets			167,731				157,383				155,369				168,149				135,839				166,334				279,294
Notes payable and capital lease obligations, less current portion			4,467				9,142				7,903				12,837				12,742				22,739				11,184
Series A convertible preferred stock(5)			—				—				—				—				—				79,790				83,314
Total stockholders’ equity			122,140				109,611				109,728				113,738				70,524				(4,228	)			63,429

(1)		In August 2003, we completed a private placement of our common stock which resulted in a decrease of the conversion price of our series A preferred stock to $9.50 per share and an increase in the number of shares of common stock issuable upon conversion of all shares of series A preferred stock by 3.5 million shares. We recorded a deemed dividend of $34.6 million in connection with the conversion price adjustment, which is attributable to the additional incremental number of shares of common stock issuable upon conversion of our series A preferred stock. In October 2003, Internap acquired the business of netVmg, Inc. and Sockeye Networks, Inc.

(2)		Internap adopted Statement of Financial Accounting Standard (SFAS) No. 142, “Goodwill and Other Intangible Assets” during 2002. Accordingly, effective January 1, 2002, goodwill is no longer amortized and is instead reviewed for impairment annually, or more frequently, if indications of impairment arise.
(3)		Effective January 1, 2006, Internap adopted SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123R) and related interpretations, using the modified prospective transition method and therefore have not restated prior periods’ results. Prior to the adoption of SFAS No. 123R on January 1, 2006, Internap accounted for stock-based compensation plans under the recognition and measurement provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Internap also provided disclosures in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosures — an Amendment of FASB Statement No. 123.” Accordingly, no expense was recognized for options to purchase Internap common stock that were granted with an exercise price equal to fair market value at the date of grant and no expense was recognized in connection with purchases under Internap employee stock purchase plans for any periods prior to January 1, 2006.
(4)		Adjusted to reflect the one-for-ten reverse stock split of Internap common stock on July 11, 2006.
(5)		In July 2003, we amended the deemed liquidation provisions of our charter to eliminate the events that could result in payment to the series A preferred stockholders such that the events giving rise to payment would be within our control. As a result, 2,887,661 shares of our series A preferred stock, with a recorded value of $78.6 million, were reclassified from mezzanine financing to stockholders’ equity during 2003. Effective September 14, 2004, all shares of our outstanding series A convertible preferred stock were mandatorily converted into common stock in accordance with the terms of our Certificate of Incorporation.

		Nine Months Ended
		September 30,				September 30,				Year Ended December 31,
		2006(1)				2005				2005(2)				2004				2003(3)				2002(4)				2001(4)
		(Unaudited)
		(In thousands, except per share data)
Historical Consolidated Statement of Operations Data:
Revenue			18,818				11,207			$	15,880			$	9,972			$	7,001			$	3,787			$	1,521
Loss from operations			(4,598	)			(1,715	)			(3,353	)			(1,039	)			(954	)			(2,246	)			(2,716	)
Loss before income taxes			(4,545	)			(1,722	)			(4,016	)			(1,544	)			(1,053	)			(2,185	)			(2,801	)
Net loss			(4,547	)			(1,724	)			(4,018	)			(1,546	)			(1,055	)			(2,187	)			(2,803	)
Net loss per share — basic and diluted(5)			(0.21	)			(0.11	)			(0.25	)			(0.13	)			(0.14	)			(0.41	)			(0.83	)
Shares used in calculation of net loss per share(5)			21,628				15,776				15,993				11,841				7,427				5,353				3,361

		As of September 30,								As of December 31,
		2006(1)				2005				2005(2)				2004				2003(3)				2002(4)				2001(4)
		(Unaudited)
		(In thousands)
Consolidated Balance Sheet Data:
Cash			16,894				6,769			$	4,118			$	10,276			$	773			$	238			$	134
Total current assets			23,450				9,768				8,108				11,490				1,644				863				443
Total assets			56,488				19,324				20,029				16,229				4,655				2,866				2,397
Total liabilities			13,891				6,994				7,810				4,908				3,182				1,977				1,067
Stockholders’ equity			42,596				12,330				12,219				11,321				1,473				889				1,330

(1)		Effective May 1, 2006, VitalStream acquired the business of EON Streams, Inc. Effective January 1, 2006, VitalStream adopted SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123R) and related interpretations, using the modified prospective transition method and therefore have not restated prior periods’ results. Prior to the adoption of SFAS No. 123R on January 1, 2006, VitalStream accounted for stock-based compensation plans under the recognition and measurement provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. VitalStream also provided disclosures in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosures — an Amendment of FASB Statement No. 123.” Accordingly, no expense was recognized for options to purchase VitalStream common stock that were granted with an exercise price equal to fair market value at the date of grant.
(2)		Effective April 1, 2005, VitalStream acquired the business of PlayStream, LLC.
(3)		Effective January 1, 2003, VitalStream acquired certain assets of Epoch Hosting, Inc. and Epoch Networks, Inc. VitalStream adopted Statement of Financial Accounting Standard (SFAS) No. 142, “Goodwill and Other Intangible Assets” during 2002. Accordingly, effective January 1, 2002, goodwill is no longer amortized and is instead reviewed for impairment annually, or more frequently, if indications of impairment arise.
(4)		For periods prior to April 23, 2002, the data is for VitalStream Holdings, Inc. and its wholly-owned subsidiary, the predecessor to VitalStream Holdings, Inc.
(5)		Adjusted to reflect the one-for-four reverse stock of VitalStream common stock on April 4, 2006.

		Nine Months Ended				Fiscal Year Ended
		September 30,				December 31,
		2006				2005
Unaudited Pro Forma Condensed Combined Statements of Operations data:
Revenue		$	151,555			$	171,035
Loss from operations			(9,623	)			(17,367	)
Loss before income taxes			(8,451	)			(17,865	)
Net loss			(8,551	)			(17,865	)
Net loss per share basic and diluted			(0.18	)			(0.39	)
Shares used in per share calculations:
Basic and Diluted			46,446				45,848

		As of
		September 30,
		2006
Unaudited Pro Forma Condensed Combined Balance Sheet data:
Cash, cash equivalents, and short-term investments		$	70,790
Total current assets			101,093
Total assets			398,923
Total liabilities			62,483
Stockholders’ equity			336,440

	•	the historical net income (loss) and book value per share of Internap common stock and the historical net income (loss) and book value per share of VitalStream common stock in comparison with the unaudited pro forma net income (loss) and book value per share after giving effect to the proposed merger of Internap with VitalStream on a purchase basis; and
	•	the equivalent historical net income (loss) and book value per share attributable to 0.5132 shares of Internap common stock which will be received for each share of VitalStream common stock.

		Nine Months Ended				Fiscal Year Ended
		September 30, 2006				December 31, 2005
Historical Per Common Share Data:
Net income (loss) per common share — basic and diluted(1)		$	0.04			$	(0.15	)
Book value per share(2)			3.46				3.21

		Nine Months Ended				Fiscal Year Ended
		September 30, 2006				December 31, 2005
Historical Per Common Share Data:
Net income (loss) per common share — basic and diluted(1)		$	(0.21	)		$	(0.25	)
Book value per share(2)			1.84				0.70

		Nine Months Ended				Year Ended
		September 30, 2006				December 31, 2005
Combined Pro Forma Per Common Share Data:
Net income (loss) per Internap share — basic and diluted(1)		$	(0.18	)		$	(0.39	)
Book value per Internap share(2)			7.13				—
Net loss per equivalent VitalStream share — basic and diluted(3)			(0.09	)			(0.20	)
Book value per equivalent VitalStream share(3)			3.66				—

(1)		Basic net income (loss) per share has been computed using the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is computed using the weighted average number of common and potentially dilutive shares outstanding during the period. Potentially dilutive shares consist of the incremental shares of common stock issuable upon the exercise of outstanding stock options and warrants and unvested restricted stock using the treasury stock method. The treasury stock method

		calculates the dilutive effect for only those stock options and warrants for which the sum of proceeds, including unrecognized compensation and any windfall tax benefits, is less than the average stock price during the period presented. Potentially dilutive shares are excluded from the computation of net income (loss) per share if their effect is antidilutive.
(2)		The historical book value per share is computed by dividing stockholders’ equity by the number of shares of common stock outstanding as of the end of the period presented after adjusting shares outstanding for reverse stock splits. The combined pro forma book value per share is computed by dividing combined pro forma stockholders’ equity by the combined pro forma number of shares of Internap common stock outstanding assuming the merger had occurred as of those dates.
(3)		The equivalent pro forma combined net loss and book value per VitalStream share are calculated by multiplying the pro forma combined share amounts by the exchange ratio of 0.5132 shares of Internap common stock for each share of VitalStream common stock.

 

FORWARD-LOOKING INFORMATION

	•	difficulties encountered in integrating merged businesses;
	•	uncertainties as to the timing of the merger, approval of the transaction by the stockholders of the companies and the satisfaction of closing conditions to the transaction, including the receipt of regulatory approvals;
	•	whether certain market segments grow as anticipated;
	•	the competitive environment in the industry and competitive responses to the proposed merger; and
	•	whether the companies can successfully develop new products and services and the degree to which these gain market acceptance.

 

You should consider the following factors in evaluating whether to approve the issuance of shares of Internap common stock in the merger or to adopt the merger agreement, as the case may be. These factors should be considered in conjunction with the other information included or incorporated by reference by Internap and VitalStream in this joint proxy statement/prospectus.

 

If we do not integrate our services, we may lose customers and fail to achieve our financial objectives.

 

Achieving the benefits of the merger will depend in part on the integration of Internap’s and VitalStream’s services in a timely and efficient manner. In order for us to provide enhanced and more valuable services to our customers after the merger, we will need to integrate our service offerings and development organizations. This will be difficult and unpredictable because our service networks are highly complex, have been developed independently and were designed without regard to such integration. If we cannot successfully integrate our services and continue to provide customers with services and new service features in the future on a timely basis, we may lose customers and our business and results of operations may be harmed.

 

If we are not successful in integrating our organizations, we will not be able to operate efficiently after the merger.

 

Achieving the benefits of the merger will also depend in part on the successful integration of Internap’s and VitalStream’s operations and personnel in a timely and efficient manner. The integration process requires coordination of different development and engineering teams, and involves the integration of systems, applications, policies, procedures and business processes. This, too, will be difficult and unpredictable because of possible cultural conflicts and different opinions on technical decisions and service roadmaps. If we cannot successfully integrate our operations and personnel, we will not realize the expected benefits of the merger.

 

Integrating our companies may divert management’s attention away from our operations.

 

Successful integration of Internap’s and VitalStream’s operations, services and personnel may place a significant burden on our management and our internal resources. The diversion of management attention and any difficulties encountered in the transition and integration process could harm our business, financial condition and operating results.

 

We expect to incur significant costs integrating the companies into a single business and if such integration is not successful we may not realize the expected benefits of the merger.

 

We expect to incur significant costs to integrate VitalStream’s operations, services and personnel with ours. For example, we expect these costs to include costs for:

 

 

We do not know whether we will be successful in these integration efforts and cannot assure you that we will realize the expected benefits of the merger.

If we fail to retain key employees the benefits of the merger could be diminished.

 

The successful combination of Internap and VitalStream will depend in part on the retention of key personnel. There can be no assurance that Internap will be able to retain its or VitalStream’s key management, technical, sales and customer support personnel, or that Internap will realize the anticipated benefits of the merger.

 

Our sales could decline if customer relationships are disrupted by the merger.

 

Our respective customers may not continue their current buying patterns during the pendency of, and following, the merger. Any significant delay or reduction in orders for Internap’s or VitalStream’s services could harm the combined company’s business, financial condition and results of operations. Customers may also seek to modify or terminate existing agreements, or prospective customers may delay entering into new agreements or purchasing our services. In addition, by increasing the breadth of Internap’s and VitalStream’s business, the merger may make it more difficult for the combined company to enter into relationships, including customer, reseller or other business relationships, some of whom may view the combined company as a more direct competitor than either Internap or VitalStream as an independent company.

 

VitalStream stockholders will receive a fixed number of shares of Internap common stock in the merger, rather than a fixed value, so if the market price of Internap common stock declines, VitalStream stockholders will receive consideration in the merger of lesser value.

 

Upon the consummation of the merger, each VitalStream share will be converted into the right to receive 0.5132 shares of Internap common stock. Since the exchange ratio is fixed, the number of shares that VitalStream stockholders will receive in the merger will not change, even if the market price of Internap common stock changes. In recent years, the stock market in general, the securities of technology companies and the price of Internap common stock, have experienced extreme price and volume fluctuations. The market price of Internap common stock upon and after the consummation of the merger could be lower than the market price on the date of the merger agreement or the current market price. VitalStream stockholders should obtain recent market quotations of Internap common stock before they vote on the merger.

 

If the merger does not close, the businesses and stock prices of both VitalStream and Internap may be harmed.

 

Each of Internap and VitalStream has incurred, and will continue to incur, substantial legal, financial advisory and other expenses associated with the merger even if it does not close. In addition, each has agreed to certain limitations on the operation of its business and may be making, or deferring, important capital expenditure and planning decisions in light of the pending merger that are different than the decisions it would make were the merger not pending. If the merger does not close, the operations, financial condition and other aspects of each our businesses viewed on a stand-alone basis may have been harmed on account of steps taken, or deferred, in anticipation of the merger.

 

Additional risks associated with the failure of the merger to close include the following:

 

 

Risks Related to Internap’s Business

 

We have a history of losses and may not sustain profitability.

 

We have incurred net losses in each quarterly and annual period since we began operations in May 1996 through the year ended December 31, 2005. We incurred net losses of $5.0 million, $18.1 million and $34.6 million for the years ended December 31, 2005, 2004 and 2003, respectively. As of September 30, 2006, our accumulated deficit was $858.7 million. Even though we have achieved profitability in the three fiscal quarters ended September 30, 2006, given the competitive and evolving nature of the industry in which we operate, we may not be able to sustain or increase profitability on a quarterly or annual basis, and our failure to do so would adversely affect our business, including our ability to raise additional funds.

 

Our operations have historically been cash flow negative, and we have depended on equity and debt financings to meet our cash requirements, which may not be available to us in the future on favorable terms.

 

We have experienced negative operating cash flow and have depended upon equity and debt financings, as well as borrowings under our credit facilities, to meet our cash requirements in most quarterly and annual periods since we began our operations in May 1996. We expect to meet our cash requirements for the remainder of 2006 and 2007 through a combination of cash flows from operations, existing cash, cash equivalents and investments in marketable securities, borrowings under our credit facilities, and the proceeds from our March 2004 public offering. 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 our cash requirements vary materially from those currently planned, if our cost reduction initiatives have unanticipated adverse effects on our business, or if we fail to generate sufficient cash flow from the sales of our services, we may require additional financing sooner than anticipated. We cannot assure you that we will be able to obtain additional financing on commercially favorable terms, or at all. Provisions in our credit facility limit our ability to incur additional indebtedness.

 

Designing and implementing adequate internal control procedures for our business after the proposed merger will be difficult.

 

In the course of our ongoing evaluation of our internal controls over financing reporting, we have identified areas requiring improvement and are in the process of designing enhanced processes and controls to address the issues identified during our evaluation. We cannot be certain that our efforts will be effective or sufficient for us, or our auditors, to issue unqualified reports in the future.

 

It may be difficult to design and implement effective financial controls for combined operations and differences in existing controls of any acquired businesses may result in weaknesses that require remediation when the financial controls and reporting are combined. Our ability to manage our operations and growth will require us to improve our operational, financial and management controls, as well as our internal reporting systems and controls. We may not be able to implement improvements to our internal reporting systems and controls in an efficient and timely manner and may discover deficiencies in existing systems and controls.

 

We may not be able to compete successfully against current and future competitors.

 

The Internet connectivity and Internet Protocol services market is highly competitive, as evidenced by recent declines in pricing for Internet connectivity services. We expect competition from existing competitors to continue 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. Our competitors currently include: regional Bell operating companies that offer Internet access; global, national and regional Internet service providers; providers of specific applications or solutions such as content distribution, security or storage; software-based and other Internet infrastructure providers and manufacturers; and colocation and data center providers. In addition, Internet network service providers may make technological advancements, such as the introduction of improved routing protocols to enhance the quality of their services, which could negatively impact the demand for our products and services.

In addition, we will face additional competition as we expand our managed services product offerings, including competition from technology and telecommunications companies. A number of telecommunications companies and Internet 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 network or use alternative delivery methods including the cable television infrastructure, direct broadcast satellites and wireless local loop. Many of our existing and future competitors may have greater market presence, engineering and marketing capabilities, and financial, technological and personnel resources than we do. As a result, our competitors may have significant advantages over us. Increased competition and technological advancements by our competitors could adversely affect our business, results of operations and financial condition.

 

Pricing pressure could decrease our revenue and threaten the attractiveness of our premium priced services.

 

Pricing for Internet connectivity services has declined significantly in recent years and may decline in the future. An economic downturn could further contribute to this effect. We currently charge, and expect to continue to charge, higher prices for our high performance Internet connectivity services than prices charged by our competitors for their connectivity services. By bundling their services and reducing the overall cost of their solutions, certain of our competitors 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. Increased price competition and other related competitive pressures could erode our revenue and significant price deflation could affect our results of operations if we are unable to control our costs. Because we rely on Internet network service providers to deliver our services and have agreed with some of these providers to purchase minimum amounts of service at predetermined prices, our profitability could be adversely affected by competitive price reductions to our customers even with an increased number of customers.

 

In addition, over the last several years, companies that require Internet connectivity have been evaluating and will continue to evaluate the cost of such services, particularly high performance connectivity services such as those we currently offer, in light of economic factors and technological advances. Consequently, existing and potential customers may be less willing to pay premium prices for high performance Internet connectivity services and may choose to purchase lower quality services at lower prices, which could adversely affect our business, results of operations and financial condition.

 

We depend on a number of Internet network service providers to provide Internet connectivity to our network access points. If we are unable to obtain required connectivity services on a cost-effective basis or at all, or if such services are interrupted or terminated, our growth prospects and business, results of operations and financial conditions would be adversely affected.

 

In delivering our services, we rely on a number of Internet networks, all of which are built and operated by others. In order to be able to provide high performance connectivity services to our customers through our network access points, we purchase connections from several Internet network service providers. We cannot assure you that these Internet network service providers will continue to provide service to us on a cost-effective basis or on otherwise competitive terms, if at all, or that these providers will provide us with additional capacity to adequately meet customer demand. Consolidation among Internet network service providers limits the number of vendors from which we obtain service, possibly resulting in higher network costs to us. We may be unable to establish and maintain relationships with other Internet network service providers that may emerge or that are significant in geographic areas, such as Asia and Europe, in which we may locate our future network access points. Any of these situations could limit our growth prospects and adversely affect our business, results of operations and financial condition.

We depend on third-party suppliers for key elements of our network infrastructure and to provide services. If we are unable to obtain products or services, such as network access loops or local loops, on favorable terms or at all, or in the event of a failure of these suppliers to deliver their products and services as agreed, our ability to provide our services on a competitive and timely basis would be impaired and our results of operations and financial conditions would be adversely affected.

 

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 services on a competitive and timely basis. In addition to depending on services from third party Internet network service we depend on other companies to supply various key elements of our infrastructure, including the network access loops between our network access points and our Internet network service providers and the local loops between our network access points and our customers’ networks. Pricing for such network access loops and local loops has been rising significantly over time, and we generally bill these charges to our customers at low or no margin, while some of our competitors have their own network access loops and local loops and are therefore not subject to similar availability and pricing issues. In addition, we currently purchase routers and switches from a limited number of vendors. Furthermore, we do not carry significant inventories of the products we purchase, and we have no guaranteed supply arrangements with our vendors. A loss of a significant vendor could delay any build-out of our infrastructure and increase our costs. If our limited source of suppliers fails to provide products or services that comply with evolving Internet standards or that interoperate with other products or services we use in our network infrastructure, we may be unable to meet all or a portion of our customer service commitments, which could adversely affect our business, results of operations and financial condition.

 

A failure in the redundancies in our network operations centers, network access points or computer systems would cause a significant disruption in our Internet connectivity services, and we may experience significant disruptions in our ability to service our customers.

 

Our business depends on the efficient and uninterrupted operation of our network operations centers, our network access points and our computer and communications hardware systems and infrastructure. Interruptions could result from natural or human caused disasters, power loss, telecommunications failure and similar events. If we experience a problem at our network operations centers, including the failure of redundant systems, we may be unable to provide Internet connectivity services to our customers, provide customer service and support or monitor our network infrastructure or network access points, any of which would seriously harm our business and operating results. Also, because we provide continuous Internet availability under our service level agreements, we may be required to issue a significant amount of customer credits as a result of such interruptions in service. These credits could negatively affect our results of operations. In addition, interruptions in service to our customers could harm our customer relations, expose us to potential lawsuits and require additional capital expenditures.

 

A significant number of our network access points are located in facilities owned and operated by third parties. In many of those arrangements, we do not have property rights similar to those customarily possessed by a lessee or subtenant, but instead have lesser rights of occupancy. In certain situations, the financial condition of those parties providing occupancy to us could have an adverse impact on the continued occupancy arrangement or the level of service delivered to us under such arrangements.

 

The increased use of high power density equipment may limit our ability to fully utilize our data centers.

 

Customers are increasing their use of high-density equipment, such as blade servers, in our data centers, which has significantly increased the demand for power on a per cabinet basis. Because most of our centers were built several years ago, the current demand for electrical power may exceed our designed capacity in these facilities. As electrical power, not space, is typically the limiting factor in our data centers, our ability to fully utilize our data centers may be limited in these facilities.

Our business could be harmed by prolonged electrical power outages or shortages, increased costs of energy or general availability of electrical resources.

 

Our data centers and P-NAPs are susceptible to regional costs of power, electrical power shortages, planned or unplanned power outages or natural disasters, and limitations, especially internationally, on availability of adequate power resources. Power outages could harm our customers and our business. We attempt to limit exposure to system downtime by using backup generators and Uninterruptible Power Systems (UPS), however, we may not be able to limit our exposure entirely even with these protections in place, as has been the case with power outages we have experienced in the past and may experience in the future. In addition, the overall power shortage in California has increased the cost of energy, which we may not be able to pass on to our customers.

 

In each of our markets, we rely on utility companies to provide a sufficient amount of power for current and future customers. At the same time, power and cooling requirements are growing on a per unit basis. As a result, some customers are consuming an increasing amount of power per cabinet. We do not have long-term power agreements in all our markets for long-term guarantees of provisioned amounts. This means that we could face power limitations in our centers. This could have a negative impact on the effective available capacity of a given center and limit our ability to grow our business, which could have a negative impact on our financial performance, operating results and cash flows.

 

Any failure of our physical infrastructure or services could lead to significant costs and disruptions that could reduce our revenue and harm our business reputation and financial results.

 

Our business depends on providing customers with highly reliable service. We must protect our customers’ data center and P-NAP infrastructure and their equipment located in our data centers. The services we provide in each of our data centers are subject to failure resulting from numerous factors, including:

 

 

Problems at one or more of the data centers operated by us or any of our colocation providers, whether or not within our control, could result in service interruptions or significant equipment damage. We have service level commitment obligations to certain of our customers, including our significant customers. As a result, service interruptions or significant equipment damage in our data centers could result in difficulty maintaining service level commitments to these customers. If we incur significant financial commitments to our customers in connection with a loss of power, or our failure to meet other service level commitment obligations, our liability insurance and revenue reserves may not be adequate. In addition, any loss of services, equipment damage or inability to meet our service level commitment obligations could reduce the confidence of our customers and could consequently impair our ability to obtain and retain customers, which would adversely affect both our ability to generate revenues and our operating results.

 

Furthermore, we are dependent upon Internet service providers and telecommunications carriers in the U.S., Europe and Asia Pacific, some of which have experienced significant system failures and electrical outages in the past. Users of our services may in the future experience difficulties due to system failures unrelated to our systems and services. If for any reason, these providers fail to provide the required services, our business, financial condition and results of operations could be materially adversely impacted.

There is no known prevention or defense against denial of service attacks. During a prolonged denial of service attack, Internet service may not be available for several hours, thus negatively impacting hosted customers’ on-line business transactions. Affected customers might file claims against us under such circumstances. Our property and liability insurance may not be adequate to cover these customer claims.

 

Our results of operations have fluctuated in the past and may continue to fluctuate, which could have a negative impact on the price of our common stock.

 

We have experienced fluctuations in our results of operations on a quarterly and annual basis. The fluctuation in our operating results may cause the market price of our common stock to decline. We expect to experience significant fluctuations in our operating results in the foreseeable future due to a variety of factors, including:

 

 

In addition, fluctuations in our results of operations may 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 network access points and the terms of our network connectivity purchase agreements. These and other factors discussed in this joint proxy statement/prospectus could have a material adverse effect on our business, results of operations and financial condition. In addition, a relatively large portion of our expense is fixed in the short-term, particularly with respect to lease and personnel expense, depreciation and amortization, and interest expense. Therefore, our results of operations are particularly sensitive to fluctuations in revenue. Because our results of operations have fluctuated in the past and are expected to continue to fluctuate in the future, investors should not rely on the results of any particular period as an indication of future performance in our business operations. Fluctuations in our results of operations could have a negative impact on our ability to raise additional capital and execute our business plan. Our operating results in one or more future quarters may fail to meet the expectations of securities analysts or investors. If this occurs, we could experience an immediate and significant decline in the trading price of our stock.

 

We have acquired and may acquire other businesses, and these acquisitions involve numerous risks.

 

We intend to pursue additional acquisitions of complementary businesses, products, services and technologies to expand our geographic footprint, enhance our existing services, expand our service offerings and enlarge our customer base. If we complete future acquisitions, we may be required to incur or assume additional debt and make capital expenditures and issue additional shares of our common stock or securities convertible into our common stock as consideration, which will dilute our existing stockholders’ ownership interest and may adversely affect our results of operations. Our ability to grow through acquisitions involves a number of additional risks, including the following:

 

 

 

Failure to effectively manage our growth through acquisitions could adversely affect our growth prospects, business, results of operations and financial condition.

 

The terms of our existing credit facility impose restrictions upon us.

 

The terms of our existing credit facility impose operating and financial restrictions on us and require us to meet certain financial tests. These restrictions may also have a negative impact on our business, financial condition and results of operations by significantly limiting or prohibiting us from engaging in certain transactions.

 

The failure to comply with any of these covenants would cause a default under the credit facility. Any defaults, if not waived, could result in the lender ceasing to make loans or extending credit to us, accelerate or declare all or any obligations immediately due, or take possession of or liquidate collateral. If any of these occur, we may not be able to borrow sufficient funds to refinance it on terms that are acceptable to us, which could adversely impact our business, results of operations and financial condition. In the past, we have violated loan covenants, under a prior credit arrangement, regarding minimum cash EBITDA.

 

As of September 30, 2006, we were in compliance with all loan covenants.

 

Continued overcapacity in the Internet connectivity and IP services market may result in our recording additional significant restructuring charges and goodwill impairment.

 

As a result of the overcapacity created in the Internet connectivity and IP services market during the past several years, we have undertaken significant operational restructurings and have taken restructuring charges and recorded total restructuring costs of less than $0.1 million for the year ended December 31, 2005 and $3.6 million and $1.1 million for the years ended December 31, 2004 and 2003, respectively. If the Internet connectivity and IP services market continues to experience overcapacity and uncertainty or declines in the future, we may incur additional restructuring charges or adjustments in the future. Such additional restructuring charges or adjustments could adversely affect our business, net profit and stockholders’ equity.

 

If we are unable to deploy new network access points or do not adequately control expense associated with the deployment of new network access points, our results of operations could be adversely affected.

 

As part of our strategy, we intend to continue to expand our network access points, particularly into new geographic markets. We will face various risks associated with identifying, obtaining and integrating attractive network access point sites, negotiating leases for centers on competitive terms, cost estimation errors or overruns, delays in connecting with local exchanges, equipment and material delays or shortages, the inability to obtain necessary permits on a timely basis, if at all, and other factors, many of which are beyond our control and all of which could delay the deployment of a new network access point. We cannot assure you that we will be able to open and operate new network access points on a timely or profitable basis. Deployment of new network access points

will increase operating expense, including expense associated with hiring, training, retaining and managing new employees, provisioning capacity from Internet network service providers, purchasing new equipment, implementing new systems, leasing additional real estate and incurring additional depreciation expense. If we are unable to control our costs as we expand in geographically dispersed locations, our results of operations could be adversely affected.

 

Because we have limited experience operating internationally, our international operations may not be successful.

 

We have limited experience operating internationally. We currently have network access points in London, England, Hong Kong, Singapore and Sydney, Australia, participate in a joint venture with NTT-ME Corporation and another NTT affiliate that operates a network access point in Tokyo, Japan and maintain a marketing agreement with Telefonica USA, which provides us with further access in Europe and access to the Latin American market. As part of our strategy to expand our geographic markets, we may develop or acquire network access points or complementary businesses in additional international markets. The risks associated with expansion of our international business operations include:

 

 

We may be unsuccessful in our efforts to address the risks associated with our international operations, which may limit our international sales growth and adversely affect our business and results of operations.

 

Disputes with vendors regarding the delivery of services may materially impact our results of operations and cash flows.

 

In delivering our services, we rely on a number of Internet network, telecommunication and other vendors. We work directly with these vendors to provision services such as establishing, modifying or discontinuing services for our customers. Because of the volume of activity, billing disputes inevitably arise. These disputes typically stem from disagreements concerning the starting and ending dates of service, quoted rates, usage and various other factors. Disputed costs, both in the vendors’ favor and our favor, are researched and discussed with vendors on an ongoing basis until ultimately resolved. We record the cost and a liability based on our estimate of the most likely outcome of the dispute. These estimates are periodically reviewed by management and modified in light of new information or developments, if any. Because estimates regarding disputed costs include assessments of uncertain outcomes, such estimates are inherently vulnerable to changes due to unforeseen circumstances that could materially and adversely affect our results of operations and cash flows.

 

We depend upon our key employees and may be unable to attract or retain sufficient numbers of qualified personnel.

 

Our future performance depends to a significant degree upon the continued contributions of our executive management team and other key employees. To the extent we are able to expand our operations and deploy

additional network access points, we may need to increase our workforce. Accordingly, our future success depends on our ability to attract, hire, train and retain highly skilled management, technical, sales, marketing and customer support personnel. Competition for qualified employees is intense, and we compete for qualified employees with companies that may have greater financial resources than we have. Our employment agreements with our executive officers provide that either party may terminate their employment at any time. 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 fail to adequately protect our intellectual property, we may lose rights to some of our most valuable assets.

 

We rely on a combination of copyright, patent, trademark, trade secret and other intellectual property law, nondisclosure agreements and other protective measures to protect our proprietary rights. We also utilize unpatented proprietary know-how and trade secrets and employ various methods to protect such intellectual property. Taken as a whole, we believe our intellectual property rights are significant and that the loss of all or a substantial portion of such rights could have a material adverse effect on our results of operations. We cannot assure you that our intellectual property protection measures will be sufficient to prevent misappropriation of our technology. In addition, the laws of many foreign countries do not protect our intellectual properties to the same extent as the laws of the United States. From time to time, third parties have or may assert infringement claims against us or against our customers in connection with their use of our products or services. In addition, we may desire or be required to renew or to obtain licenses from others in order to further develop and market commercially viable products or services effectively. We cannot assure you that any necessary licenses will be available on reasonable terms.

 

We may face litigation and liability due to claims of infringement of third-party intellectual property rights.

 

The Internet services 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 products or 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, our customer agreements generally provide for us to indemnify our customers for expense or liabilities resulting from claimed infringement of patents or copyrights of third parties, subject to certain limitations. If an infringement claim against us were 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 or services to avoid infringement, our ability to compete successfully in our competitive market would be materially impaired.

 

Risks Related to Internap’s Industry

 

The future evolution of the high performance Internet connectivity market, and therefore the role of our products and services, cannot be predicted with certainty.

 

We face the risk that the market for high performance Internet connectivity services might develop more slowly or differently than currently projected, or that our services may not achieve continued and/or widespread market acceptance. 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 a premium for our services, which may affect market acceptance of our services or adversely impact the rate of market acceptance. We believe the danger of non-acceptance is particularly acute during economic slowdowns and when there is significant pricing pressure on Internet service providers. Finally, if the Internet becomes subject to a form of central management, or if Internet network service providers establish an economic settlement arrangement regarding the exchange of traffic between Internet networks, the demand for our Internet connectivity services could be adversely affected.

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 and IP services industry is characterized by rapidly changing technology, industry standards and customer needs, as well as by frequent new product and service introductions. 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. Our failure to anticipate the prevailing standard, to adapt our technology to any changes in the prevailing standard or the failure of a common standard to emerge could hurt our business. 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 alternative access devices and technologies.

 

Our network and software are vulnerable to security breaches and similar threats that could result in our liability for damages and harm our reputation.

 

There have recently been a number of widespread and disabling attacks on public and private networks. The number and severity of these attacks may increase in the future as network assailants take advantage of outdated software, security breaches or incompatibility between or among networks. Computer viruses, intrusions and similar disruptive problems could result in our liability for damages under agreements with our customers, and our reputation could suffer, thereby deterring potential customers from working with us. Security problems or other attacks 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 and could expose us to liability under Internet “spam” regulations. In the past, third parties have occasionally circumvented some of these industry-standard measures. Therefore, we cannot assure you that the measures we implement will not be circumvented. Our efforts to eliminate computer viruses and alleviate other security problems, or any circumventions of those efforts, may result in increased costs, interruptions, delays or cessation of service to our customers, which could hurt our business, results of operations and financial condition.

 

Terrorist activity throughout the world and military action to counter terrorism could adversely impact our business.

 

The continued threat of terrorist activity and other acts of war or hostility may have an adverse effect on business, financial and general economic conditions internationally. Effects from any future terrorist activity, including cyber terrorism, may, in turn, increase our costs due to the need to provide enhanced security, which would adversely affect our business and results of operations. These circumstances may also damage or destroy the Internet infrastructure and may adversely affect our ability to attract and retain customers, our ability to raise capital and the operation and maintenance of our network access points.

 

If governments modify or increase regulation of the Internet, the provision of our services could become more costly.

 

International bodies and federal, state and local governments have adopted a number of laws and regulations that affect the Internet and are likely to continue to seek to implement additional laws and regulations. For example, a federal law regulating unsolicited commercial e-mail, or “spam,” was enacted in 2003. In addition, federal and state agencies are actively considering regulation of various aspects of the Internet, including taxation of transactions, and imposing access fees for voice over IP, or VoIP. The Federal Communications Commission and state agencies are also reviewing the regulatory requirements, if any, that should be applicable to VoIP. If we seek to offer VoIP services, we could be required to obtain certain authorizations from regulatory agencies. We may not be able to obtain such authorizations in a timely manner, or at all, and conditions could be imposed upon such authorization that may not be favorable to us. 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, regulate the Internet in some respects as has been done with traditional telecommunications services, or otherwise increase the cost of doing business on the Internet or in some other manner. Any of these actions could have a significantly harmful effect on our customers or us. Moreover, the nature of any new laws and regulations and the

interpretation of 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.

 

Congress has extended the Internet Tax Freedom Act, which placed a moratorium against certain state and local taxation of Internet access, until November 1, 2007. Pursuant to this moratorium, most of our services are not subject to state and local taxation. Should the U.S. Congress not further extend or pass a similar moratorium limiting the taxation of Internet access or related services, state and local governments may impose taxes on some or all of the services we currently provide after November 1, 2007. We may not be able to pass these taxes along to our customers. This additional expense may have a negative impact on our business and the industry generally.

 

Risks Related to Internap’s Capital Stock

 

Our common stockholders may experience significant dilution, which could depress the market price of our common stock.

 

Holders of our stock options and warrants to purchase common stock may exercise their options or warrants to purchase our common stock which would increase the number of outstanding shares of common stock in the future. As of September 30, 2006, (1) options to purchase an aggregate of 2.9 million shares of our common stock at a weighted average exercise price of $10.86 were outstanding, and (2) warrants to purchase 0.2 million shares of our common stock at an exercise price of $9.50 per share were outstanding. The issuance of our common stock upon the exercise of options and warrants could depress the market price of the common stock by increasing the number of shares of common stock outstanding on an absolute basis or as a result of the timing of additional shares of common stock becoming available on the market.

 

Our stock price may be volatile.

 

The market for our equity securities has been extremely volatile. Our stock price could suffer in the future 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. The following factors could cause the price of our common stock in the public market to fluctuate significantly:

 

 

VitalStream is subject to many risks that are similar to those described under the following sub-headings under Risks Relating to Internap:

 

 

Risks Related to VitalStream’s Business.

 

We may continue to experience net losses from operations and may never become profitable.

 

We have experienced net losses in each quarter since our inception and as of September 30, 2006, had an accumulated deficit of $17.2 million. We are uncertain when, or if, we will generate net income. Even if we do generate net income in one or more quarters in the future, subsequent developments in our industry, customer base, business or cost structure or expenses associated with our operations, or due to an event such as significant litigation or a significant transaction may cause us to again experience net losses. We may never become profitable for the long-term, or even for any quarter.

 

We are dependent on a concentrated number of customers, and a material reduction in revenue from any of our significant customers would harm our financial results.

 

Historically, a significant portion of our revenues has come from a limited number of customers. We may not be able to sustain our revenue levels from these customers because our revenues have largely been generated in connection with these customers’ decisions to choose our Streaming Service for Flash, Streaming Service for Windows Media and managed hosting and colocation services versus competing services. During the nine months ended September 30, 2006, MySpace, Inc. accounted for approximately 35% of our revenue. In early October 2006, MySpace informed us that it intends to develop its own in-house streaming capabilities and to significantly reduce its use of our services. We began experiencing a significant reduction in revenue from MySpace commencing in October 2006 and expect that reduction to continue in the future.

 

During 2005, Comcast Corporation, MySpace, Inc. and World Netmedia, LLC accounted for approximately 14%, 11% and 11% of our revenue, respectively. During 2004, World Netmedia, LLC and Hypermedia Systems, Inc. accounted for approximately 18% and 10% of our revenue, respectively. Several additional customers individually accounted for between 1% and 9% of our revenues during the nine months ended September 30, 2006 and the years ended December 31, 2005 and 2004. Many of our agreements with customers are only for a year at a time and are generally terminable at any time upon short-term notice. In addition, during the term of an agreement, customer usage may expand or contract dramatically. Costs and disruptions associated with changing content delivery network, or CDN, providers are generally insignificant. Our largest customers generally use several CDN providers and, as a result, can move their business rapidly. As a result, customers accounting for a significant portion of our revenue could change CDN providers at any given time. Decisions by one or more significant customers to terminate or not renew their agreements with us, or to substantially reduce their use of our services, could substantially slow our revenue growth or lead to a decline in revenue.

 

We are substantially dependent upon technology and services provided by third parties, including our Adobe and Microsoft product licenses, and we may not be able to continue our current operations without such technology and services.

 

We rely on other companies to provide software licenses and supply key components of our network infrastructure, including Internet bandwidth, which constitutes our largest direct cost of providing services, and networking equipment. Additionally, we rely on third-party development of technology to provide media-related functionality, such as streaming media formats. We do not have long-term agreements governing the supply or license of many of these services or technologies, and most are available from only limited sources. Our Streaming Service for Flash and Streaming Service for Windows Media services are dependent upon licenses from Adobe Systems Incorporated and Microsoft Corporation, respectively. Our licenses are effective for the term of the applicable license agreements, which have limited terms and may be terminated early following an uncured material breach or may not be renewed upon expiration. Our license from Adobe terminates in December 2007. We have a one-year option to renew this license. Our license from Microsoft terminates in February 2007. A termination or nonrenewal of our license agreements with Adobe or Microsoft would result in a decrease in revenue and would harm our business. In the future, irrespective of our licenses with Adobe or Microsoft, we may be unable to continue to obtain needed services or licenses for needed technologies on commercially reasonable terms, or at all, which would harm our ability to continue to provide services, our cost structure and/or the quality of our services.

If we are unsuccessful in introducing our ad selection and ad insertion services and if our customers do not adopt our ad selection and ad insertion technology, we may not be able to achieve or sustain our anticipated growth.

 

We currently offer ad insertion technology for audio and video streams. Our VitalStream Advertising Service is designed to enable customers to turn existing streaming traffic into content packaged with advertising. In the third quarter, we first recognized material revenues from the VitalStream Advertising Service product line. Ad insertion for audio and video streams is a new technology and an evolving method of advertising and is subject to technological and market acceptance risk. If our VitalStream Advertising Service fails to achieve market acceptance, we may not grow our business, and our revenue may grow slower than expected. In addition, if we do not continue to improve our VitalStream Advertising Service, it may not remain competitive with other services.

 

Our failure to meet performance standards under our service level agreements could result in our customers terminating their relationship with us or our customers being entitled to receive service credits which could lead to reduced revenues.

 

We have service level agreements with substantially all of our customers in which we provide various guarantees regarding our levels of service. As a result, service interruptions could result in difficulty maintaining our service level commitments required by these agreements. If we fail to provide the levels of service required by these agreements, our customers may be able to receive service credits for their accounts, as well as terminate their relationship with us. In addition, any inability to meet our service level commitments could reduce the confidence of our customers and could consequently impair our ability to obtain and retain customers, which would harm our ability to generate revenues and our operating results.

 

We intend to expand our operations and increase our expenditures in an effort to grow our business. If we are unable to achieve or manage significant growth and expansion, or if our business does not grow as we expect, our operating results will suffer.

 

In order to successfully implement our business strategy, we must achieve substantial growth in our customer base through sales, business acquisitions or a combination thereof. We may not achieve such growth. If achieved, significant growth would place increased demands on our management, accounting systems, network infrastructure and systems of financial and internal controls. We may be unable to expand associated resources and refine associated systems fast enough to keep pace with expansion, especially as we expand into multiple facilities at distant locations. Rapid growth would also require an increase in the capacity, efficiency and accuracy of our billing and customer support systems. This would require an increase in the number of our personnel, particularly within accounting, customer service and technical support. Because of competition for employees and difficulties inherent in hiring, retaining and training large numbers of service and support personnel in a short period of time, we may be short staffed at times or be staffed with relatively inexperienced personnel. Our labor, administrative, professional fees and other costs may also increase. Any failure to expand our technical and personnel infrastructure with our business could lead to a decline in the quality of our sales, marketing, service, or other aspects of our business and lead to a long-term decline in revenue.

 

If we are unable to sell our services at acceptable prices relative to our costs, our business and financial results are likely to suffer.

 

Prices we have been charging for some of our services have declined in recent years. We expect that this decline may continue in the future as a result of, among other things, existing and new competition in the markets we serve. Consequently, our historical revenue rates may not be indicative of future revenues based on comparable traffic volumes. If we are unable to sell our services at acceptable prices relative to our costs or if we are unsuccessful with our strategy of selling additional services and features to our existing content delivery customers, our gross margins will decrease, and our business and financial results will suffer.

If we are unable to keep up with evolving industry standards and changing user needs, our business is likely to suffer, and we may need to deploy significant company resources to keep up with evolving industry standards and changing user needs.

 

The market for our Internet streaming and other services, and the markets for products and services utilizing our streaming and other services, are relatively new and rapidly evolving. As our customers’ needs and industry standards continue to evolve, our success will depend, in part, on our ability to timely and accurately identify emerging trends and to modify our services offerings accordingly. We may be unable to modify our proprietary technology, obtain licenses for key third-party technologies or integrate technologies rapidly and efficiently enough to keep pace with emerging trends. We may fail to identify and invest in technologies that subsequently dominate the industry, and we may build our offerings around, and invest in, technologies that fail to achieve a substantial foothold in the industry. In addition, new industry standards or technologies could render our Internet streaming and other services obsolete and unmarketable or require substantial reduction in the fees we charge.

 

Any failure on our part to properly identify, invest in and adopt new technologies that subsequently achieve market dominance in a timely and cost effective manner could lead to a substantial reduction in our market share, a reduction in our revenue and an increase in our operating costs. Any such decrease in revenues, or increase in costs, would harm our business, financial condition and results of operations.

 

The market for services supported by our Internet streaming services may not continue to grow at a sufficient pace to permit our continued growth.

 

Our continued growth is dependent upon the continued expansion of the markets for services supported by our Internet broadcasting and streaming services. This includes markets for services such as the streaming of movie trailers and music samples online, virtual home tours, online video games, live streamed sporting events or concerts and video conferences or presentations. The market for streaming-supported services may not continue to grow for various reasons, including:

 

 

If the market for streaming-dependent services does not grow, or grows more slowly than expected, our business, results of operations and financial condition will be harmed. Our business plan assumes continued growth in revenue, and it is unlikely that we could become profitable if our revenue were to cease growing.

 

The markets in which we operate are highly competitive, and we may be unable to compete successfully against existing or future competitors of our businesses.

 

We have experienced, and expect to continue to experience, increasingly competitive markets for our services. Our current and future competitors in Internet streaming may include other CDN providers, Internet broadcast

network specialty providers and alternative access providers such as cable television companies, direct broadcast satellite companies, telecommunication companies, wireless communications providers and other established media. Our current and future competitors in hosting and colocation may include other Internet hosting, colocation and access businesses, including such major providers as Savvis and AT&T. Barriers to entry in the hosting and colocation business are minimal.

 

Many of our existing and prospective competitors have longer operating histories and greater market presence, brand recognition, engineering and marketing capabilities, and financial, technological and personnel resources than we do. Competitors with an extended operating history, a strong financial position and an established reputation have an inherent marketing advantage because of the reluctance of many potential customers to entrust key operations to a company that may be perceived as unproven or unstable. In addition, our competitors may be able to use their extensive resources to our disadvantage in the following ways, among others:

 

 

If we are unable to compete effectively in our various markets, or if competition places downward pressure on the prices at which we offer our services, our business, financial condition and results of operations may suffer.

 

Our sales cycle requires us to expend a significant amount of resources, and could have an adverse effect on the amount, timing and predictability of future revenues.

 

The sales cycle of our products and services, beginning from our first customer contact to closing of the sale, often ranges from one to three months. We may expend significant resources during the sales cycle and ultimately fail to close the sale. The success of our sales process is subject to factors over which we have little or no control, including:

 

 

We expend substantial time, effort and money educating our current and prospective customers as to the value of our products and services. Even if we are successful in persuading lower-level decision makers within our customers’ organizations of the benefits of our products and services, senior management might nonetheless elect not to buy our products and services after months of sales efforts by our employees or resellers. If we are unsuccessful in closing sales after expending significant resources, this would result in lost potential revenues and an increase in operating expenses and would harm our business.

 

If we are unable to maintain peering arrangements with Internet Service Providers on favorable terms, our revenues could decrease and our operations could be harmed.

 

We enter into “peering” agreements with Internet Service Providers. “Peering” is the voluntary interconnecting of distinct data networks on the Internet in order to increase the number of alternatives participants have for the routing of data. Previously, many providers agreed to exchange traffic without charging each other. Recently, however, many providers that previously offered peering have reduced peering relationships or are seeking to

impose charges for transit. Increases in costs associated with Internet and exchange traffic could have an adverse effect on our business. If we are not able to maintain our peering relationships on favorable terms, our costs may increase or, if we decrease our use of peering relationships, the data transmission speed experienced by our customers may decrease. Such an increase in cost, decrease in transmission speed or combination of the two would likely lead to a decrease in our customer base and otherwise harm our business. In addition, consolidation in the telecommunication industry has led to fewer companies providing Internet bandwidth between major nodes, which may lead to higher prices for the bandwidth services we depend upon.

 

The network architecture and data tracking technology underlying our services is complex and may contain errors in design or implementation that could harm our business.

 

The network architecture and data tracking technology underlying our streaming and hosting services is complex and includes software and code used to generate customer invoices. This software and code is either developed internally or licensed from third parties. Any of the system architecture, system administration, software or code may contain errors, or may be implemented or interpreted incorrectly, particularly when first introduced or when new versions or enhancements to our services are released. In addition, with respect to certain usage-based billing, the data used to bill the customer for usage is an estimate, based upon complex formulas or algorithms. We or the customer may subsequently believe that such formulas or algorithms overstate or understate actual usage. In any such case, a design or application error could cause overbilling or underbilling of our customers, which may:

 

 

We may have insufficient transmission, electrical power and server capacity, which could result in interruptions in our services and loss of revenues.

 

Our operations are dependent in part upon transmission and electrical power capacity provided by third-party telecommunications network providers and power companies or owners of the facilities at which our data centers are located. In addition, our content delivery network must be sufficiently robust to handle all of our customers’ traffic. We may not be adequately prepared for unexpected increases in bandwidth demands by our customers, and the bandwidth we have contracted to purchase may become unavailable for a variety of reasons, including due to payment disputes or network providers going out of business. Any failure of these network providers to provide the capacity we require, due to financial or other reasons, may result in a reduction in, or interruption of, service to our customers. If we do not have adequate access to third-party transmission capacity, we could lose customers. If we are unable to obtain adequate transmission capacity or power on terms commercially acceptable to us, or at all, our business and financial results could suffer. We may not be able to deploy on a timely basis enough servers to meet the needs of our customer base or effectively manage the functioning of those servers. In addition, damage or destruction of, or other denial of access to, a facility where our servers are housed could result in a reduction in, or interruption of, service to our customers.

 

If “network neutrality” principles do not continue to govern the Internet, our business may be harmed by an increase in costs associated with the bandwidth underlying our streaming services.

 

The Internet is currently “network neutral.” This means that network providers generally transport all packets of data on a first come, first served basis, offer service plans distinguished only by bandwidth, refrain from billing third parties for network service and provide access to all sources of content on an equal basis. Residential broadband providers such as Verizon, Comcast, and AT&T have proposed tiered service offerings. In a tiered, as opposed to a neutral system, data from entities that purchase the higher tiered and more expensive service streams through the Internet faster and with more consistency than data from entities that have purchased lower tiered offerings. If content providers are able to charge for premium services, because of the importance of speed and quality to our streaming

services, we would likely be required by our customers to purchase and pay for premium services, which may significantly increase our bandwidth and related costs. We would likely attempt to pass along these premium charges to our customers. If our customers are unwilling to pay premium charges, or if our competitors are able to provide premium services in a more cost-effective manner than we are, we would experience an increase in costs without a corresponding increase in revenue, which would harm our business and results of operations.

 

We are dependent upon key personnel who may leave at any time and may be unable to attract qualified personnel in the future which could harm our anticipated growth, implementation of current business plans and may impair our financial performance.

 

We are highly dependent upon the continued services of our senior management team. As a result of our recent growth and the number of new customers and transactions, we are constantly evaluating our executive and management resources. To the extent our executives officers and managers are parties to employment agreements, such agreements are terminable at will by such employees. If one or more of our executives or senior managers were to leave, particularly if several were to leave within a short period of time, we may experience a significant disruption in our ability to recruit and retain customers, maintain our internal controls, and complete significant transactions in a timely and competent manner. In addition, we may be unable to recruit competent replacement personnel on a timely basis. The loss of the services of key executive or management personnel could harm our ability to execute our business plan and may impair our financial performance.

 

We may become subject to risks associated with international operations, which could slow our anticipated growth, implementation of current business plans and impair our financial performance.

 

We plan to expand our marketing efforts in foreign countries, which will involve the establishment of one or more data centers or other bases of operations outside of the U.S. We currently have a data center in the Netherlands. The establishment or expansion of foreign operations involves numerous risks, including without limitation:

 

 

Failure to establish and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could harm our operating results.

 

Section 404 of the Sarbanes-Oxley Act of 2002 requires that we maintain effective internal controls over financial reporting. If we remain an SEC reporting company, beginning with our Annual Report on Form 10-K for the year ended December 31, 2006, we are required to furnish annually a report of our management’s assessment of

the effectiveness of our internal controls over financial reporting and to cause our auditors to attest to, and report on, our assessment. In addition, effective internal controls are necessary for us to provide reliable and accurate financial reports and effectively prevent fraud. We have not yet completed a report, or undergone an audit on a report, related to management’s assessment of our internal controls. We may identify material weaknesses or other areas in need of improvement in connection with management’s assessment of our internal controls. Separately, our auditors may identify material weaknesses or other areas in need of improvement as part of their review and audit of our internal controls. We could experience significant expenses in connection with the design and implementation of our internal assessment, the audit of our assessment and efforts to remedy any weaknesses identified. In addition, we may fail to identify and remedy weaknesses in our internal controls over financial reporting. Weaknesses in our existing internal controls, or any failure to remedy weaknesses in internal controls in the future, could harm our operating results or cause management to be unable to report that our internal controls over financial reporting are effective.

 

Increases in government regulation may have an adverse effect on our business and increase compliance costs.

 

As Internet commerce continues to evolve, and, in particular, as the use of streaming media in markets such as wireless communications increases, we expect that federal, state or foreign legislatures and agencies may adopt laws and regulations affecting our business or our customers, including laws or regulations potentially imposing taxes or other fees on us or our customers, imposing reporting, tracking or other similar requirements or imposing restrictions or standards on us or our customers related to issues such as user privacy, pricing, content and quality of products and services. Such laws and regulations may significantly increase our costs of operations, may expose us to liability or may limit the services we can offer, or may impose similar burdens on our customers, which in turn may negatively impact our business, financial condition and results of operations. In particular, the growth and development of the market for online commerce has prompted calls for more stringent tax, consumer protection and privacy laws, both in the U.S. and abroad, that may impose additional burdens on companies conducting business online or providing Internet-related services such as ours. This could negatively affect both our business directly as well as the businesses of our customers, which could reduce their demand for our services. Tax laws that might apply to our servers, which are located in many different jurisdictions, could require us to pay additional taxes that would adversely affect any profitability we may experience. Internet-related laws remain largely unsettled, even in areas where there has been some legislative action. The adoption or modification of laws or regulations relating to the Internet or our operations, or interpretations of existing law, could adversely affect our business.

 

If we are found liable for the material that content providers distribute over our network, we could incur material monetary settlements.

 

The law relating to the liability of private network operators for information carried on or disseminated through their networks is still unsettled in many jurisdictions. We may become subject to legal claims relating to the content disseminated on our network. Lawsuits may be brought against us claiming that material on our network on which one of our customers relied was inaccurate. Claims could also involve matters such as defamation, invasion of privacy and copyright infringement. Content providers operating private networks have been sued in the past, sometimes successfully, based on the content of material. Such actions could be brought against us in international jurisdictions and defending such actions could be costly and divert management attention. If we need to take costly measures to reduce our exposure to these risks, or are required to defend ourselves against, or pay large monetary settlements in connection with, such claims, our financial results could be negatively affected.

 

Risks Related to VitalStream Common Stock.

 

Our common stock has low trading volume, which may make it difficult to dispose of a large number of shares.

 

Our common stock has been listed on the NASDAQ Market since June 21, 2006. The volume of trading in our common stock is relatively low, which limits significantly the number of shares that investors can purchase or sell in a short period of time without adversely affecting the market price of our common stock. Consequently, an investor

may find it more difficult to dispose of large numbers of shares of our common stock or to obtain a fair price for our common stock in the market.

 

The market price for our common stock is volatile and may change dramatically at any time.

 

The market price of our common stock may be highly volatile. Our stock price may change dramatically as the result of announcements of our quarterly results, new products or innovations by us or our competitors, the execution or termination of significant customer contracts, significant litigation or other factors or events that could affect our business, financial condition, results of operations or future prospects. In addition, the market price for our common stock may be affected by various factors not directly related to our business, including the following:

 

 

If our existing stockholders sell a large number of shares of our common stock or the public market perceives that existing stockholders might sell shares of our common stock, the market price of our common stock could decline significantly. As of December 29, 2006, we had 23,774,014 outstanding shares of common stock. Of these shares, other than the 1,747,312 shares of common stock we issued to EON Streams, Inc. in May 2006, which are “restricted securities” under Rule 144 of the Securities Act of 1933, substantially all of our outstanding shares of common stock may be sold without significant restriction pursuant to resale registration statements that we have filed for the benefit of certain stockholders or pursuant to Rule 144(k) of the Securities Act of 1933.

 

Our ability to issue preferred stock and common stock may significantly dilute ownership and voting power, negatively affect the price of our common stock and inhibit hostile takeovers.

 

Under our Articles of Incorporation, as amended, we are authorized to issue up to 10,000,000 shares of preferred stock and 290,000,000 shares of common stock without seeking stockholder approval. Our board of directors has the authority to create various series of preferred stock with such voting and other rights superior to those of our common stock and to issue such stock without stockholder approval. Any issuance of such preferred stock or common stock would dilute the ownership and voting power of existing holders of our common stock and may have a negative effect on the price of our common stock. The issuance of preferred stock without stockholder approval may also be used by management to stop or delay a change of control, or might discourage third parties from seeking a change of control of our company, even though some stockholders or potential investors may view possible takeover attempts as potentially beneficial to our stockholders.

 

The concentration of our capital stock in the hands of affiliates may limit the voting power of other stockholders and permit affiliates to make decisions benefiting themselves at the expense of stockholders generally.

 

Our executive officers, directors, affiliates of our officers and directors and other holders of more than five percent of our common stock collectively own or control approximately 42% of the voting power of VitalStream as of December 29, 2006. As a result, if such persons act together, they have the ability to effectively control substantially all matters submitted to our stockholders for approval, including the election and removal of directors and the approval of any merger, consolidation or sale of all or substantially all of our assets. These stockholders may make decisions that benefit themselves at the expense of stockholders generally.

 

Within the affiliate group as of November 10, 2006, affiliates of Dolphin Equity Partners held 3,190,114 shares, representing approximately 13% of the outstanding common stock of VitalStream, and affiliates of WaldenVC held 3,305,959 shares, representing approximately 14% of the outstanding common stock of VitalStream. Each of Dolphin Equity Partners and WaldenVC also has contractual rights effectively assuring each of them a seat on our board of directors. As a result of their stock holdings and board seats, Dolphin Equity Partners or WaldenVC may be able to block, or extract concessions or special benefits in connection with, various transactions, including any future financing or business combination transactions.

We have never declared, do not presently intend to declare, and are currently not permitted to declare, dividends with respect to our common stock.

 

We have never declared dividends on our common stock. We intend to retain earnings, if any, to finance the operation and expansion of our business and, therefore, we do not expect to pay cash dividends on our shares of common stock in the foreseeable future. In addition, restrictive covenants in our financing agreements presently prohibit us from paying dividends without the consent of Comerica Bank.

 

Internap markets products and services that provide managed and premise-based Internet Protocol (IP) and route optimization technologies that enable business-critical applications such as e-commerce, customer relationship management, video and audio streaming, voice-over-IP, virtual private networks, and supply chain management. Internap’s IP and route optimization product and service offerings are complemented by IP access solutions such as data center services, content delivery networks and managed security. Additionally, it offers high levels of pre- and post-installation service and consulting.

 

Internap was originally incorporated in Washington in 1996 and reincorporated in Delaware in 2001.

 

Ivy Acquisition Corp, or Merger Sub, is a wholly owned subsidiary of Internap that was incorporated in Nevada in 2006. Merger Sub does not engage in any operations and exists solely to facilitate the merger.

 

VitalStream provides products and services for storing and delivering audio and video digital media to large audiences over the Internet. Its content delivery network, or CDN, was purpose-built for streaming digital media and enables content owners to monetize their digital media assets via both subscription and ad-based business models. Historically, its core products have been Internet streaming, hosting and collocation services. In May 2006, it launched VitalStream Advertising Services, offering proprietary ad selection and ad insertion capabilities, enabling customers to turn existing streaming traffic into content packaged with advertising. Some of its other offerings include Internet Protocol Television, or IPTV, professional services and small business services.

 

VitalStream was incorporated in Nevada in 1986. VitalStream commenced its streaming, hosting and colocation business in 2000 as VitalStream, Inc. In April 2002, VitalStream, Inc. became a wholly-owned subsidiary of VitalStream Holdings, Inc., which had no operations at that time.

 

The special meeting of Internap stockholders will be held at 3 p.m. local time on February 20, 2007, at the principal executive offices of Internap at 250 Williams Street, Atlanta, Georgia. We are sending this joint proxy statement/prospectus to you in connection with the solicitation of proxies by the Internap board of directors for use at the Internap special meeting and any adjournments or postponements of the special meeting.

 

The purposes of the Internap special meeting are:

 

 

 

The Internap board of directors has determined and believes that the issuance of shares of Internap common stock in the merger and adoption of the merger agreement is advisable to, and in the best interests of, Internap and its stockholders and has unanimously approved such issuance and has unanimously approved the merger and the merger agreement. The Internap board of directors unanimously recommends that Internap stockholders vote “FOR” Proposal No. 1, to approve the issuance of shares of Internap common stock in the merger and adopt the merger agreement.

 

The Internap board of directors has concluded that the proposal to adjourn the Internap special meeting, if a quorum is present, if necessary to solicit additional proxies if there are not sufficient votes in favor of Proposal No. 1, is advisable to, and in the best interests of, Internap and its stockholders. Accordingly, the Internap board of directors unanimously recommends that all Internap stockholders vote “FOR” Proposal No. 2 to adjourn the Internap special meeting, if a quorum is present, if necessary to solicit additional proxies in favor of Proposal No. 1.

 

Only holders of record of Internap common stock at the close of business on the record date, December 29, 2006, are entitled to notice of, and to vote at, the Internap special meeting. There were approximately 1,057 holders of record of Internap common stock at the close of business on the record date. Because many of such shares are held by brokers and other institutions on behalf of stockholders, Internap is unable to estimate the total number of stockholders represented by these record holders. 35,875,746 shares of Internap common stock were issued and outstanding at the close of business on the record date. Each share of Internap common stock entitles the holder thereof to one vote on each matter submitted for stockholder approval. See “Security Ownership by Certain Beneficial Owners” for information regarding persons known to the management of Internap to be the beneficial owners of more than 5% of the outstanding shares of Internap common stock.

 

The proxy accompanying this joint proxy statement/prospectus is solicited on behalf of the board of directors of Internap for use at the Internap special meeting.

 

All properly executed proxies that are not revoked will be voted at the Internap special meeting and at any adjournments or postponements of the special meeting in accordance with the instructions contained in the proxy. If a holder of Internap common stock executes and returns a proxy and does not specify otherwise, the shares represented by that proxy will be voted “FOR” Proposal No. 1 to approve the issuance of shares of Internap common stock in the merger and adopt the merger agreement and “FOR” Proposal No. 2 to adjourn the special meeting, if a quorum is present, if necessary to solicit additional proxies in favor of Proposal No. 1, in accordance with the recommendation of the Internap board of directors.

 

An Internap stockholder who has submitted a proxy may revoke it at any time before it is voted at the Internap special meeting by executing and returning a proxy bearing a later date, providing proxy instructions via the Internet (your latest Internet proxy is counted), filing written notice of revocation with the Secretary of Internap stating that the proxy is revoked or attending the special meeting and voting in person.

 

The presence, in person or by proxy, at the special meeting of the holders of a majority of the shares of Internap common stock outstanding and entitled to vote at the special meeting is necessary to constitute a quorum at the meeting. Approval of each of Proposal No. 1 and Proposal No. 2 requires the affirmative vote of the holders of a majority of the votes cast in person or by proxy at the special meeting. Abstentions and broker non-votes will be

counted towards a quorum, but will not be counted for any purpose in determining whether either proposal is approved.

 

At the record date for the special meeting, the directors and executive officers of Internap owned approximately 3% of the outstanding shares of Internap common stock entitled to vote at the meeting.

 

In addition to solicitation by mail, the directors, officers, employees and agents of Internap may solicit proxies from Internap stockholders by personal interview, telephone, telegram, email or otherwise. Internap will bear the costs of the solicitation of proxies from its stockholders, except that Internap and VitalStream will each pay one-half of the cost of printing this joint proxy statement/prospectus. Arrangements will also be made with brokerage firms and other custodians, nominees and fiduciaries who are record holders of Internap common stock for the forwarding of solicitation materials to the beneficial owners of Internap common stock. Internap will reimburse these brokers, custodians, nominees and fiduciaries for the reasonable out-of-pocket expenses they incur in connection with the forwarding of solicitation materials. Internap has engaged the services of Morrow & Co., Inc. to distribute proxy solicitation materials to brokers, banks and other nominees and to assist in the solicitation of proxies from Internap stockholders for a fee of approximately $6,000 plus reasonable out-of-pocket expenses.

 

As of the date of this joint proxy statement/prospectus, the Internap board of directors does not know of any business to be presented at the Internap special meeting other than as set forth in the notice accompanying this joint proxy statement/prospectus. If any other matters should properly come before the special meeting, the accompanying proxy gives discretionary authority to the persons named as proxies to vote the shares represented by all valid proxies with respect to such other matters, and it is intended that the shares represented by such proxies will be voted with respect to such matters in accordance with the judgment of the persons named in the proxies.

 

Stockholder proposals may be included in Internap’s proxy materials for the Internap 2007 annual meeting so long as they are provided to Internap on a timely basis and satisfy the other conditions set forth in applicable SEC rules and regulations. For a stockholder proposal to be included in Internap’s proxy materials for the Internap annual meeting to be held in 2007, Internap must receive the proposal at its principal executive offices, addressed to its Secretary, not later than January 2, 2007. In addition, stockholder business that is not intended for inclusion in Internap’s proxy materials may be brought before the Internap annual meeting so long as Internap receives notice of the proposal in compliance with the requirements set forth in Internap’s Amended and Restated Bylaws, at Internap’s principal executive offices, not earlier than February 21, 2007 and not later than March 23, 2007.

 

The special meeting of VitalStream stockholders will be held at 12 p.m. local time on February 20, 2007, at the principal executive offices of VitalStream at 555 Anton Blvd., Suite 400, Costa Mesa, California. We are sending this joint proxy statement/prospectus to you in connection with the solicitation of proxies by the VitalStream board of directors for use at the VitalStream special meeting and any adjournments or postponements of the special meeting.

 

The purposes of the VitalStream special meeting are:

 

 

 

The VitalStream board of directors has unanimously determined and believes that the merger is advisable and fair to, and in the best interests of, VitalStream and its stockholders and has unanimously approved the merger and the merger agreement. The VitalStream board of directors unanimously recommends that VitalStream stockholders vote “FOR” Proposal No. 1, to adopt the merger agreement.

 

The VitalStream board of directors has concluded that the proposal to adjourn the VitalStream special meeting, if necessary to solicit additional proxies in favor of the foregoing Proposal No. 1, is advisable to, and in the best interests of, VitalStream and its stockholders. Accordingly, the VitalStream board of directors unanimously recommends that VitalStream stockholders vote “FOR” Proposal No. 2, to adjourn the VitalStream special meeting, if necessary to solicit additional proxies in favor of Proposal No. 1.

 

Only holders of record of VitalStream common stock at the close of business on the record date, December 29, 2006, are entitled to notice of, and to vote at, the VitalStream special meeting. There were approximately 375 holders of record of VitalStream common stock at the close of business on the record date, with 23,774,014 shares of VitalStream common stock issued and outstanding. Each share of VitalStream common stock entitles the holder thereof to one vote on each matter submitted for stockholder approval. See “Security Ownership by Certain Beneficial Owners” for information regarding persons known to the management of VitalStream to be the beneficial owners of more than 5% of the outstanding shares of VitalStream common stock.

 

The proxy accompanying this joint proxy statement/prospectus is solicited on behalf of the board of directors of VitalStream for use at the VitalStream special meeting.

 

All properly executed proxies that are not revoked will be voted at the VitalStream special meeting and at any adjournments or postponements of the special meeting in accordance with the instructions contained in the proxy. If a holder of VitalStream common stock executes and returns a proxy and does not specify otherwise, the shares represented by the proxy will be voted: (i) “FOR” Proposal No. 1 to adopt the merger agreement; (ii) “FOR” Proposal No. 2 to adjourn the special meeting, if necessary to solicit additional proxies if there are not sufficient votes in favor of Proposal No. 1, in accordance with the recommendation of the VitalStream board of directors; and (iii) in the discretion of the proxy holders as to any other matters incident to the conduct of the special meeting.

 

A VitalStream stockholder who has submitted a proxy may revoke it at any time before it is voted at the VitalStream special meeting by executing and returning a proxy bearing a later date, providing proxy instructions via the Internet (your latest Internet proxy is counted), filing written notice of revocation with the Secretary of VitalStream stating that the proxy is revoked or attending the special meeting and voting in person.

 

The presence, in person or by proxy, at the special meeting of the holders of a majority of the shares of VitalStream common stock outstanding and entitled to vote at the special meeting is necessary to constitute a quorum at the special meeting. VitalStream will count abstentions and broker non-votes to determine the number of shares present at the special meeting for the purpose of determining the presence or absence of a quorum. Broker non-votes are proxies from brokers or other nominees indicating that the record holder of the shares has not received instructions from the beneficial owner or other person entitled to vote the shares which are the subject of the proxy on a particular matter with respect to which the broker or other nominee does not have discretionary voting power. Approval of Proposal No. 1, requires the affirmative vote of the holders of a majority of the voting power of the shares of VitalStream common stock outstanding on the record date of the VitalStream special meeting. Approval of Proposal No. 2, requires the affirmative vote of holders of a majority of the votes cast in person or by proxy at the

VitalStream special meeting. Abstentions and broker non-votes will be counted towards a quorum and will have the same effect as negative votes on Proposal No. 1, but will not be counted for any purpose in determining whether Proposal No. 2, is approved.

 

At the record date for the VitalStream special meeting, the directors and executive officers of VitalStream and their affiliates owned approximately 7% of the outstanding shares of VitalStream common stock entitled to vote at the meeting. WaldenVC II, LP, or Walden, and four investment funds affiliated with Dolphin Communications, LLC, collectively referred to as the Dolphin Group, each of which beneficially owns 10% or more of the outstanding common stock of VitalStream, have each entered into voting agreements with Internap dated October 12, 2006 pursuant to which these stockholders agreed, among other things, to vote, or cause to be voted, all of the shares of VitalStream common stock owned by them, as well as all shares of VitalStream common stock acquired by them, in favor of the approval of the merger agreement and against approval of any proposal made in opposition to, or in competition with, the merger agreement. As of the record date for the special meeting, 6,496,103 shares of VitalStream common stock were subject to the voting agreements, representing approximately 27% of the outstanding shares of VitalStream common stock entitled to vote at the VitalStream special meeting. See “Voting Agreements.”

 

 

In addition to solicitation by mail, the directors, officers, employees and agents of VitalStream may solicit proxies from VitalStream stockholders by personal interview, telephone, telegram or otherwise. VitalStream will bear the costs of the solicitation of proxies from its stockholders, except that Internap and VitalStream will each pay one-half of the cost of printing this joint proxy statement/prospectus. Arrangements will also be made with brokerage firms and other custodians, nominees and fiduciaries who are record holders of VitalStream common stock for the forwarding of solicitation materials to the beneficial owners of VitalStream common stock. VitalStream will reimburse these brokers, custodians, nominees and fiduciaries for the reasonable out-of-pocket expenses they incur in connection with the forwarding of solicitation materials. In connection with this joint proxy statement/prospectus, VitalStream has retained a proxy solicitation firm, Morrow & Co., Inc., to aid in the solicitation process and will pay it a fee of approximately $5,500 for its services, plus any reasonable expenses incurred in connection with the solicitation.

 

 

As of the date of this joint proxy statement/prospectus, the VitalStream board of directors does not know of any business to be presented at the VitalStream special meeting other than as set forth in the notice accompanying this joint proxy statement/prospectus. If any other matters should properly come before the special meeting, it is intended that the shares represented by proxies will be voted with respect to such matters in accordance with the judgment of the persons voting the proxies.

 

 

Stockholder proposals may be included in VitalStream’s proxy materials for an annual meeting so long as they are provided to VitalStream on a timely basis and satisfy the other conditions set forth in applicable SEC rules and regulations. For a stockholder proposal to be included in VitalStream’s proxy materials for the VitalStream annual meeting to be held in 2007, VitalStream must have received the proposal at its principal executive offices, addressed to its Secretary, not later than February 10, 2007. In addition, stockholder business that is not intended for inclusion in VitalStream’s proxy materials may be brought before the VitalStream annual meeting so long as VitalStream receives notice of the proposal in compliance with the requirements set forth in VitalStream’s bylaws, addressed to its Secretary at VitalStream’s principal executive offices, no less than 30 days prior to the 2007 annual meeting; provided, however, that in the event such notice is provided less than 40 days prior to the 2007 annual meeting, to be timely, a stockholder notice must be received no later than the close of business on the 10^th day following the date on which the notice of 2007 annual meeting was mailed. Pursuant to rules adopted by the SEC, if a stockholder intends to propose any matter for a vote at the 2007 annual meeting but failed to notify VitalStream of such intention prior to April 28, 2007, then a proxy solicited by the VitalStream board of directors may be voted on such matter in the discretion of the proxy holder, without discussion of the matter in the proxy statement soliciting such proxy and without such matter appearing as a separate item on the proxy card.

 

At the effective time of the merger, Merger Sub will be merged with and into VitalStream. VitalStream will be the surviving corporation and will continue as a wholly owned subsidiary of Internap. In the merger, each share of VitalStream common stock outstanding at the effective time will automatically be converted into the right to receive 0.5132 shares of Internap common stock. Each VitalStream stockholder who would otherwise be entitled to receive a fraction of a share of Internap common stock (after aggregating all fractional shares to be received by such stockholder) will instead be paid in cash for such fractional share.

 

Based on the number of shares of Internap common stock and VitalStream common stock outstanding as of the record date, 12,200,823 shares of Internap common stock will be issuable pursuant to the merger agreement, representing approximately 25% of the total Internap common stock to be outstanding after such issuance. This assumes that no shares of VitalStream common stock or Internap common stock are issued after the record date and prior to the effective time of the merger.

 

As part of the ongoing evaluation of its business, Internap regularly considers a variety of strategic alternatives for its business. As a part of this process, Internap has evaluated, independently and with investment bankers, various alternatives for expanding its business, improving its competitive position and enhancing stockholder value, including the advisability of potential acquisitions and other transactions.

 

In March 2006, Internap and VitalStream discussed a possible commercial sales relationship in which VitalStream would purchase products and/or services from Internap. In connection with these discussions, the parties decided to discuss various commercial and strategic relationships.

 

A mutual nondisclosure agreement was executed between Internap and VitalStream on April 20, 2006. Neither the nondisclosure agreement nor any other agreement in effect between Internap and VitalStream prior to the execution of the merger agreement contained any provision that prevented VitalStream from discussing potential business combinations with other parties.

 

On April 27, 2006, Jack Waterman, VitalStream’s Chief Executive Officer, and Philip Kaplan, VitalStream’s President and Chief Operating Officer met with representatives of its financial advisor, RBC Capital Markets Corporation, or RBC, to discuss financial alternatives available to VitalStream at that time, including a public offering of VitalStream common stock to raise capital for its business, a sale of the company, acquisitions of other companies in the sector and private placement of equity. Management had been directed by VitalStream’s board to search for transactions that would significantly enhance the company’s prospects for rapid expansion in what was felt to be a time of rapid growth and change in VitalStream’s sector.

 

On May 11, 2006, David A. Buckel, Internap’s Chief Financial Officer, David C. Abrahamson, Internap’s Executive Vice President of Sales, Eric Klinker, Internap’s Chief Technology Officer and Chief Information Officer, Andrew Albrecht, Internap’s Vice President of Corporate Development and Investor Relations, and other representatives of Internap met with Mr. Kaplan and Chris Dion, VitalStream’s current Senior Vice President of Business Development, in Atlanta, Georgia to discuss commercial business opportunities between the companies. At the meeting, the parties also discussed a possible strategic business combination of the two companies. After discussing the results of their initial contacts with other members of the executive staff at their respective companies and consulting with their respective boards of directors, the parties agreed to arrange another meeting to discuss a possible combination of the two companies.

 

On May 31, 2006, James P. DeBlasio, Internap’s President and Chief Executive Officer, Mr. Albrecht, Mr. Waterman, Mr. Kaplan, Mr. Dion and Steve Newman, Executive Vice President of VitalStream Advertising Services, met in New York City to further discuss the possibility of a business combination of the two companies.

On June 5, 2006, Messrs. Buckel and Albrecht held a conference call with representatives of RBC to discuss general strategic benefits of a potential business combination between the two companies, to exchange information and to discuss potential transactional structures for such a business combination.

 

On June 6, 2006 at a meeting of the VitalStream board of directors, the directors discussed the potential business combination with Internap. Management presented preliminary valuation material on a potential business combination with Internap and reviewed with the board its views of the strategic rationale for the potential business combination and RBC presented information relating to the potential business combination. Following the presentation, the board approved discussions with Internap regarding a potential business combination with the assistance of RBC as financial advisor and directed management, with the assistance of RBC, to search for alternative business combinations for the board to consider. The board also authorized the engagement of RBC and Cowen & Company as co-book running managers with respect to a potential public offering and the commencement of definitive due diligence, drafting and other activities in preparation for the potential public offering. On June 7, 2006, VitalStream formally engaged RBC as VitalStream’s exclusive financial advisor for a potential sale transaction and, along with Cowen, as co-book running manager in connection with a contemplated public offering. The VitalStream board directed RBC to facilitate discussion with Internap and to actively check the market for alternative acquirers.

 

From June 7 though June 21, 2006, Messrs. Buckel and Albrecht, representatives of Internap’s financial advisor, Thomas Weisel Partners LLC, or TWP, Messrs. Waterman, Kaplan and Dion from VitalStream, Mark Belzowski, VitalStream’s Chief Financial Officer at the time, and representatives of RBC held several conference calls and discussions regarding Internap’s and VitalStream’s respective businesses, strategies and financial position, general strategic benefits of a potential business combination of the two companies, and methodologies for determining valuations of the companies.

 

On June 7, 2006, VitalStream formally engaged RBC as VitalStream’s financial advisor for the potential transaction with Internap and in connection with a contemplated registered offering.

 

From June 7, 2006 to July 17, 2006, VitalStream, with the assistance of Cowen, RBC and other investment banks, engaged in due diligence, drafting sessions and related activities with respect to a proposed registered offering of its common stock.

 

On June 11, 2006 the strategy committee of the Internap board of directors, which meets on an ad hoc basis to discuss and provide guidance to management on corporate strategy, including corporate development activities, met with Messrs. DeBlasio, Buckel and Albrecht to discuss the potential business combination with VitalStream. The committee and Internap management discussed the business opportunity presented by a strategic business combination with VitalStream, the relative valuations of the two companies, their respective business prospects, and market and investor perception of each company. The committee discussed the potential strategic, cultural and technology fit of the two companies.

 

On June 12, 2006, Internap formally engaged TWP as Internap’s financial advisor for the potential transaction with VitalStream.

 

On June 12, 2006, representatives of TWP and representatives of RBC held a conference call to discuss methodologies for determining valuations of the companies and the key terms relating to such a strategic business combination between the two companies.

 

On June 16, 2006, Internap received a proposed term sheet from VitalStream regarding a possible transaction between Internap and VitalStream.

 

Representatives of TWP and RBC held a conference call on June 19, 2006 to discuss the methodologies for determining valuations of the companies. The same day, Mr. DeBlasio, representatives of TWP, Mr. Waterman, Mr. Kaplan and representatives of RBC discussed Internap’s and VitalStream’s respective businesses, strategies and financial position, and the strategic benefits of a potential business combination of the two companies. At the conclusion of the meeting, the parties determined to move forward with further discussions.

 

On June 21, 2006 at a meeting of the Internap board of directors, the directors discussed the potential business combination with VitalStream. Management presented its views of the strategic rationale for the potential business

combination and TWP also discussed the potential business combination. At the conclusion of this meeting, the Internap board authorized management to continue discussions with VitalStream regarding such a potential business combination.

 

On July 10, 2006, TWP submitted an initial due diligence list and a proposed process timeline to VitalStream.

 

On July 13, 2006 at a special meeting of the VitalStream board of directors, among other matters, the VitalStream board of directors was updated by management about the status of discussions with Internap, as well as other strategic alternatives and the public offering. The board authorized the public offering and created a pricing committee with respect to the public offering with authority, among other things, to proceed with or cancel the public offering. The board also discussed the continued pursuit of discussions with Internap and the exploration of additional strategic alternatives.

 

On July 14, 2006, RBC submitted a supplemental financial due diligence request list to Internap.

 

On July 17, 2006, at a special meeting of the VitalStream board of directors, the board was updated by RBC and management about the status of discussions with Internap, as well as other strategic alternatives and the public offering. The board authorized the pricing committee of the board of directors, working with management, to make a decision with respect to the filing of a registration statement for the public offering that week. The board discussed the continued pursuit of discussions with Internap and exploration of additional strategic alternatives if the determination was made not to file the registration statement.

 

After close of market on July 17, 2006, VitalStream suspended its activities with respect to the proposed registered offering of its common stock due to several factors. These factors included unfavorable market conditions for the public offering and an interest in creating a window for additional discussions with Internap prior to moving forward with the public offering, which management viewed as foreclosing the possibility of a sale of the company in the short term.

 

On July 20 and 21, 2006, Messrs. DeBlasio, Buckel, Klinker and Albrecht, representatives of TWP, Messrs. Waterman, Kaplan, Dion, Belzowski, Newman and other representatives of VitalStream, including Arturo Sida, Chief Legal Officer, and Steven Smith, Chief Technical Officer at the time, and representatives of RBC conducted joint due diligence meetings in Irvine, California. The parties conducted in-depth discussions regarding the operations of each company and how a combined company could be integrated to take advantage of the synergies created by such a strategic business combination. At the conclusion of the meeting, the parties determined to move forward with further discussions.

 

From August 1 though August 15, 2006, representatives of RBC and TWP continued their financial due diligence discussions and exchanged financial due diligence materials.

 

On August 4, 2006, Mr. Waterman received a call from another investment bank regarding an indication of preliminary interest by another potential acquirer, referred to as Company A.

 

On August 9, 2006, Messrs. Buckel and Albrecht, representatives of TWP, Messrs. Waterman and Dion and other representatives of VitalStream and representatives of RBC held a conference call to discuss the potential strategic business combination of the two companies. Internap management expressed its continued interest in a potential strategic business combination with VitalStream.

 

On August 16, 2006, at a meeting of the Internap board of directors, the directors discussed the potential business combination with VitalStream. Internap management updated the board of directors on the status of the ongoing discussions with VitalStream regarding a potential strategic business combination. Following the presentation, the board authorized management to continue discussions with VitalStream regarding such a potential strategic business combination.

 

In mid-to-late August 2006, Messrs. Kaplan and Dion held discussions with executives of Company A regarding a potential alternative business combination. Management subsequently reported to the VitalStream board of directors regarding the discussions, which management did not believe were promising.

 

On or about September 6, 2006, VitalStream recommenced its efforts with respect to the public offering of its common stock, and on September 12, 2006, VitalStream filed a registration statement on Form S-3 with the SEC

with respect to an underwritten offering of its common stock. In part because of the ongoing discussions with respect to a potential business combination between VitalStream and either Internap or Company A, VitalStream did not commence marketing efforts with respect to its public offering, and withdrew its registration statement on October 12, 2006, the date it entered into the merger agreement with Internap.

 

From September 7 though September 24, 2006, VitalStream’s management and representatives of RBC contacted six other companies to discuss a potential business combination with them. Messrs. Kaplan and Dion visited the offices of one of these companies in person to discuss an acquisition of the company’s content delivery network business. Of the six companies contacted, three indicated an interest in a potential business combination with VitalStream, and VitalStream delivered financial due diligence materials to each of these three companies. On September 12, 2006, representatives of RBC updated VitalStream management regarding the interest level and status of discussions with these three potential acquirers.

 

On September 15, 2006, Internap delivered to VitalStream a non-binding outline of potential terms for a business combination.

 

On September 18 and 19, 2006, Messrs. Buckel and Albrecht met with Messrs. Waterman, Kaplan and Dion and Eric Mersch, VitalStream’s Chief Financial Officer in Irvine to discuss business updates and the status of the public offering, and to exchange additional financial information.

 

On September 19, 2006, the strategy committee of the Internap board met with Messrs. DeBlasio, Buckel and Albrecht to receive an update on discussions with VitalStream and to further discuss the potential business combination.

 

In the last several days of September 2006, Messrs. Buckel and Albrecht of Internap, representatives of TWP, Eric Mersch, the newly appointed Chief Financial Officer of VitalStream and Mr. Dion of VitalStream and representatives of RBC held numerous conference calls regarding the key economics terms and other issues with respect to a proposed business combination. During this time, representatives of RBC and representatives of TWP held a few conference calls to discuss additional financial due diligence requests and the agenda and process for a potential business combination between VitalStream and Internap.

 

On September 25, 2006, Messrs. Waterman and Kaplan met with Messrs. DeBlasio, Buckel, Abrahamson, Klinker, Albrecht and other members of Internap’s senior management in Atlanta to engage in extensive discussions regarding VitalStream’s business, service offerings and possible business synergies of the potential business combination.

 

On September 30, 2006, the first draft of the definitive merger agreement was circulated and negotiations with respect to the merger agreement began between Internap, advised by Morris, Manning & Martin, LLP, legal advisors to Internap, referred to as Morris, Manning, and VitalStream, advised by Parr Waddoups. Between September 30, and October 12, 2006, representatives of Internap and VitalStream, along with their respective legal and financial advisors, negotiated the terms of the merger agreement and voting agreements, and discussed potential management employment agreements and other employee matters.

 

On October 2, 2006, members of VitalStream management and representatives of RBC conducted financial due diligence and a tour of Internap’s facilities in Atlanta. On the same day, Internap management conducted accounting, financial and operational due diligence on VitalStream in Irvine, California.

 

Beginning on October 2, 2006, and continuing through October 12, 2006, representatives of Internap, TWP and Morris Manning continued their due diligence on the business, legal and financial records of VitalStream.

 

On October 5, 2006, the Internap board of directors held a meeting at which Internap senior management made presentations to the board regarding the proposed business combination with VitalStream, including the due diligence investigation regarding VitalStream by Internap and its advisors, and organizational and integration matters. The Internap board continued its discussion of the potential business combination, including the strategic rationale for such a business combination, as well as the relative potential benefits and risks of combining with VitalStream. Following discussions regarding due diligence and the financial impact of the transaction, and after extensive board discussion, the Internap board authorized management to proceed with due diligence and negotiations on the proposed transaction on the terms discussed.

The board of directors of VitalStream met on October 5, 2006 to discuss Internap’s offer, which did not yet include key financial terms, and to consider authorizing the commencement of marketing efforts with respect to the public offering. Representatives of Cowen discussed with the board numerous issues related to the public offering, including timing, risk, logistics and expectations as to timing, pricing and the likelihood of success based upon current market circumstances. Representatives of RBC discussed with the board various financial and strategic aspects of a potential business combination with Internap. The VitalStream board considered the public offering, a possible business combination with Internap and additional possible strategic alternatives, including the possibility of remaining an independent entity and proceeding with neither transaction. At the conclusion of this meeting, the VitalStream board authorized the preparation of a pre-effective amendment to the registration statement for the public offering in anticipation of commencing marketing in the near future. The board also authorized the continuation of discussions regarding a potential business combination with Internap and, in particular, the negotiation of key financial terms for the board to consider at a subsequent meeting.

 

On October 6, 2006, Messrs. DeBlasio, Buckel and Albrecht met with Messrs. Waterman and Dion in Atlanta to discuss the business outlook of both companies and the potential for integrating the companies as a cohesive entity.

 

From October 9 though October 12, Messrs. Buckel and Albrecht and other representatives of Internap and VitalStream and their respective advisors conducted final negotiations on the deal terms and the definitive transaction documents in Irvine, California.

 

On October 9, 2006, Internap’s board of directors held a meeting by conference call, at which Messrs. DeBlasio and Buckel and other executives of Internap and a representative of TWP provided the board with an update on the discussions with representatives of VitalStream. Representatives of TWP updated the board with respect to its financial analysis regarding the potential business combination. The Internap board continued its discussion, with input from both its legal and financial advisors, of the potential business combination, including the strategic rationale for a business combination, as well as the potential benefits and risks of combining with VitalStream. At the conclusion of this meeting, the Internap board authorized management to continue discussions regarding the potential business combination.

 

On October 10, 2006, Mr. DeBlasio and Buckel and other executives of Internap and representatives of TWP updated members of Internap’s board of directors by conference call to review and discuss the status of the discussions with VitalStream and terms of the transaction.

 

On October 11, 2006, the Internap board of directors held a special meeting at which the proposed merger was extensively discussed and considered. TWP reviewed in detail the financial terms of the proposed merger and its analysis of the proposed transaction. TWP then delivered its oral opinion, subsequently confirmed in writing as of October 12, 2006, and based on and in reliance on the factors and assumptions set forth in its written opinion, that the consideration to be paid by Internap pursuant to the merger agreement was fair to Internap from a financial point of view. Representatives of Morris, Manning reviewed with the board in detail the proposed terms of the merger agreement, the voting agreements to be entered into by Internap with key stockholders of VitalStream, the irrevocable proxies to be granted to Internap by such key stockholders and related matters, as well as the fiduciary duties of the VitalStream board. Following the presentation, and after further review and extensive discussion, the board unanimously approved the merger and related matters, authorized management to execute the merger agreement and related agreements and recommended that Internap stockholders approve the issuance of shares of Internap common stock in the merger and adopt the merger agreement.

 

On October 11, 2006, the VitalStream board of directors held a meeting at which the proposed merger was discussed and considered. Mr. Waterman provided an update on the Internap board of directors’ authorization of the proposed exchange ratio of 0.5132 shares of Internap common stock for each share of VitalStream common stock. At this meeting, VitalStream senior management and representatives of RBC made presentations to the board regarding the proposed merger. The board reviewed in detail the outcome of further negotiations and the terms of the merger agreement and related agreements, and together with Parr Waddoups, discussed key issues related to the fiduciary duties of the VitalStream board. The VitalStream board was apprised of the interests of certain members of VitalStream management in the proposed merger. RBC reviewed with the board the financial terms of the proposed merger and delivered its oral opinion, subsequently confirmed in writing as of the same date, to the VitalStream

board of directors that, as of October 11, 2006, and based upon and subject to the assumptions, qualifications and limitations set forth in its opinion, the exchange ratio, as set forth in the merger agreement, was fair from a financial point of view to the holders of VitalStream common stock. Following the presentations, and after further review and discussion, the board unanimously voted to approve the merger and related matters, authorized management to execute the merger agreement and related agreements and resolved to recommend that VitalStream stockholders adopt the merger agreement.

 

The merger agreement was signed on October 12, 2006, and a press release announcing the deal was made on October 12, 2006, prior to the opening of regular trading on the NASDAQ Global Market.

 

The following discussion of the parties’ reasons for the merger contains a number of forward-looking statements that reflect the current views of Internap and/or VitalStream with respect to future events that may have an effect on their future financial performance. Forward-looking statements are subject to risks and uncertainties. Actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. Cautionary statements that identify important factors that could cause or contribute to differences in results and outcomes include those discussed in “Summary — Forward-Looking Information” and “Risk Factors.”

 

We believe that the combined companies together can meet more of their customers’ needs for products, services and technologies. Many of our customer segments are complementary. We believe that the broad set of products and services that Internap and VitalStream can provide to customers, including high performance route control products and services, content delivery services and on-line advertising services, will represent one of the industry’s most comprehensive solutions for optimized delivery and management of websites, and website scalability and the monetization of streaming and digital content over the Internet.

 

In addition to considering the strategic factors outlined above, the Internap board of directors considered the following factors in reaching its conclusion to approve the merger and to recommend that the Internap stockholders approve the issuance of shares of Internap common stock in the merger, all of which it viewed as generally supporting its decision to approve the business combination with VitalStream:

 

 

 

Internap’s board of directors also considered the potential risks of the merger, including the following:

 

 

 

The foregoing information and factors considered by Internap’s board of directors are not intended to be exhaustive but are believed to include all of the material factors considered by Internap’s board of directors. In view of the wide variety of factors considered in connection with its evaluation of the merger and the complexity of these matters, the Internap board of directors did not find it useful, and did not attempt, to quantify, rank or otherwise assign relative weights to these factors. In considering the factors described above, individual members of the Internap board of directors may have given different weight to different factors. The Internap board of directors conducted an overall analysis of the factors described above, including thorough discussions with, and questioning of, Internap’s management and Internap’s legal and financial advisors, and considered the factors overall to be favorable to, and to support, its determination.

 

The VitalStream board of directors has determined that the terms of the merger agreement and the merger are advisable, fair to, and in the best interests of, VitalStream and its stockholders. In the course of reaching its decision to approve the merger and to approve and adopt the merger agreement, the VitalStream board of directors consulted with our management, RBC and legal counsel.

 

The decision of the VitalStream board of directors was based upon a number of potential benefits of the transaction, including the following:

 

 

 

In addition to the potential benefits accruing to VitalStream and its stockholders from the merger, the VitalStream board of directors also considered a number of other factors in approving the merger, including the following: