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Article by DailyStocks_admin    (05-06-08 09:09 AM)

SAVVIS Inc. CEO PHILIP J KOEN bought 20,000 shares on 5-02-2008 at $14.99

BUSINESS OVERVIEW

Overview

We provide information technology, or IT, services including managed hosting, utility computing, colocation, security, network, and professional services through our global infrastructure to businesses and government agencies around the world. Our services are designed to offer a flexible, comprehensive IT solution that meets the specific business and infrastructure needs of our customers. Our suite of products can be purchased individually, in various combinations, or as part of a total or partial outsourcing arrangement. Our point solutions meet the specific needs of customers who require control of their physical assets, while our managed hosting solution provides customers with access to our services and infrastructure without the upfront capital costs. By outsourcing significant elements of their network and IT infrastructure needs, our customers are able to focus on their core business while we ensure the performance of their IT infrastructure. We have over 4,200 customers across all industries with a particular emphasis in the financial services, media and entertainment, software, and government sectors.

We were incorporated in Delaware in 1998 and began providing high speed Internet service to enterprise clients and Internet service providers. In 2004, we acquired substantially all of the assets of Cable and Wireless USA, Inc. and Cable & Wireless Internet Services, Inc. together with the assets of certain of their affiliates (CWA). With the acquisition of CWA, we acquired hosting assets in 15 data centers, an Internet Protocol (IP) network, a global Content Delivery Network (CDN) and consulting expertise that enabled us to expand the scope of services we offer and the scale of our operations.

In January 2007, we completed the sale of the assets related to our non-strategic CDN services, and in June 2007, we sold the assets and assigned the lease for two data centers in Santa Clara, California to Microsoft Corporation. We used the proceeds from these sales to develop or expand data centers in the United States, the United Kingdom and Singapore.

Our principal executive offices are located at 1 SAVVIS Parkway, Town & Country, Missouri 63017 and our telephone number is (314) 628-7000. Our Internet site is at http://www.savvis.net. We are not including the information contained on our website as part of, or incorporating it by reference into, this filing. We make available to the public on our website, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such material is electronically filed with, or furnished to, the U.S. Securities and Exchange Commission, or SEC. Our reports filed with, or furnished to, the SEC are also available on the SEC’s website at http://www.sec.gov.

Unless the context requires otherwise, references to “we,” “us,” “our,” the “Company,” and “SAVVIS” refer to SAVVIS, Inc. and its subsidiaries.

Our Services

Our primary products and services are our hosting services, which include managed hosting and colocation services, and our network services.

Hosting Services provide the core facilities and network infrastructure to run business applications, provide data storage, and redundancy services. Our hosting services are comprised of colocation and managed hosting. Managed hosting also includes utility computing, security and professional services. Our hosting services allow our customers to choose the amount of IT infrastructure they prefer to outsource to support their business applications. Customers can scale their use of our services as their own requirements grow and as customers learn the benefits of outsourcing IT infrastructure management.


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Colocation is designed for customers seeking data center space and power for their server and networking equipment needs. We manage 28 data centers located in the United States, Europe, and Asia with approximately 1.3 million square feet of gross raised floor space, providing our customers around the world with a secure, high-powered, purpose-built location for their IT equipment.


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Managed Hosting Services provide an outsourced solution for a customer’s server and network equipment needs. In providing our managed hosting services, we deploy industry standard hardware and software platforms that are installed in our data centers to deliver the services necessary for operating our customers’ applications. We provide our managed hosting services, including related technology and operations support, on a monthly fee basis. Managed hosting services also include:


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Utility Computing provides customers with an available, secure applications platform that delivers scalability of an entire range of IT infrastructure at lower total cost than found with traditional service provider models. We achieve this combination of lower cost and better service through the use of virtualization technology. Whereas IT infrastructure services have traditionally been provided by discrete hardware components, advances in virtualization technology and software have enabled us to provide a broad range of functionality without the challenges of implementing and managing discrete components. Not only does this enable us to improve our own asset utilization, it also results in our ability to dynamically configure services to meet customer requirements with a utility model. Through our managed network, we provide connectivity between the customer and the utility computing platform housed in our data centers. With our utility computing solution, our customers pay only for the services they currently need, while maintaining the ability to scale up or down the services to meet their changing business needs.

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Managed Security Services provide global around-the-clock monitoring and management of security appliances, software, and network-based controls, and incident response, for our managed hosting and network services customers. We focus on delivering security services in a cost-effective manner while attempting to adhere to industry best practices to protect infrastructure and application assets. Utilizing our network backbone-based cleaning centers to detect and filter malicious traffic before it reaches our customers’ infrastructures, we work to mitigate the impact of such attacks. We also provide virtualized security services by using industry-standard virtualization technology in our data centers to reduce the need for our customers to pay for dedicated security equipment.


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Professional Services are provided through our skilled personnel who assist our customers in getting maximum value from our service offerings. We offer assistance and consultation in security for network and hosting environments, virtualization, web-based applications, business recovery, software as a service, program management, infrastructure, and migration. Our professional services organization assists our customers with assessing, designing, developing, implementing, and managing outsourcing solutions.

Network Services are comprised of our managed network services, including managed IP VPN, High Speed Layer-2 VPN, and the services marketed under our WAM!Net brand, hosting area network and bandwidth services, including Tier 1 Internet services and bandwidth sold to wholesale customers. We recently enhanced the performance of our network services by completing the deployment of our Application Transport Network, which provides an enhanced architecture to our network. This architecture ties together our data centers to facilitate a wide variety of integrated network and hosting solutions, including business continuity and disaster recovery, and ties together our hosting and customer sites into a single IP VPN solution.


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Managed IP VPN service is a fully managed, end-to-end solution that includes all hardware, management systems, and operations to transport an enterprise’s voice, video and data applications at corresponding quality-of-service levels, whether those applications are housed at our customer’s site or in our data centers. Customers that purchase this service are generally geographically dispersed enterprises seeking to communicate more cost effectively in a secure environment among their multiple locations around the world.


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High-Speed Layer-2 VPN uses our metro Ethernet ring capabilities to provide access between connected nodes, which may include data centers, carrier hotels for internet carrier diversity, or market data exchanges.


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WAM!NET Services provide a shared infrastructure tied to applications that streamline process and workflow around the creation, production and distribution of digital media and marketing content. These services help companies to manage, share, store, and distribute their digital media inside of their organization and throughout their external supply chains using a single access point.


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Hosting Area Network , or HAN, is a dedicated network that provides high speed Internet connectivity for hosting customers located in our data centers, along with value-added services such as load balancing and firewalls.


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Bandwidth Services are provided to enterprises and wholesale carrier customers. We offer Tier 1 Internet services in the United States, Europe, and Asia that are managed, unmanaged, or integrated with our IP VPN. In addition, we offer carrier diversity by enabling connectivity either to Internet providers built into our data centers or to providers in carrier hotels that are connected to our data centers by our metro Ethernet rings.

Our Strategy

Our key growth strategies include the following:


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Target the right customers. We specifically target customers that we believe will receive the most economic value from using our technology. Many mid-sized businesses have traditionally outsourced single IT service offerings, such as network services or hosting services, and have continued to own and manage portions of their IT infrastructure themselves. These businesses can lower the overall cost of their IT operations while improving the quality of their IT systems by purchasing our managed services and outsourcing the majority of their IT services rather than a single IT service. We believe that pursuing these customers will allow us to increase revenues as these customers purchase our higher margin services while at the same time reducing their overall IT costs.


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Offer broad integrated comprehensive services. Our broad, integrated, comprehensive offering of IT services allows us to act as a full service provider to our customers. Unlike most of our competitors who have limited or single service offerings, we offer a full range of solutions, including computing, storage, applications, network, security services, and hosting. Our full service orientation creates incremental revenue growth as customers seek to minimize the number of outside vendors and demand “one-stop” service providers.


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Leverage our data centers and global network. We currently operate 28 data centers and an extensive global network, which we expect will provide us with significant operating leverage as we increase the amount of our revenue that is derived from managed services. By supplementing existing customers that purchase only basic colocation or network services with customers that purchase a wide array of higher priced managed services, we expect to be able to increase the revenues we derive from these data centers. In late 2006, we initiated a data center expansion strategy in which we opened four new data centers in 2007, and announced plans to open an additional four new data centers in 2008, all in high-growth, high-demand markets. In total, upon completion, the eight new data centers will have added approximately 275,000 square feet of gross raised floor space, which will enable us to sell additional colocation and managed hosting services.

Our Infrastructure

We provide our services through our global infrastructure that extends to 29 countries and includes:


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28 Data Centers in the United States, Europe, and Asia with approximately 1.3 million square feet of gross raised floor space;
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Tier 1 OC-192 Internet Backbone with over 17,000 miles of fiber; and
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Operations Support System, or OSS, which provides automated provisioning, end-to-end management, and integration with commercial element management systems.

We have combined our global infrastructure with our virtualization and automation technologies to allow us to offer our services as part of a total outsourcing solution or on a utility services basis. By applying our virtualization technology to our servers, storage, security, and network devices, we are able to offer customers connected to our network access to a suite of services, without the customer having to purchase, install, and configure equipment and network services, and with the ability to easily scale the infrastructure to meet evolving customer requirements.

For information regarding our revenue and long-lived assets by geographic region, see Note 15 of Notes to Consolidated Financial Statements, which is incorporated herein by reference.

Industry Trends

The IT strategy for many businesses has been increasingly focused on reducing costs, improving responsiveness to a changing business environment, and focusing resources on projects that deliver competitive advantages. While IT capabilities were often viewed as competitive advantages in the past, many businesses now recognize that a large part of their IT infrastructure no longer provides a strategic or financial advantage. As the core functions of IT, such as data storage, processing, and transport, have become commonplace throughout all industries, these functions have become routine and increasingly thought of as simply costs of doing business. Many businesses are also recognizing the high cost and inefficiency of managing IT themselves, including the difficulties of upgrading technology, training and retaining skilled personnel with domain expertise, and matching IT costs with actual benefits. Given these trends in IT strategy, budget constraints, and inefficient use of resources, businesses often look to outsource significant parts of their IT functions to trusted partners so they can focus on the areas that still provide competitive advantages, such as customer or industry-specific applications.

Most businesses today will consider outsourcing when reviewing their IT strategies; however, traditional outsourcing approaches do not often provide meaningful strategic, operational, or financial benefits as many outsourcers simply operate a customer’s infrastructure without fundamentally changing or updating the underlying technology or the way the infrastructure is managed. For example, an outsourcer may run the customer’s current IT systems more efficiently, but because they use legacy technology, the customer will likely not achieve the benefits of an operating infrastructure utilizing the best of breed hardware, software, and IT research and development.

Our solution is to provide managed and utility infrastructure services that enable customers to improve the quality and lower the cost of their IT operations and increase the availability and flexibility of their IT systems. In addition, our solution allows our customers to have visibility and control of their application performance while shifting them from a corporate model based on large capital investments for buying, maintaining, and depreciating IT assets to a pay-as-you-go service model that allows customers to scale up or down their IT infrastructure as their business requirements change. Our approach enables us to be a flexible and scalable partner to our customers that can provide tailored, end-to-end IT infrastructure solutions on demand.

Customers

We currently provide services to over 4,200 customers. Our largest customer, Reuters Limited, represented 11% of our revenue in 2006 and 7% of our revenue in 2007. No single customer accounted for more than 10% of our revenue during 2007.

Our contracts with our customers are typically for one to three years in length. Many of our customer contracts contain service level agreements that provide for service credits if we fail to maintain defined and specific quality levels of service.

Sales and Marketing

We reach potential new customers and sell new services to our existing customers through our direct sales force, channel partners, and marketing programs.

Direct Sales. We have approximately 142 sales professionals working directly with potential new and existing customers. Our direct sales force uses a “solution selling” approach to understand a customer’s IT infrastructure requirements. Once an opportunity is identified with a new or existing customer, we engage product and engineering support resources to design the final solution. All direct sales representatives take part in an extensive training program designed to develop in-depth consultative selling skills.

Channel Partners. We partner with agents and resellers who either sell our products themselves or refer business to our direct sales force. Channel partners are selected based on the strength of their customer relationships and their ability to complement our solution portfolio to deliver maximum value to a customer.

Marketing. We are a business-to-business company whose marketing programs are targeted at information technology executives, as well as line of business and finance executives. We use marketing campaigns to increase brand awareness, generate leads, accelerate the sales process, retain existing customers, and promote new products to existing and prospective customers. We place print advertisements in trade journals, newspapers, and special-interest publications. We participate in industry conferences and trade shows. We use direct mail, e-newsletters, surveys, Internet marketing, on-line and on-site seminars, collateral materials, and welcome kits to communicate with existing customers and to reach potential new customers. Our employees author and publish articles about industry trends and our services. Additionally, we work closely with industry analysts and the press so that they understand and can communicate the value of our services.

Competition

Prospective customers for SAVVIS’ infrastructure solutions often weigh the advantages of outsourcing to a service provider against their ability to manage IT infrastructure internally. In those instances, the in-house solution is a source of competition. Our external competitors range from very large telecommunications companies, hardware manufacturers, and system integrators that support the in-house IT operations for a business or offer outsourcing solutions, to smaller point solutions companies that sell individual IT services or solutions to selected industries, as follows:

Traditional Telecommunications Companies. This category includes companies such as AT&T Inc. and Verizon Communications, Inc. These traditional carriers have used their legacy voice and data business to expand into IP VPN and hosting services.

Large Scale Systems Integrators. Leading companies in this category include IBM and Electronic Data Systems Corporation, or EDS. These companies tend to focus on large scale, long-term systems integration projects and outsourcing contracts that include hiring a large portion of the client’s staff.

Internet Infrastructure Service Providers. Companies such as Equinix, Inc., Rackspace, Ltd., and Internap Network Services Corporation are included in this category. These companies tend to focus on one part of Internet infrastructure service such as colocation, managed hosting, or Internet access.

Point Software and Service Solutions Providers. These competitors focus on delivering a niche solution to one of the industry verticals or solution areas that we target. These are smaller companies with expertise in a single area that may be difficult to integrate with a business’ overall IT operations.

REGULATORY MATTERS

The following section describes material laws and regulatory developments that we believe are currently applicable to our business. It does not cover all present or pending federal, state, local, or foreign regulations affecting the communications industry.

U.S. Regulatory Matters

Most of our existing services are not currently regulated by the Federal Communications Commission, or FCC, or any other government agency of the United States or public utility commissions of the individual states, other than regulations that apply to businesses generally, although, our private line service is generally regulated by the FCC as a telecommunications service. As implemented by rules, policies, and precedents issued by the FCC, the Telecommunications Act of 1996 regulates the provision of “telecommunications services” and generally exempts “information services” and “non-common carrier services” from its regulation. We believe that many of the products and services we offer, whether on a facilities or resale basis, generally qualify as information services or non-common carrier services and are therefore not subject to federal regulation. However, in light of ongoing FCC proceedings and developing FCC case law, it is possible that some or all of the information services that we provide should or will become subject to certain regulatory requirements.

International Regulatory Matters

Our principal markets outside the United States include countries in Europe and the Asia Pacific Rim. We have data centers in the United Kingdom, Japan, and Singapore. As is true in the United States, the market for our services in each of the major economies within these regions is open to foreign competition. We believe that we are authorized to provide our services under the applicable regulations in all countries where we derive substantial business. In certain countries throughout Asia, Latin America, the Middle East, and Africa, regulatory and market access barriers, including foreign ownership limitations and entrenched monopolies, continue to prevent us from providing services directly to customers. As our business plan does not contemplate our selling a significant amount of services in any of these countries in the near term, we do not believe that our inability to offer services directly to customers in these countries will impact us significantly. Nevertheless, in many of the highly regulated countries in these regions, we partner with local providers to provide certain services to our customers.

INTELLECTUAL PROPERTY

We protect certain proprietary aspects of our business with a combination of patent, trademark, trade secret, copyright, and other intellectual property laws. We have a number of United States and international patents protecting aspects of our technology, and we are currently pursuing additional patent applications in the United States and internationally. We have registered trademarks for our business name and several product and service names and marketing slogans. In addition, we have applied for trademark protection for various products, services and marketing slogans. We have also registered various Internet domain names in connection with the SAVVIS public website.

Although we consider our intellectual property rights to be valuable, we do not believe that the expiration of any single patent, service mark or trademark would materially affect our consolidated results of operations.

EMPLOYEES

As of December 31, 2007, we employed 2,233 full-time persons, of which 1,066 were engaged in engineering, global operations and customer service; 168 in product development and product engineering; 687 in sales, sales support, product management, and marketing; and 312 in finance and administration. None of our employees is represented by a labor union. We believe our relationship with our employees is good.

CEO BACKGROUND

PHILIP J. KOEN has served as our Chief Executive Officer and a director since March 2006. Before joining our company, Mr. Koen was employed by Equinix, Inc. beginning in July 1999, most recently as President and Chief Operating Officer of Equinix, Inc. from May 2001 to March 2006. Prior to joining Equinix, Mr. Koen was employed at PointCast, Inc., an Internet company, where he served as chief executive officer during the period from March 1999 to June 1999; chief operating officer during the period from November 1998 to March 1999; and chief financial officer and executive vice president responsible for software development and network operations during the period from July 1997 to November 1998. Mr. Koen received a B.A. degree in Economics from Claremont McKenna College and a M.B.A. degree from the University of Virginia.

JONATHAN C. CRANE has served as our President since May 2006 and a director from March 2006 to February 1, 2008, after joining us as an officer of our company with the title Chairman of the Board in March 2006. Prior to joining us, Mr. Crane served as Chief Strategy Officer – Executive Vice President, Corporate Development at MCI, Inc. from January 2003 to January 2006. While serving in this capacity, Mr. Crane also served as President, International and Wholesale Markets for MCI from May 2004 to October 2004, and in 2003, he served as MCI’s Executive Vice President, Marketing. Furthermore, Mr. Crane served as Chairman of the Board of Digex, Inc., an enhanced hosting company, during 2003. Upon rejoining MCI in January 2002, Mr. Crane served as Chief of Staff–Sales and then President – Sales, Marketing and Customer Service until his appointment as Chief Strategy Officer in January 2003. Prior to joining MCI, Mr. Crane served as Chief Executive Officer of Adero, Inc. from 1999 to 2001, and he served as Chief Executive Officer of Marcam Solutions, Inc. from 1997 to 1999. Mr. Crane received a B.A. degree in History from Dartmouth College.

JEFFREY H. VON DEYLEN has served as our Chief Financial Officer and a director since March 2003, after joining us as Executive Vice President for Finance in January 2003. From August 2002 to January 2003, Mr. Von Deylen served as Vice President for Corporate Development and Financial Analysis at American Electric Power Company. From June 2001 to June 2002, Mr. Von Deylen served as Chief Financial Officer for KPNQwest N.V. (KPNQwest), and prior to joining KPNQwest, he was employed by Global TeleSystems Inc. as Senior Vice President of Finance from October 1999 to May 2001. From May 1994 to September 1999, Mr. Von Deylen served in a number of financial positions with LCI International (LCI) and then as Vice President and Corporate Controller of Qwest Communications International after it acquired LCI in June 1998. Mr. Von Deylen received a B.S. degree in Accountancy from Miami University.

MARY ANN ALTERGOTT has served as our Senior Vice President, Human Resources since August 2006. Prior to joining us, Ms. Altergott led The Clermont Group, a human resources consultancy, since March 2005. From November 2001 to March 2005, Ms. Altergott held various senior human resources positions at Bank of America, N.A., including Senior Vice President and Personnel Executive. Prior to this, Ms. Altergott was employed by The Pillsbury Company from 1990 to 2001 in various senior human resources and operational roles. Ms. Altergott received a B.S. degree from Vanderbilt University.

TIMOTHY E. CAULFIELD has served as our Senior Vice President, Operations since November 2006, and previously served as Managing Director – Global Solutions upon joining us in March 2004. Prior to joining us, Mr. Caulfield served as Senior Vice President Consulting and Hosting Services for Cable & Wireless USA, Inc. and Cable & Wireless Internet Services, Inc. (CWA) from September 2002 until our acquisition of the CWA assets in March 2004 after CWA filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Bankruptcy Code. From January 2001 to September 2002, Mr. Caulfield led regional and global operations for Exodus Communications until it was acquired by CWA after it filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Bankruptcy Code. Previously, Mr. Caulfield held various leadership positions with ENVIOSNet, an enterprise and service support company, Gateway, Inc., Sequent Computer Systems and Digital Equipment Corporation. Mr. Caulfield received a B.A. degree from Clark University in Worcester, Massachusetts and a M.B.A. degree from the University of Oregon.

EUGENE V. DEFELICE has served as our Senior Vice President, General Counsel and Corporate Secretary since November 2006. Prior to joining us, Mr. DeFelice was the founder of and a consultant with Novo Strategic Partners LLC, a business consulting firm, from July 2005 to November 2006. From March 2003 to July 2005, Mr. DeFelice served as Vice President, General Counsel for K.V. Pharmaceutical Company. Prior to joining K.V. Pharmaceutical Company, Mr. DeFelice was Vice President and General Counsel for Enzon Pharmaceutical Company from April 2002 to January 2003. Prior to this, Mr. DeFelice held several positions as General Counsel and in business management both domestically and internationally. Mr. DeFelice received his B.A. from Rutgers College, a M.B.A. from Webster University in Geneva Switzerland, and a J.D. from Seton Hall University School of Law.

BRYAN S. DOERR has served as our Chief Technology Officer since October 2003. From February 2002 to October 2003, Mr. Doerr was our Vice President—Software Development. Prior to this, Mr. Doerr held several positions in management, software technology research, and software development at Bridge Information Systems, Inc., The Boeing Company, and Johns Hopkins University Applied Physics Laboratory. Mr. Doerr received his B.S. in Electrical Engineering from the University of Missouri – Columbia, an M.S. degree in Electrical Engineering from Johns Hopkins University, and a Masters in Information Management from Washington University in St. Louis, Missouri.

WILLIAM D. FATHERS has served as our Senior Vice President, Engineering and Development since April 2007. Prior to joining us, Mr. Fathers was Global Head of Development for Reuters Limited from April 2005 to April 2007. From September 2003 to April 2005, Mr. Fathers was a Senior Vice President within Reuters Global Business Development team and was responsible for several major acquisition and post acquisition integration programs within the financial services market. From 2001 to 2003, Mr. Fathers held other senior technology positions within Reuters Limited. Prior to joining Reuters Limited, Mr. Fathers was a senior consultant at a telecom and media consultancy company, PA Consulting Group, and he served as an officer in the British Armed Forces. He received a Masters degree in Engineering from Cambridge University.

PAUL F. GOETZ has served as our Senior Vice President of Sales – Americas since November 2007. Prior to joining us, Mr. Goetz was employed by EMC Corporation since 1988, most recently as Vice President of Global Service Sales from October 2006 to November 2007, Vice President, Global Consulting and Managed Services from March 2005 to October 2006, and Vice President, Solutions and Services Marketing from 2003 to October 2006. Mr. Goetz received a B.A. degree in Business Administration from the University of Massachusetts.

JAMES D. MORI has served as our Senior Vice President, Client Services since November 2007, and prior to this, our Managing Director – Americas since joining our company in October 1999. Previously, Mr. Mori served as Area Director for Sprint Corporation and in various other sales leadership positions with Sprint Corporation prior to that time. Mr. Mori received a B.S. in Business Administration from the University of Missouri.

RICHARD S. WARLEY has served as our Senior Vice President, Managing Director – International since July 2006, and prior to July 2006, served as our Managing Director – Europe, Middle East, and Africa since September 2003. Previously, Mr. Warley held various positions at our company, including Executive Vice President of Corporate Development and Managing Director – Asia, since joining us in 2000. Prior to joining us, Mr. Warley was a director in an investment banking group of Merrill Lynch & Co., Inc. Mr. Warley earned a B.A. and MSc with distinction from the London School of Economics and his law degree from the College of Law, London.

JAMES D. WHITEMORE has served as our Chief Marketing Officer since June 2007. From August 2004 to December 2006, Mr. Whitemore served as Vice President – Chief Marketing Officer for the storage group at Sun Microsystems, Inc., and prior to this, Mr. Whitemore held various other sales and marketing positions with Sun Microsystems in New York, California, Japan, and the UK commencing in 1997. Previously, Mr. Whitemore held various marketing roles at IBM and StorageTek. Mr. Whitemore received a degree in business studies from the University of Newcastle upon Tyne in the UK.

COMPENSATION

Base Salary

We determine base salaries for our executives based on job responsibilities and their prior relevant background and experience. An executive’s base salary is also evaluated in reference to between the 50th and 75th percentile base salary range of comparable positions in our peer group together with other components of the executive’s other compensation to ensure that the executive’s total compensation is in line with our overall compensation philosophy. Actual individual salary amounts are not objectively determined, but instead reflect our compensation committee’s judgment with respect to each executive officer’s responsibility, individual performance, experience, and other factors, including any retention concerns, overall performance of our company and the individual’s historical compensation. Our compensation committee reviews base salaries annually and may also adjust an executive’s base salary during the year for promotions or other changes in the scope of an executive’s role or responsibilities with our company.

Commencing in 2008, base salary reviews and adjustments for all executives, which historically took place in October of each year, were moved to a common February review date. As a result, the 2007 annual review was moved to February 2008, and our named executive officers did not receive any salary increases in 2007.

Based on our compensation committee’s review of the base salaries for all of our executive officers in February 2008, the committee approved the salary increases for named executive officers set forth in the table below, all of which are in line with the percentage increases for our other employees.

Annual Bonuses

Annual performance-based cash bonuses reflect our policy of requiring a certain level of company financial performance for the prior fiscal year before any cash bonuses are earned by executive officers. When establishing the performance targets, our compensation committee reviews and discusses with both executives and the full board of directors our business plan and its key underlying assumptions and then establishes the performance targets for the year. The amount of the annual bonus paid to each executive is based upon percentage bonus targets established by our compensation committee.

Percentage Bonus Targets

All senior executives are eligible for annual performance-based cash bonuses in amounts ranging from 40% to 75% of their base salaries. For the named executive officers, the target annual incentives for 2007 are listed in the table below.

As part of the compensation committee’s annual review of executive compensation, the compensation committee also reviews the percentage bonus target for each executive. As discussed previously, our compensation committee’s review of executive compensation was moved from October 2007 to February 2008, and as a result, our compensation committee did not change the percentage bonus target for any executive officers in 2007.

In 2008, our compensation committee reviewed the percentage bonus target for each named executive officer in reference to the 50th and 75th percentile bonus range of comparable positions in our peer group. While certain of the named executive officers’ bonus targets were below the median of our peer group, our compensation committee decided not to increase any named executive officer’s bonus target since each named executive officer’s total compensation was above the median for our peer group.

2007 Annual Incentive Plan

In 2007, our compensation committee established performance goals for 2007 bonuses based upon our company achieving certain specified levels of adjusted EBITDA. Adjusted EBITDA for plan purposes is defined differently than the adjusted EBITDA we report in our quarterly financial-results press releases, which we furnish to the SEC. For plan purposes, adjusted EBITDA, in addition to excluding non-cash equity compensation expenses and other one-time asset disposition gains or losses, also excludes certain non-recurring accounting adjustments that do not reflect on-going performance, such as prior year’s expense or revenue adjustments that do not reflect 2007 results. On this basis, targeted adjusted EBITDA for plan purposes was $145.3 million in 2007, after adjustment to reflect the disposition of certain data center assets to Microsoft in June 2007 and the subsequent loss of EBITDA from that customer due to the sale. The plan has a formula that establishes a payout range if and to the extent that performance goals are met or exceeded. The formula determines the percentage of the bonus to be paid, based on a percentage of goal achievement. Awards of up to 150% of target could be paid if our performance exceeds the maximum target and no awards would be paid if our performance does not meet the minimum threshold. One hundred percent of the bonus determination for executives is based upon performance against these goals.

MANAGEMENT DISCUSSION FROM LATEST 10K

EXECUTIVE SUMMARY

We provide information technology, or IT, services including managed hosting, utility computing, colocation, security, network, and professional services through our global infrastructure to businesses and government agencies around the world. Our services are designed to offer a flexible, comprehensive IT solution that meets the specific business and infrastructure needs of our customers. Our suite of products can be purchased individually, in various combinations, or as part of a total or partial outsourcing arrangement. Our point solutions meet the specific needs of customers who require control of their physical assets, while our managed hosting solution provides customers with access to our services and infrastructure without the upfront capital costs. By outsourcing significant elements of their network and IT infrastructure needs, our customers are able to focus on their core business while we ensure the performance of their IT infrastructure. We have over 4,200 customers across all industries with a particular emphasis in the financial services, media and entertainment, software, and government sectors.

Our Services

Although we operate in one operating segment across three geographic locations, we report our revenue by categories of service. On January 1, 2007, we changed the way we report our revenue to reflect our core service offerings. We now report revenue in three categories of services: (1) hosting services, (2) network services, and (3) other services. In the second half of 2007, revenue from other services was eliminated primarily due to the sale of our content delivery network (CDN) assets in January 2007 and the migration of Moneyline Telerate Holdings, Inc. (Telerate), which was acquired by Reuters in 2005, to Reuters products and services. The 2006 and 2005 amounts reported herein have been reclassified to reflect the new categories of revenue. Accordingly, revenue from Reuters, which was previously reported separately in 2006, is now reflected within these three categories of revenue.

Hosting Services provide the core facilities and network infrastructure to run business applications, provide data storage, and redundancy services. Our hosting services are comprised of colocation and managed hosting. Managed hosting also includes utility computing, colocation, managed security services, and professional services. Our hosting services allow our customers to choose the amount of IT infrastructure they prefer to outsource to support their business applications. Customers can scale their use of our services as their own requirements grow and as customers learn the benefits of outsourcing IT infrastructure management.

Network Services are comprised of our managed network services, including managed IP VPN, High Speed Layer-2 VPN and the services marketed under our WAM!Net brand; hosting area network; and bandwidth services, including Tier 1 Internet services and bandwidth sold to wholesale customers. We recently enhanced the performance of our network services by completing the deployment of our Application Transport Network, which provides an enhanced architecture to our network. This architecture ties together our data centers to facilitate a wide variety of integrated network and hosting solutions, including business continuity and disaster recovery, and ties together our hosting and customer sites into a single IP VPN solution.

Other Services are comprised of streaming and caching services that we provided pursuant to a reseller agreement that we entered into with Level 3 Communications, Inc. (Level 3) in connection with the sale of our CDN assets and the services that we provided under our contract with Telerate, which contract was assigned to Reuters in June 2005 in connection with Reuters’ acquisition of Telerate. Revenue from other services was eliminated in the second half of 2007 due to CDN customers having transitioned to Level 3, the completion of the migration of Telerate to Reuters’ products, and the reclassification of $1.4 million of quarterly revenue to network services revenue to reflect the retention of certain network services revenue that we previously expected to be lost.

Business Trends and Outlook

Our financial results continue to be affected by competition in our industry. We expect competitive factors in our industry to continue to affect the prices for our services and our results of operations. Price pressures vary by product and service. Prices for certain network services that we offer have decreased over the past several years, and we have seen a decline in the demand for some of our network services in 2007 due to increased competition and the introduction of new technology by large telecommunications providers.

While we may continue to see decreases in pricing and demand for some of our network services, there has been some stabilization and increases in pricing and demand of other services that we offer. We have seen price increases in our colocation services over the past few years and we believe that prices will continue to remain at these levels in areas where there continues to be a high demand for high grade data center space. In addition, despite the current economic slowdown, we have not experienced a significant change in customer demand for our hosting services. We completed 2007 with encouraging trends as revenue from our managed hosting services grew 27% and revenue from colocation grew 18% compared to 2006. We believe that this is partially due to the potential cost savings that we can offer our customers as they outsource their IT functions.

As we enter 2008, we remain cautious about the worldwide economy and continue to explore new opportunities to enhance the services that we offer in order to differentiate our service offerings from those of our competitors. We intend to focus on the following key areas in 2008:


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Increasing the quality of our infrastructure and the reliability of our services and client satisfaction through the continued build-out of high grade data center space;


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Improving the efficiencies in our general and administrative areas through process improvement and increasing overall productivity; and


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Continuing to explore strategic options for those services which have experienced relatively slow growth in the past in order to allow us to focus on our high growth services.

We regularly review our revenue, gross profit, gross margin and income (loss) from operations to evaluate our financial results and overall performance of our business and to assess trends that may affect our business.

Revenue

Our revenue grew 4% during the year ended December 31, 2007, compared to the year ended December 31, 2006. Increases in our hosting revenue reflected continued demand for managed hosting, utility computing, and colocation services and the repricing of certain colocation contracts to market rates, offset by revenue lost in the second half of 2007 due to our sale of certain data center assets. Managed hosting services contributed 27% of total revenue for the year ended December 31, 2007, an increase from 22% for the year ended December 31, 2006.

Network services revenue was down 6% for the year ended December 31, 2007, compared to the year ended December 31, 2006. The decline in network services revenue was primarily due to decreases in bandwidth services and in managed IP VPN revenue, which was slightly offset by hosting customers that continue to increase their use of our HAN services for data transport.

Other services revenue was eliminated in the last half of the year. The $9.4 million of other services revenue included revenue from Telerate, which migrated its customers to Reuters’ products in 2007, and CDN revenue, which was eliminated in connection with our sale of the CDN assets to Level 3 in the first quarter of 2007.

Gross Profit and Gross Margin

Among other financial measures, we use gross profit, defined as revenue less cost of revenue, excluding depreciation, amortization, and accretion, and gross margin, defined as gross profit as a percentage of revenue, to evaluate our business. Gross profit was $339.5 million for the year ended December 31, 2007, an increase of $40.4 million, or 14%, from $299.1 million for the year ended December 31, 2006. The improvement of gross profit throughout the years ended December 31, 2007 and 2006 reflects our efforts to grow revenue from our managed hosting and colocation services, which leverage the fixed cost structure of our data centers. Such improvements were partially offset during the last three quarters of 2007 by the sale of our CDN assets in January 2007, and during the last two quarters of 2007, by the sale of certain data center assets in June 2007. Our gross profit improvement initiatives were also partially offset by incremental operating expenses incurred during the construction of our new data centers, four of which opened in 2007, with additional or expanded data centers scheduled to open in 2008. As a result, gross margin was 43% for the year ended December 31, 2007, compared to 39% for the year ended December 31, 2006.

Income from Operations

Income from operations was $338.0 million for the year ended December 31, 2007, an improvement of $312.5 million, compared to income from operations of $25.5 million for the year ended December 31, 2006. The improvement was due to the gain on sale of our CDN assets of $125.2 million in January 2007, the gain on sale of certain data center assets of $180.5 million in June 2007, revenue growth of $29.8 million, and a decrease in cost of revenue of $10.6 million. These were partially offset by increases in sales, general, and administrative expenses of $16.3 million, which included an increase of $11.2 million of non-cash equity-based compensation, and increases in depreciation, amortization, and accretion of $17.3 million, due to the construction and opening of four new data centers in the second half of 2007 and the deployment of our Application Transport Network, which provides an enhanced architecture to our network.

SIGNIFICANT TRANSACTIONS

Sale of Content Delivery Network Assets

In January 2007, we completed the sale of substantially all of the assets related to our CDN services for $132.5 million, after certain working capital adjustments and the assumption of certain liabilities, pursuant to a purchase agreement dated December 23, 2006. The transaction resulted in net proceeds of $128.3 million, after transaction fees, related costs, and working capital adjustments and we recorded a gain on sale of $125.2 million for the year ended December 31, 2007, all of which was recorded in the first half of the year. We recorded revenue of $19.0 million related to these assets for the year ended December 31, 2006.

Issuance of Convertible Debt

In May 2007, we issued $345.0 million in aggregate principal amount of 3.0% Convertible Senior Notes that are due May 15, 2012 (the Convertible Notes). Interest is payable semi-annually on May 15 and November 15 of each year, commencing November 15, 2007. The initial conversion rate is 14.2086 shares of common stock per $1,000 principal amount of Convertible Notes, subject to adjustment. This represents an initial conversion price of approximately $70.38 per share of common stock. As of December 31, 2007, if the conditions for conversion had been satisfied, the Convertible Notes would have been convertible into 4.9 million shares of our common stock.

Upon conversion, holders will receive, at our election, cash, shares of our common stock, or a combination thereof. However, we may at any time irrevocably elect for the remaining term of the Convertible Notes to satisfy our obligation in cash up to 100% of the principal amount of the Convertible Notes converted, with any remaining amount to be satisfied, at our election, in cash, shares of our common stock, or a combination thereof.

Debt Extinguishment

In June 2007, we completed the early extinguishment of our Series A Subordinated Notes (the Subordinated Notes) by making cash payments totaling $342.5 million to the noteholders. Such payments included the original principal of $200.0 million, paid-in-kind and make-whole interest of $147.6 million, and an early extinguishment premium of $3.5 million, offset by a negotiated discount to the original contractual extinguishment provisions of $8.6 million. In connection with the extinguishment, we wrote-off the remaining unamortized original issue discount of $23.8 million and the remaining unamortized issuance costs of $0.5 million, and recorded a loss on debt extinguishment of $45.1 million in June 2007.

Sale of Data Center Assets

In June 2007, we sold assets related to two of our data centers located in Santa Clara, California for $190.2 million in cash before fees, the assumption and forgiveness of certain liabilities, including $10.4 million of previously advanced revenue, and the assignment of an operating lease associated with the facilities. In connection with the sale, we recorded a gain on sale of $180.5 million for the year ended December 31, 2007. We recorded revenue of $16.5 million related to these data centers in the first half of 2007 and $32.9 million for the year ended December 31, 2006.

Data Center Development

During the year ended December 31, 2007, we spent $225.8 million for the development of four new data centers that were opened in 2007 and for the development and expansion of six additional data centers that are expected to open in 2008. We also entered into capital leases in 2007 totaling $43.5 million related to the development and expansion of a data center. In addition, during 2007, we commenced two operating leases for data centers that were opened in 2007 and entered into four additional operating leases for data centers that are currently under development and are expected to open in 2008.

RESULTS OF OPERATIONS

The historical financial information included in this Form 10-K is not intended to represent the consolidated financial position, results of operations, or cash flows that may be achieved in the future.

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

Executive Summary of Results of Operations

Revenue increased $29.8 million, or 4%, for the year ended December 31, 2007 compared to the year ended December 31, 2006, primarily as a result of a 22% increase in total hosting, partially offset by declines in network services and other services. Income from operations improved $312.5 million for the year ended December 31, 2007 compared to the year ended December 31, 2006 and includes the gains on the sale of certain data center assets of $180.5 million in June 2007 and CDN assets of $125.2 million in January 2007. Excluding these gains, the improvement in income from operations of $6.8 million was due primarily to the increase in revenue of $29.8 million and a decrease in cost of revenue of $10.6 million, which was partially offset by an increase in costs to support revenue growth, including initial operating expenses for our four new data centers which opened in 2007. Also offsetting the increase in revenue were increases in sales, general, and administrative expenses of $16.3 million and depreciation, amortization, and accretion of $17.3 million. Net income (loss) improved $294.6 million due to the factors previously described.

Revenue was $793.8 million for the year ended December 31, 2007, an increase of $29.8 million, or 4%, from $764.0 million for the year ended December 31, 2006. Hosting revenue was $474.6 million for the year ended December 31, 2007, an increase of $85.3 million, or 22%, from $389.3 million for the year ended December 31, 2006. This increase was due primarily to growth in new and existing services, particularly in our managed hosting service offerings and the favorable impact from negotiated price increases for certain colocation contracts to market rates. Network services revenue was $309.8 million for the year ended December 31, 2007, a decrease of $19.1 million, or 6%, from $328.9 million for the year ended December 31, 2006. The decrease was mainly attributed to lower revenue resulting from the sale of certain data center assets in June 2007 and declines in wholesale bandwidth volumes and managed IP VPN revenue, partially offset by hosting customers that continue to increase their use of our networks for data transport. Other services, which is comprised of our CDN services and our Telerate contract, contributed $9.4 million for the year ended December 31, 2007, a decrease of $36.4 million, or 80%, from $45.8 million for the year ended December 31, 2006. This decrease was due to the sale of our CDN assets and the migration of Telerate to Reuters’ products and services. Other services revenue was eliminated in the second half of 2007, due to CDN customers completing the move to Level 3 and Telerate completing the move to Reuters products.

Cost of Revenue . Cost of revenue includes costs of leasing local access lines to connect customers to our Points of Presence, or PoPs; leasing backbone circuits to interconnect our PoPs; indefeasible rights of use, or IRUs, operations and maintenance; rental costs, utilities, and other operating costs for hosting space; and salaries and related benefits for engineering, service delivery and provisioning, customer service, consulting services and operations personnel who maintain our network, monitor network performance, resolve service issues, and install new sites. Cost of revenue excludes depreciation, amortization, and accretion, which are reported separately. Cost of revenue was $454.3 million for the year ended December 31, 2007, a decrease of $10.6 million, or 2%, from $464.9 million for the year ended December 31, 2006. This decrease was primarily driven by lower costs resulting from the lower network costs due to the sale of certain data center assets in June 2007 and our revenue and margin growth strategies to migrate customers toward managed hosting services that better leverage the fixed cost structure of our data centers, partially offset by a $2.7 million increase in non-cash equity-based compensation. Gross profit was $339.5 million for the year ended December 31, 2007, an increase of $40.4 million, or 14%, from $299.1 million for the year ended December 31, 2006. Gross margin increased to 43% for the year ended December 31, 2007 compared to 39% for the year ended December 31, 2006.

Sales, General, and Administrative Expenses. Sales, general, and administrative expenses include sales and marketing salaries and related benefits; product management, pricing and support salaries and related benefits; sales commissions and referral payments; advertising, direct marketing and trade show costs; occupancy costs; executive, financial, legal, tax and administrative support personnel and related costs; professional services, including legal, accounting, tax and consulting services; and bad debt expense. Sales, general, and administrative expenses were $212.4 million for the year ended December 31, 2007, an increase of $16.3 million, or 8%, from $196.1 million for the year ended December 31, 2006. Sales, general, and administrative expenses as a percentage of revenue were 27% for the year ended December 31, 2007 compared to 26% for the year ended December 31, 2006. This increase was primarily driven by an $11.2 million increase in non-cash equity-based compensation.

Depreciation, Amortization, and Accretion. Depreciation, amortization, and accretion expense consists primarily of the depreciation of property and equipment, amortization of intangible assets, and accretion related to the aging of the discounted present value of certain liabilities and unfavorable long-term fixed price contracts assumed in acquisitions. Depreciation, amortization, and accretion expense was $94.8 million for the year ended December 31, 2007, an increase of $17.3 million, or 22%, from $77.5 million for the year ended December 31, 2006. This increase was driven by $348.6 million of capital expenditures incurred during 2007, including $225.8 million we spent to develop four new data centers opened in 2007 and to commence the development or expansion of six data centers which are expected to be completed in 2008.

Gain on Sales of Assets. As previously described herein, after transaction fees and related costs and working capital adjustments, the sale of certain data center assets resulted in a gain of $180.5 million, and the sale of our CDN Assets resulted in a gain of $125.2 million.

Loss on Debt Extinguishment. As previously described herein, in connection with the extinguishment of our Subordinated Notes in June 2007, we recorded a loss on debt extinguishment of $45.1 million.

Net Interest Expense and Other. Net interest expense and other was $40.9 million for the year ended December 31, 2007, a decrease of $26.6 million, or 39%, from $67.5 million for the year ended December 31, 2006. The decrease was due primarily to the elimination of $27.1 million of interest on the Subordinated Notes, the $5.9 million of amortization of original issue discount and debt issuance costs associated with the Subordinated Notes, the absence of interest expense on our Revolving Facility in 2007, and interest income earned on higher invested cash and cash equivalent balances in 2007. This decrease was partially offset by the interest associated with our issuance of the 3.0% Convertible Notes and incremental interest expense on new capital leases of $3.1 million. Cash paid for interest was $20.3 million for the year ended December 31, 2007, an increase of $4.5 million, or 28%, from $15.8 million for the year ended December 31, 2006 due to the payment of semi-annual interest payments on our Convertible Notes, which were issued in 2007, and the lack of interest payments made in 2006 on our Subordinated Notes, which accrued interest until extinguishment.

Net Income (Loss) before Income Taxes. Net income (loss) before income taxes for the year ended December 31, 2007 was $252.0 million, an improvement of $294.1 million from a net loss before taxes of $42.1 million for the year ended December 31, 2006, primarily driven by the gain on sales of assets of $305.7 million and other factors previously described.

Income Tax Expense (Benefit). Income tax expense for the year ended December 31, 2007 was $1.4 million compared to $1.9 million for the year ended December 31, 2006. This reduction in income tax expense was due primarily to our 2006 tax return to provision adjustment made in 2007 as a result of a lower than expected actual income tax obligation in 2006.

Net Income (Loss). Net income for the year ended December 31, 2007 was $250.6 million, an improvement of $294.6 million from a net loss of $44.0 million for the year ended December 31, 2006, primarily driven by the gain on sales of assets of $305.7 million and other factors previously described.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

RESULTS OF OPERATIONS

The historical financial information included in this Form 10-Q is not intended to represent the consolidated results of operations, financial position or cash flows that may be achieved in the future.

Three Months Ended September 30, 2007 Compared to the Three Months Ended September 30, 2006

Executive Summary of Results of Operations

Revenue decreased $3.5 million, or 2%, for the three months ended September 30, 2007, compared to the three months ended September 30, 2006. This decrease was primarily driven by the elimination of other services revenue of $10.8 million and the elimination of colocation revenue associated with the sale of data center assets to Microsoft in June 2007. These decreases were partially offset by improvement in our managed hosting revenue of $9.9 million, an increase of 22%, over the comparable prior year period. Income from operations declined to $3.7 million for the three months ended September 30, 2007, compared to income from operations of $4.1 million for the three months ended September 30, 2006. The decline in income from operations was due primarily to increased operating expenses associated with the development and opening of our four new data centers in 2007, which will begin to generate revenue in the fourth quarter of 2007, and into 2008. Net income increased to $5.3 million for the three months ended September 30, 2007, compared to a net loss of $13.6 million for the three months ended September 30, 2006. This increase was primarily driven by reduced interest expense due to the extinguishment of our Subordinated Notes in June 2007, in addition to the factors previously described.

Revenue was $190.3 million for the three months ended September 30, 2007, a decrease of $3.5 million, or 2%, from $193.7 million for the three months ended September 30, 2006. Hosting revenue was $113.7 million for the three months ended September 30, 2007, an increase of $13.2 million, or 13%, from $100.5 million for the three months ended September 30, 2006. The increase was due primarily to growth in new and existing services, particularly in our managed hosting services and the favorable impact from re-pricing certain below market colocation contracts. Growth in colocation was offset by the elimination of revenue associated with a Microsoft contract terminated in connection with the sale of data center assets in June 2007. Network services revenue was $76.5 million for the three months ended September 30, 2007, a decrease of $5.9 million, or 7%, from $82.4 million for the three months ended September 30, 2006. The decrease was driven by declines in wholesale bandwidth volumes and in managed IP VPN revenue, which was offset by hosting customers that continue to increase their use of our HAN services for data transport. Other services, which are comprised of our CDN services and our Telerate contract, was eliminated for the three months ended September 30, 2007, a decrease of $10.8 million. The elimination of other services revenue was a result of our CDN customers’ migration to Level 3 in connection with our sale of CDN assets in January 2007, and Reuters’ migration away from the Telerate contract as previously described.

Cost of Revenue. Cost of revenue includes costs of leasing local access lines to connect customers to our Points of Presence, or PoPs; leasing backbone circuits to interconnect our PoPs; indefeasible rights of use (IRUs) operations and maintenance; rental costs, power costs, and other operating costs for hosting space; and salaries and related benefits for engineering, service delivery and provisioning, customer service, consulting services and operations personnel who maintain our network, monitor network performance, resolve service issues, and install new sites. Cost of revenue excludes depreciation, amortization, and accretion, which are reported separately. Cost of revenue was $112.3 million for the three months ended September 30, 2007, a decrease of $4.2 million, or 4%, from $116.5 million for the three months ended September 30, 2006. Cost of revenue, as a percentage of revenue, was 59% for the three months ended September 30, 2007, compared to 60% for the three months ended September 30, 2006. These decreases were primarily driven by our revenue and margin growth strategies to migrate current customers toward managed hosting services that better leverage the fixed cost structure of our data centers and the re-pricing of certain colocation contracts.

Sales, General, and Administrative Expenses. Sales, general, and administrative expenses include all costs associated with the selling of our services and administrative functions such as finance, legal, and human resources. Such expenses were $51.1 million for the three months ended September 30, 2007, a decrease of $1.3 million, or 2%, from $52.4 million for the three months ended September 30, 2006. Sales, general, and administrative expenses as a percentage of revenue were 27% for both the three months ended September 30, 2007 and 2006, respectively, due to a continued focus on cost control.

Depreciation, Amortization, and Accretion. Depreciation, amortization, and accretion includes depreciation of property and equipment, amortization of intangible assets, and accretion of the discounted present value of certain liabilities and long-term fixed price contracts. Depreciation, amortization, and accretion was $22.7 million for the three months ended September 30, 2007, an increase of $1.9 million, or 9%, from $20.8 million for the three months ended September 30, 2006. This increase was primarily driven by increased capital additions in 2007 related to our data center expansion and network upgrade projects.

Net Interest Expense and Other. Net interest expense and other primarily represents interest on our Convertible Notes and Subordinated Notes, amortization of related debt issuance costs and the original issue discount on the Subordinated Notes, interest on our capital and financing method lease obligations, the impact of foreign currency revaluations, and certain other non-operating charges. Such costs are partially offset by interest income on invested cash and cash equivalents. Net interest expense and other was $0.3 million for the three months ended September 30, 2007, a decrease of $17.4 million, or 98%, from $17.7 million for the three months ended September 30, 2006. The decrease was primarily due to reduced interest expense of $12.0 million due to the extinguishment of our Subordinated Notes, higher interest income of $2.8 million earned on higher invested cash and cash equivalent balances, and favorable impact from currency translation of foreign denominated balances of $2.4 million.

Net Income before Income Taxes. Net income before income taxes for the three months ended September 30, 2007, was $3.4 million, an improvement of $17.0 million, from a net loss before income taxes of $13.6 million for the three months ended September 30, 2006, primarily driven by the factors previously described.

Income Taxes. Income taxes for the three months ended September 30, 2007, represented a benefit of $1.9 million with no comparative expense for the three months ended September 30, 2006. This benefit was due to the reduction in our expected annual effective tax rate in the third quarter of 2007 resulting from the continued utilization of existing net operating losses, the interest deductions resulting from the extinguishment of the Subordinated Notes, and continued refinement of our global tax position.

Net Income. Net income for the three months ended September 30, 2007, was $5.3 million, an improvement of $18.9 million from a net loss of $13.6 million for the three months ended September 30, 2006, primarily driven by the factors previously described.


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