Results of Operations

Revenues.  Total revenues increased 48%, or $207.7 million, to $636.4 million for the year ended December 31, 2007 as compared to $428.7 million for the year ended December 31, 2006. Total revenues increased 51%, or $145.6 million, to $428.7 million for the year ended December 31, 2006 as compared to $283.1 million for the year ended December 31, 2005. The increases in revenue during the years presented were primarily attributable to an increase in the number of customers under recurring revenue contracts, as well as increases in traffic and additional services sold to new and existing customers, the latter leading to increases in the average revenue per customer during each year, partially offset by reduced unit prices offered to new and renewing customers. We believe that the continued growth in use of the Internet by businesses and consumers, particularly in the media and entertainment segment, is the principal factor driving increased purchases of our services. We expect this trend to continue in 2008. Also contributing to the increase in revenues for the year ended December 31, 2007 were revenues generated through our acquisitions of Netli and Nine Systems. As of December 31, 2007, we had 2,645 customers under recurring revenue contracts as compared to 2,347 at December 31, 2006, and 1,910 at December 31, 2005.

For 2007 and 2006, 23% and 22%, respectively, of our total revenues was derived from our operations located outside of the United States, of which 17% and 18% of total revenues, respectively, was derived from operations in Europe. For 2005, 21% of our total revenues was derived from our operations located outside of the United States, of which 16% of total revenues was derived from operations in Europe. Other than the United States, no single country accounted for 10% or more of our total revenues during these periods. We expect international sales to increase slightly as a percentage of our overall sales in 2008 as compared to prior years. Resellers accounted for 18% of revenues in 2007, 20% in 2006 and 24% in 2005. For 2007, 2006 and 2005, no single customer accounted for 10% or more of total revenues.

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Cost of Revenues.  Cost of revenues includes fees paid to network providers for bandwidth and co-location of our network equipment. Cost of revenues also includes payroll and related costs and stock-based compensation for network operations personnel, cost of software licenses, depreciation of network equipment used to deliver our services and amortization of internal-use software.

Cost of revenues was comprised of the following (in millions):

Cost of revenues increased 78%, or $73.3 million, to $167.4 million for the year ended December 31, 2007 as compared to $94.1 million for the year ended December 31, 2006. Cost of revenues increased 69%, or $38.4 million, to $94.1 million for the year ended December 31, 2006 as compared to $55.7 million for the year ended December 31, 2005. These increases were primarily due to an increase in the amounts paid to network providers due to higher traffic levels, partially offset by reduced bandwidth costs per unit, and an increase in depreciation expense of network equipment as we continued to invest in our infrastructure. Additionally, in 2007 and 2006, cost of revenues included stock-based compensation expense, which increased by $1.4 million and $2.0 million, respectively, as compared to 2006 and 2005, respectively. Cost of revenues during 2007, 2006 and 2005 also included credits received of approximately $3.4 million, $1.5 million and $1.2 million, respectively, from settlements and renegotiations entered into in connection with billing disputes related to bandwidth contracts. Credits of this nature may occur in the future; however, the timing and amount of future credits, if any, will vary.

We have long-term purchase commitments for bandwidth usage and co-location with various networks and Internet service providers. For the years ending December 31, 2008, 2009 and 2010, the minimum commitments related to bandwidth usage and co-location services are approximately $38.2 million, $6.6 million and $2.4 million, respectively.

We believe cost of revenues will increase in 2008. We expect to deliver more traffic on our network, which would result in higher expenses associated with the increased traffic; however, such costs are likely to be partially offset by lower bandwidth costs per unit. Additionally, for 2008, we anticipate increases in depreciation expense related to our network equipment and amortization of internal-use software development costs, along with increased payroll and related costs, as we continue to make investments in our network with the expectation that our customer base will continue to expand. Additionally, cost of revenues is expected to increase as a result of higher stock-based compensation expense due to additional equity awards we expect to grant to network-related personnel.

Research and Development.  Research and development expenses consist primarily of payroll and related costs and stock-based compensation for research and development personnel who design, develop, test and enhance our services and our network. Research and development costs are expensed as incurred, except for certain internal-use software development costs eligible for capitalization. During the years ended December 31, 2007, 2006 and 2005, we capitalized software development costs of $17.8 million, $11.7 million and $8.5 million, respectively, net of impairments. These development costs consisted of external consulting and payroll and payroll-related costs for personnel involved in the development of internal-use software used to deliver our services and operate our network. Additionally, for the years ended December 31, 2007 and 2006, we

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capitalized $6.4 million and $4.3 million, respectively, of non-cash stock-based compensation in accordance with SFAS No. 123R. These capitalized internal-use software costs are amortized to cost of revenues over their estimated useful lives of two years.

Research and development expenses increased 33%, or $11.0 million, to $44.1 million for the year ended December 31, 2007 as compared to $33.1 million for the year ended December 31, 2006. Research and development expenses increased 83%, or $15.0 million, to $33.1 million for the year ended December 31, 2006, as compared $18.1 million for the year ended December 31, 2005. The research and development expense increases in both 2007 and 2006 as compared to the prior years were due to increases in payroll and related costs resulting from higher headcount, as well as additional stock-based compensation expense.

The following table quantifies the net increase in the various components of our research and development expenses for the periods presented (in millions):

We believe that research and development expenses will increase in 2008, as we expect to continue to hire additional development personnel in order to make investments in our core technology, develop new services and make refinements to our other service offerings.

Sales and Marketing.  Sales and marketing expenses consist primarily of payroll and related costs, stock-based compensation expense and commissions for personnel engaged in marketing, sales and support functions, as well as advertising and promotional expenses.

Sales and marketing expenses increased 23%, or $27.9 million, to $147.6 million for the year ended December 31, 2007 as compared to $119.7 million for the year ended December 31, 2006. Sales and marketing expenses increased 54%, or $41.8 million, to $119.7 million for the year ended December 31, 2006 as compared to $77.9 million for the year ended December 31, 2005. The increase in sales and marketing expenses during these periods was primarily due to higher payroll and related costs, particularly commissions for sales and marketing personnel, attributable to revenue growth and as a result of higher stock-based compensation expense, particularly for the year ended December 31, 2006, as compared to the year ended December 31, 2005.

The following table quantifies the net increase in the various components of our sales and marketing expenses for the periods presented (in millions):

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We expect that sales and marketing expenses will increase in 2008 due to an expected increase in commissions on higher forecasted sales of our services, the expected increase in hiring of sales and marketing personnel and additional expected increases in other marketing costs such as advertising.

General and Administrative.  General and administrative expenses consist primarily of the following components:

General and administrative expenses increased 34%, or $30.9 million, to $121.1 million for the year ended December 31, 2007 as compared to $90.2 million for the year ended December 31, 2006. General and administrative expenses increased 70%, or $37.2 million, to $90.2 million for the year ended December 31, 2006 as compared to $53.0 million for the year ended December 31, 2005. The increase in general and administrative expenses during both periods was primarily due to an increase in payroll and related costs as a result of headcount growth, as well as higher stock-based compensation expense. Additionally, facilities-related costs have increased due to office expansions, and we have incurred increased expenditures for professional services, particularly legal fees related to current litigation matters.

The following table quantifies the net increase in various components of our general and administrative expenses for the periods presented (in millions):

We expect general and administrative expenses to increase in 2008 due to increased payroll and related costs attributable to increased hiring, an increase in rent and facilities costs, and higher litigation-related expenses in connection with a trial that commenced in February 2008.

Amortization of Other Intangible Assets.  Amortization of other intangible assets consists of the amortization of intangible assets acquired in business combinations and amortization of acquired license rights. Amortization of other intangible assets increased 35%, or $2.9 million, to $11.4 million for the year ended December 31, 2007

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as compared to $8.5 million for the year ended December 31, 2006. Amortization of other intangible assets for the year ended December 31, 2006 increased by $3.4 million, or 66%, over amortization of other intangible assets in the year ended December 31, 2005 of $5.1 million. The increase in amortization of other intangible assets in 2007 as compared to 2006 was due to the amortization of intangible assets from the acquisitions of Netli in March 2007 and Nine Systems in December 2006. The increase in amortization of intangible assets in 2006 as compared to 2005 was due to the amortization of intangible assets from the acquisition of Speedera in June 2005. Based on our currently owned intangible assets, we expect amortization of other intangible assets to be approximately $13.4 million, $13.6 million, $12.9 million, $12.3 million and $11.5 million for the years ending December 31, 2008, 2009, 2010, 2011 and 2012, respectively.

Interest Income.  Interest income includes interest earned on invested cash balances and marketable securities. Interest income increased 46%, or $8.1 million, to $25.8 million for the year ended December 31, 2007 as compared to $17.7 million for the year ended December 31, 2006. Interest income increased 315%, or $13.4 million, to $17.7 million for the year ended December 31, 2006 as compared to $4.3 million for the year ended December 31, 2005. The increase in 2007 as compared to 2006 was primarily due to an increase in our total invested marketable securities as a result of an increase in our cash from operations. The increase in interest income in 2006 as compared to 2005 was also due to an increase in our invested marketable securities in 2006 as compared to 2005, an increase in cash from operations, as well as the investment of the $202.1 million in net proceeds we received from our public equity offering of 12.0 million shares of our common stock in November 2005.

Interest Expense.  Interest expense includes interest paid on our debt obligations as well as amortization of deferred financing costs. Interest expense decreased 3%, or $85,000, to $3.1 million for the year ended December 31, 2007 compared to $3.2 million for the year ended December 31, 2006. Interest expense decreased 41%, or $2.2 million, to $3.2 million for the year ended December 31, 2006 compared to $5.3 million for the year ended December 31, 2005. Based upon our outstanding indebtedness at December 31, 2007, we believe that interest expense on our debt obligations, including deferred financing amortization, will not exceed $3.1 million in 2008.

Other Income (Expense), net.  Other income (expense), net primarily represents net foreign exchange gains and losses incurred during the periods presented, as well as gains and losses on legal settlements. Other income, net decreased 8%, or $43,000, to other income, net of $527,000 for the year ended December 31, 2007 as compared to other income, net of $570,000 for the year ended December 31, 2006. Other expense, net was $507,000 for the year ended December 31, 2005. Other income, net for the year ended December 31, 2007 consisted of $35,000 of foreign exchange gains and $492,000 of net gains on legal settlements. Other income, net of $570,000 for the year ended December 31, 2006 consisted of approximately $90,000 of foreign exchange gains and $480,000 of net gains on legal settlements. For the year ended December 31, 2005, other expense, net of $507,000 consisted of approximately $1.5 million of foreign exchange losses, offset by $1.0 million of net gains on legal settlements. Other income (expense), net may fluctuate in the future based upon movements in foreign exchange rates, the outcome of legal proceedings and other events.

Gain (Loss) on Investments, net.  During the year ended December 31, 2007, we recorded a net gain on investments of $24,000 on the sale of marketable securities. During the years ended December 31, 2006 and 2005, we recorded a net gain on investments of $261,000 and a net loss on investments of $27,000, respectively, from the sale of marketable securities. We do not expect significant gains or losses on investments in 2008.

Loss on Early Extinguishment of Debt.  Loss on early extinguishment of debt for the year ended December 31, 2005 was $1.4 million as a result of our redemption of $56.6 million in aggregate principal amount of our 5  ¹ / 2 % convertible subordinated notes during 2005. This loss of $1.4 million consisted of $889,000 in premiums above par value paid to redeem such notes and $481,000 of deferred financing costs associated with redeeming such notes prior to their maturity.

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Provision for (Benefit from) Income Taxes.  For the year ended December 31, 2007, our effective tax rate of 40.0% was higher than the 35% statutory federal income tax rate applicable to corporations due primarily to state income taxes, the effect of non-deductible stock-based compensation, and an increase in our tax valuation allowance for capital loss carryforwards; partially offset by the benefit recorded for research and development tax credits. For the year ended December 31, 2006, our effective tax rate of 41.5% was higher than the 35% statutory federal income tax rate due primarily to state income taxes and the effect of non-deductible stock-based compensation, partially offset by the benefit recorded for research and development tax credits. For the year ended December 31, 2005, our effective tax rate was a benefit of 363.5% and was higher than the 35% statutory federal income tax rate due primarily to a tax benefit of $285.8 million recorded in connection with the release of substantially all of the valuation allowance recorded against net deferred tax assets.

Provision for income taxes increased by 64%, or $26.2 million, to $67.2 million for the year ended December 31, 2007 as compared to $41.1 million during the year ended December 31, 2006. Benefit from income taxes was $257.6 million for the year ended December 31, 2005. During 2005, in connection with the release of our deferred tax asset valuation allowance, we recorded an income tax benefit of $285.8 million which was offset by provisions for income taxes primarily related to our alternative minimum tax obligations and income earned in profitable foreign jurisdictions. As a result of the release of the deferred tax asset valuation allowance in 2005, we recorded a provision for income taxes of $41.1 million and $67.2 million in 2006 and 2007, respectively.

Based upon our cumulative history of earnings over a twelve-quarter period and an assessment of our expected future results of operations, during the third quarter of 2005, we determined that it had become more likely than not that we would be able to realize a substantial portion of our United States and foreign NOL carryforward tax assets prior to their expiration. As a result, during 2005, we released a total of $349.5 million of our United States and foreign deferred tax asset valuation allowance. Of such amount, $285.8 million was recorded as an income tax benefit in our statement of operations; $61.0 million was attributable to stock option exercises, which was recorded as an increase in additional paid-in capital on our balance sheet; and approximately $2.7 million was recorded as a reduction to acquired goodwill and intangible assets.

As of December 31, 2007, we had a total valuation allowance of $11.2 million. During the fourth quarter of 2007, we recorded a valuation allowance of $6.7 million against capital loss carryforwards that are expected to expire unused and also reversed an existing valuation allowance of $1.9 million related to certain state NOL carryforwards.

While we expect our consolidated annualized effective tax rate in 2008 to remain relatively consistent with 2007, this expectation does not take into consideration the effect of discrete items recorded as a result of our compliance with SFAS No. 123R or any potential tax planning strategies. Our effective tax rate could be materially different depending on the nature and timing of the disposition of incentive and other employee stock options. Further, our effective tax rate may fluctuate within a fiscal year and from quarter to quarter, due to items arising from discrete events, including settlements of tax audits and assessments, the resolution or identification of tax position uncertainties and acquisitions of other companies.

Because of the availability of the NOLs discussed above, a significant portion of our future provision for income taxes is expected to be a non-cash expense; consequently, the amount of cash paid with respect to income taxes is expected to be a relatively small portion of the total annualized tax expense during periods in which the NOLs are utilized. In determining our net deferred tax assets and valuation allowances, annualized effective tax rates, and cash paid for income taxes, management is required to make judgments and estimates about domestic and foreign profitability, the timing and extent of the utilization of NOL carryforwards, applicable tax rates, transfer pricing methodologies and tax planning strategies. Judgments and estimates related to our projections and assumptions are inherently uncertain; therefore, actual results could differ materially from our projections.

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We have recorded certain tax reserves to address potential exposures involving our income tax and sales and use tax positions. These potential tax liabilities result from the varying application of statutes, rules, regulations and interpretations by different taxing jurisdictions. Our estimate of the value of these tax reserves reflects assumptions based on past experiences and judgments about the interpretation of statutes, rules and regulations by taxing jurisdictions. It is possible that the ultimate tax liability or benefit from of these matters may be materially greater or less than the amount that we have estimated.