**SECURITIESAND EXCHANGE COMMISSIONWashington, D.C. 20549**

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FORM 10-Q

| x                                                | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------|---------------------------------------------------------------------------------------------------------|
| **FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005** |
| **OR**                                           |
| o                                                | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Commissionfile number: 000-29391**

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VIA NET.WORKS, INC.(Exact name ofregistrant as specified in its charter)

| **Delaware**                   | **84-1412512**                        |
|--------------------------------|---------------------------------------|
| (State or other  jurisdiction) | (I.R.S. Employer  Identification No.) |

 

**H.Walaardt Sacrestraat 401-403 1117 BM SchipholThe Netherlands**(Address of principalexecutive offices)

Registrant’stelephone number, including area code: **+31 20502 0000**

(Former name or former address, if changed since last report)

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Indicate by check mark whetherthe registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such report) and (2) has been subject to such filing requirements forthe past 90 days. Yes x  No o

Indicate by check markwhether the registrant is: an accelerated filer (as defined in Rule 12b-2of the Exchange Act). Yes o  No x

As of August 11, 2004, there were outstanding65,284,651 shares of the registrant’s common stock.

 

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**VIANET.WORKS, INC.**

**TABLE OF CONTENTS**
| PART I. FINANCIAL  INFORMATION |   |                                                                                                            |
|-------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------|
| Item 1.                             |   | Financial Statements:                                                                                           |   | 3 |
|                                |   | Condensed Consolidated Balance Sheets as of  December 31, 2004 and June 30, 2005                      |   | 3 |
|                                |   | Condensed Consolidated Statements of Operations for  the three and six months ended June 30, 2004 and 2005 |   | 4 |
|                                |   | Condensed Consolidated Statements of Cash Flows for  the six months ended June 30, 2004 and 2005           |   | 5 |
|                                |   | Notes to Condensed Consolidated Financial Statements                                                            |   | 6 |
| Item 2.                             |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                     |   | 23 |
| Item 3.                             |   | Quantitative  and Qualitative Disclosures About Market Risk                                                     |   | 35 |
| Item 4.                             |   | Controls and  Procedures                                                                                        |   | 36 |
| PART II. OTHER INFORMATION     |   |                                                                                                            |
| Item 1.                             |   | Legal Proceedings                                                                                               |   | 37 |
| Item 2.                             |   | Changes in  Securities and Use of Proceeds                                                                      |   | 37 |
| Item 3.                             |   | Defaults Upon  Senior Securities                                                                                |   | 37 |
| Item 4.                             |   | Submission of  Matters to a Vote of Security Holders                                                            |   | 37 |
| Item 5.                             |   | Other Information                                                                                               |   | 38 |
| Item  6.                            |   | Exhibits                                                                                                        |   | 38 |
| SIGNATURES                          |   | 39                                                                                                              |
| EXHIBIT INDEX                       |   | 40                                                                                                              |

 

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**PART I**

**ITEM 1.**                FINANCIALSTATEMENTS

**VIA NET.WORKS, INC.CONDENSED CONSOLIDATEDBALANCE SHEETS(In thousands of U.S. dollars, except share data)**
| ** **                                                                                                            | ** ** | **December 31,  2004** | ** ** | **June 30,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| ** **                                                                                                            | ** ** | ** **                  | ** ** | **(Unaudited)**         | ** ** |
| **ASSETS**                                                                                                            |       |                        |       |                    |       |   |   |   |   |
| Current assets:                                                                                                       |       |                        |       |                    |       |   |   |   |   |
| Cash and cash equivalents                                                                                             |       |                        | $          | 15,497                  |       |   |   | $ | 3,140 |   |   |
| Restricted cash                                                                                                       |       |                        | 5,100      |                    |       |   | 2,457 |   |   |
| Trade and other  accounts receivable, net of allowance of $2,966 and $1,516 respectively                              |       |                        | 13,909     |                    |       |   | 4,827 |   |   |
| Other current  assets                                                                                                 |       |                        | 6,972      |                    |       |   | 3,701 |   |   |
| Assets of  businesses held for sale (Note 2)                                                                          |       |                        | —     |                    |       |   | 19,843 |   |   |
| Total current assets                                                                                                  |       |                        | 41,478     |                    |       |   | 33,968 |   |   |
| Property and  equipment, net                                                                                          |       |                        | 13,065     |                    |       |   | 6,222 |   |   |
| Goodwill                                                                                                              |       |                        | 42,466     |                    |       |   | 18,834 |   |   |
| Intangible assets,  net                                                                                               |       |                        | 8,695      |                    |       |   | 3,052 |   |   |
| Other non-current  assets                                                                                             |       |                        | 444        |                    |       |   | 792 |   |   |
| Deferred tax asset                                                                                                    |       |                        | 14,305     |                    |       |   | 13,771 |   |   |
| Total assets                                                                                                          |       |                        | $          | 120,453                 |       |   |   | $ | 76,639 |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                         |       |                        |       |                    |       |   |   |   |   |
| Current  liabilities:                                                                                                 |       |                        |       |                    |       |   |   |   |   |
| Accounts payable                                                                                                      |       |                        | $          | 16,899                  |       |   |   | $ | 9,912 |   |   |
| VAT and other  taxes payable                                                                                          |       |                        | 1,083      |                    |       |   | 507 |   |   |
| Current portion of  capital lease obligations and long-term payables                                                  |       |                        | 9,325      |                    |       |   | 7,483 |   |   |
| Deferred revenue                                                                                                      |       |                        | 15,591     |                    |       |   | 2,151 |   |   |
| Accrued expenses                                                                                                      |       |                        | 24,451     |                    |       |   | 20,831 |   |   |
| Deferred tax  liability                                                                                               |       |                        | 13,772     |                    |       |   | 14,034 |   |   |
| Other current  liabilities                                                                                            |       |                        | 3,744      |                    |       |   | 1,918 |   |   |
| Liabilities of  businesses held for sale (Note 2)                                                                     |       |                        | —     |                    |       |   | 19,598 |   |   |
| Total current liabilities                                                                                             |       |                        | 84,865     |                    |       |   | 76,434 |   |   |
| Capital lease  obligations and long-term payables, less current portion                                               |       |                        | 344        |                    |       |   | 142 |   |   |
| Deferred tax  liability                                                                                               |       |                        | 2,639      |                    |       |   | 937 |   |   |
| Total liabilities                                                                                                     |       |                        | 87,848     |                    |       |   | 77,513 |   |   |
| Commitments and  contingencies (Note 11)                                                                              |       |                        |       |                    |       |   |   |   |   |
| Stockholders’  equity:                                                                                           |       |                        |       |                    |       |   |   |   |   |
| Preferred stock,  $.001 par value; 10,000,000 shares authorized; no shares issued                                     |       |                        | —     |                    |       |   | — |   |   |
| Common stock,  $.001 par value; 132,500,000 shares authorized; 62,624,777 and 66,805,440  shares issued, respectively |       |                        | 63         |                    |       |   | 67 |   |   |
| Additional paid-in  capital                                                                                           |       |                        | 557,907    |                    |       |   | 558,478 |   |   |
| Treasury stock,  1,520,789 shares                                                                                     |       |                        | (1,521     | )                       |       |   | (1,521 | ) |   |
| Accumulated  deficit                                                                                                  |       |                        | (488,880   | )                       |       |   | (535,232 | ) |   |
| Accumulated other  comprehensive loss                                                                                 |       |                        | (34,964    | )                       |       |   | (22,666 | ) |   |
| Total stockholders’  equity                                                                                      |       |                        | 32,605     |                    |       |   | (874 | ) |   |
| Total liabilities and stockholders’ equity                                                                       |       |                        | $          | 120,453                 |       |   |   | $ | 76,639 |   |   |

 

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

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**VIA NET.WORKS, INC.CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS(in thousands of U.S. dollars, except share and per share data)(Unaudited)**
| ** **                                                 | ** ** | **For the three months  ended June 30,** | ** ** | **For the six months  ended June 30,** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2004**                                                          | ** ** | **2005**                                                        | ** ** | **2004** | ** ** | **2005** | ** ** |
| Revenue                                                    |       | 4,152                                                             |       | 14,057                                                          |       | 8,242 |   | 29,586 |   |
| Operating costs and  expenses:                             |       |                                                              |       |                                                            |       |   |   |   |   |
| Internet services                                          |       | 2,506                                                             |       | 7,065                                                           |       | 4,744 |   | 15,458 |   |
| Selling, general  and administrative                       |       | 9,545                                                             |       | 13,322                                                          |       | 19,033 |   | 28,566 |   |
| Impairment and  restructuring charges                      |       | 195                                                               |       | 10,417                                                          |       | 495 |   | 11,846 |   |
| Depreciation and  amortization                             |       | 897                                                               |       | 1,386                                                           |       | 1,995 |   | 2,911 |   |
| Total operating  costs and expenses                        |       | 13,143                                                            |       | 32,190                                                          |       | 26,267 |   | 58,781 |   |
| Operating loss  from continuing operations                 |       | (8,991                                                            | )          | (18,133                                                         | )          | (18,025 | ) | (29,195 | ) |
| Interest income                                            |       | 180                                                               |       | 49                                                              |       | 279 |   | 60 |   |
| Interest expense                                           |       | —                                                            |       | (173                                                            | )          | (6 | ) | (333 | ) |
| Other (expense)  income, net                               |       | (74                                                               | )          | (1,212                                                          | )          | 98 |   | 299 |   |
| Foreign currency  gains (losses), net                      |       | (544                                                              | )          | (8,598                                                          | )          | (3,867 | ) | (10,366 | ) |
| Loss from  continuing operations before income taxes       |       | (9,429                                                            | )          | (28,067                                                         | )          | (21,521 | ) | (39,535 | ) |
| Income tax  expense                                        |       | (1                                                                | )          | (162                                                            | )          | (1 | ) | (172 | ) |
| Net loss from  continuing operations                       |       | (9,430                                                            | )          | (28,229                                                         | )          | (21,522 | ) | (39,707 | ) |
| Discontinued operations:                                   |       |                                                              |       |                                                            |       |   |   |   |   |
| Gain (loss) from  discontinued operations                  |       | (2,047                                                            | )          | (7,767                                                          | )          | 228 |   | (10,928 | ) |
| Gain on disposal  of discontinued operations               |       | —                                                            |       | 1,060                                                           |       | — |   | 4,283 |   |
| Net loss                                                   |       | $                                                                 | (11,477    | )                                                               | $          | (34,936 | ) | $ | (21,294 | ) | $ | (46,352 | ) |
| Basic and diluted loss  per share:                         |       |                                                              |       |                                                            |       |   |   |   |   |
| Continuing  operations                                     |       | $                                                                 | (0.16      | )                                                               | $          | (0.45 | ) | $ | (0.35 | ) | $ | (0.64 | ) |
| Discontinued  operations                                   |       | $                                                                 | (0.03      | )                                                               | $          | (0.11 | ) | $ | (0.00 | ) | $ | (0.11 | ) |
| Net loss per  share—basic and diluted                 |       | $                                                                 | (0.19      | )                                                               | $          | (0.56 | ) | $ | (0.35 | ) | $ | (0. 75 | ) |
| Shares used in computing  basic and diluted loss per share |       | 61,076,502                                                        |       | 61,839,050                                                      |       | 60,860,462 |   | 61,471,519 |   |

 

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

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**VIA NET.WORKS, INC.CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS(in thousands of U.S. dollars)(Unaudited)**
| ** **                                                                                              | ** ** | **For the six months  ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                                                              | ** ** | **2004**                                                        | ** ** | **2005** | ** ** |
| Cash flows from  operating activities:                                                                  |       |                                                            |       |   |   |
| Net loss from  continuing operations                                                                    |       | $                                                               | (21,522    | ) | (39,707 | ) |
| Adjustments to reconcile  net loss from continuing operations to net cash used in operating activities: |       |                                                            |       |   |   |
| Depreciation and amortization                                                                           |       | 1,995                                                           |       | 2,911 |   |
| Impairment charges                                                                                      |       | —                                                          |       | 10,197 |   |
| Provision for doubtful accounts receivable                                                              |       | 563                                                             |       | 39 |   |
| Unrealized foreign currency transaction losses                                                          |       | 2,867                                                           |       | 10,348 |   |
| Deferred tax                                                                                            |       | —                                                          |       | 132 |   |
| Stock compensation                                                                                      |       | 80                                                              |       | — |   |
| Changes in assets and  liabilities, net of acquisitions:                                                |       |                                                            |       |   |   |
| Trade accounts receivable                                                                               |       | (238                                                            | )          | 927 |   |
| Other current assets                                                                                    |       | (1,087                                                          | )          | 2,547 |   |
| Other non-current assets                                                                                |       | 35                                                              |       | — |   |
| Accounts payable                                                                                        |       | 1,662                                                           |       | (1,284 | ) |
| VAT and other taxes payable                                                                             |       | (211                                                            | )          | (80 | ) |
| Accrued expenses                                                                                        |       | (351                                                            | )          | 202 |   |
| Other current liabilities                                                                               |       | 772                                                             |       | (996 | ) |
| Deferred revenue                                                                                        |       | (2                                                              | )          | (729 | ) |
| Net cash provided by (used in) operating activities  by discontinued  operations                        |       | 3,420                                                           |       | (1,847 | ) |
| Net cash used in operating activities                                                                   |       | (12,017                                                         | )          | (17,340 | ) |
| Cash flows from  investing activities:                                                                  |       |                                                            |       |   |   |
| (Increase)  decrease in restricted cash                                                                 |       | (58                                                             | )          | 2,643 |   |
| Acquisition of  subsidiaries (net of cash acquired)                                                     |       | (8,429                                                          | )          | (1,280 | ) |
| Purchases of  property, equipment and other assets                                                      |       | (2,301                                                          | )          | (818 | ) |
| Proceeds from  disposition of subsidiaries                                                              |       | —                                                          |       | 6,140 |   |
| Net cash used in  investing activities by discontinued operations                                       |       | (959                                                            | )          | 38 |   |
| Net cash used in investing activities                                                                   |       | (11,747                                                         | )          | 6,723 |   |
| Cash flows from  financing activities:                                                                  |       |                                                            |       |   |   |
| Repayment of debt  and principal payments on capital lease obligations                                  |       | 8                                                               |       | (482 | ) |
| Proceeds from  issuance of common stock, net                                                            |       | 369                                                             |       | — |   |
| Net cash used in  financing activities by discontinued operations                                       |       | (127                                                            | )          | (107 | ) |
| Net cash (used  in) received from financing activities                                                  |       | 250                                                             |       | (589 | ) |
| Effect of  currency exchange rate changes on cash                                                       |       | 2                                                               |       | (1,151 | ) |
| Net decrease in cash and cash equivalents                                                               |       | (23,512                                                         | )          | (12,357 | ) |
| Cash and cash  equivalents, beginning of period                                                         |       | 65,803                                                          |       | 15,497 |   |
| Cash and cash  equivalents, end of period                                                               |       | $                                                               | 42,291     |   | 3,140 |   |

 

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

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**VIA NET.WORKS, INC.NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS(Unaudited)**

**1.  Basis of Presentation**

These condensed consolidated financial statements asof June 30, 2005 and for the three and six month periods ended June 30,2004 and 2005 and the related footnote information are unaudited and have beenprepared on a basis substantially consistent with the audited consolidatedfinancial statements of VIA NET.WORKS, Inc. (“VIA” or “the Company”) as ofand for the year ended December 31, 2004, included in VIA’s Annual Reporton Form 10-K as filed with the Securities and Exchange Commission (“2004Annual Report”). These condensed consolidated financial statements should beread in conjunction with the audited consolidated financial statements and the relatednotes to the financial statements included in the 2004 Annual Report. In theopinion of management, the accompanying unaudited condensed consolidatedfinancial statements contain all adjustments (consisting of normal recurringadjustments) that management considers necessary to present fairly theconsolidated financial position of VIA at June 30, 2005 and the results ofits operations and its cash flows for the six month periods ended June 30,2004 and 2005. The results of operations for the three and six month periodended June 30, 2005 may not be indicative of the results expected for anysucceeding quarter or for the year ending December 31, 2005. Certain priorperiod amounts have been reclassified to conform to the current periodpresentation. Reclassifications have been made to prior period amounts toaccount for discontinued operations.

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires VIA to make estimates andassumptions that affect the reported amounts of assets, liabilities, revenueand expenses, together with amounts disclosed in the related notes to theconsolidated financial statements. Actual results could differ from therecorded estimates.

**Going concern:**

For the six months ended June 30, 2005, theCompany had net losses from continuing operations of $39.7 million and netdecrease of cash and cash equivalents for the period of $12.4 million.

As of June 30, 2005, the Company had$3.1 million in cash and cash equivalents and $2.5 million inrestricted cash. The Company continues to sustain losses and net decreases ofcash and cash equivalents from its continuing operations. As announced on March 17,2005, the Company has insufficient cash reserves to continue operations of itsgroup parent, VIA NET.WORKS, Inc., without new financing. The Company hassought, with the support of its professional advisors, to address this issue,by seeking new investments in the Company, new financing and opportunities tosell all or part of its business operations. Since Apri1 1, 2005, the Companyhas financed its continuing operations through the sale of operating units ofthe Company and obtaining advances of funds in connection with the sale ofcertain operating units.

On April 1, 2005, the Company announced the saleof two of its Swiss companies—VIA NET.WORKS (Schweiz) AG and VIA NET.WORKSServices AG—to former managers and owners of the businesses, for a cashconsideration of CHF 3.5 million ($2.9 million). The net proceeds of the saleprovided VIA with additional liquidity to continue its discussions with otherparties to obtain new financing or enter into transactions for the sale of allor parts of its business.

On April 30, 2005, VIA NET.WORKS, Inc.entered into a sale and purchase agreement, or Sale Agreement, with ClaranetGroup Limited (Claranet), a privately-held European Internet services providerbased in the United Kingdom, to sell all of the Company’s remaining businessoperations in Europe and 

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the United States (the “AssetSale”). The agreement followed on the letter of intent entered into betweenClaranet and VIA on April 10, 2005. The material provisions of the SaleAgreement were described in the Company’s Quarterly Report on Form 10-Qfor the three month period ended March 31, 2005.

The Asset Sale was conditioned upon the approval bythe Company’s shareholders. On or about June 3, 2005, the Company mailedits definitive proxy statement on Form 14A to its shareholders of recordas of May 25, 2005 and scheduled a Special and Annual Meeting of theShareholders to take place on June 29, 2005. In the proxy statement theCompany delivered to its shareholders, the Company requested approval of, amongother things, the Asset Sale and a plan of complete dissolution and liquidationof the Company. On June 28, 2005, the Company announced the postponementof the shareholders’ meeting until July 22, 2005. The closing of the AssetSale was conditioned on receiving the requisite majority vote of theshareholders of the Company.

On July 12, 2005, VIA and Claranet entered intoan Amendment and Restatement Agreement relating to the Sale Agreement of April 30,2005 (the “Amended Sale Agreement”). Pursuant to the Amended Sale Agreement,the Company sold its Amen group of businesses and its U.S., Dutch andPortuguese VIA NET.WORKS branded legacy operations to Claranet for $9.3million, less a portion of the deposit already paid by Claranet inconnection with the Asset Sale (plus interest on such amount), repayment toClaranet of the amounts owed by VIA under the loan facility established on April 30,2005, including interest, and an amount held as a deferred payment (the “July 12thSale”). The sale excluded the PSINet Europe operations and VIA’s legacyoperations in France, Germany and Spain and certain assets pertaining to theCompany’s centralized back office and technical support systems, includingemployee contracts of certain headquarters personal (the “Remaining Assets”).No shareholder approval was necessary for the closing of the July 12thSale. Upon completion of the July 12th Sale, the Companyrecorded a loss in the statement of operations for the three months ending September 30,2005 of $1.6 million, relating to amounts previously recorded in accumulatedother comprehensive loss.

The Amended Sale Agreement contemplated that theRemaining Assets would be sold to Claranet for $17.1 million, subject tocertain adjustments, in a second closing that would be subject to shareholderapproval. As a part of the July 12th Sale, VIA and Claranetalso entered into an Amendment and Restatement Agreement relating to theFacility Agreement of April 30, 2005 (the “Amended Facility Agreement”). Underthe Amended Facility Agreement, Claranet agreed to extend to VIA a secured loanfacility of $2.5 million, in replacement of the previous €5.3million ($7.0 million) loan facility under the Facility Agreement of April 30,2005. VIA subsequently delivered to its shareholders a supplement to its proxymaterials describing, among other things, the July 12th Sale,the sale of the Remaining Assets and the approval being sought at the July 22ndshareholders’ meeting. The shareholders’ meeting was convened on July 22,2005 and then adjourned until August 2, 2005 in order to provide theCompany additional time to secure the requisite majority vote.

On July 27, 2005, Claranet delivered a letterpurporting to terminate the Amended Sale Agreement. Claranet alsodelivered a letter of termination that day regarding the Amended FacilityAgreement. In its letters of termination, Claranet alleged that certain eventshad occurred that permit it to terminate the Amended Sale Agreement and theAmended Facility Agreement; specifically, that VIA’s cash flow exceeded thelevel of negative cash flow permitted by the Amended Sale Agreement, thatcertain alleged new liabilities have arisen and that Claranet did not consentto VIA’s recent transaction with Sorbie (See Note 10). The Company promptlydelivered a notice to Claranet disputing the assertions made by Claranet,disputing the right of Claranet to terminate the agreements and demanding thatit fully perform the agreements.

While VIA believes thatClaranet’s position is not supported by the facts or the terms of theagreements and that Claranet is therefore in breach of th agreements, VIA’smanagement also is aware that Claranet is not willing to proceed to completethe sale and provide financing on the terms of the 

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agreements,and that VIA will need to pursue a different transaction. VIA therefore hasengaged Claranet in discussions toward resolving the dispute, and at the sametime VIA also has actively sought a new buyer for the Remaining Assets, and hashad substantive discussions with several interested parties. In light of theCompany’s liquidity problems and without further advances under the Amended FacilityAgreement from Claranet, the Company is seeking to complete its discussionswith Claranet and to enter into a new arrangement for the sale of the businessand interim funding within the next few weeks. In the absence of a resolutionof the dispute with Claranet, the Company could be liable to pay Claranettermination and related charges in an amount of $1.2 million, if Claranet’sposition is determined to be justified. If the Company’s position is correct,Claranet would owe the Company $0.5 million for a break fee and the Companycould pursue Claranet in litigation for significant damages. Based ondiscussions to date, the Company anticipates that it will be able to concludearrangements with a new buyer for the sale of the business and interimfinancing, as well as an agreement with Claranet to resolve the disputedtermination of the sale and financing agreements, within that time frame. Therecan be no assurances that the Company will be successful in these efforts, orwhat value a new buyer will place on the Company’s business and assets. If, forwhatever reason, the Company is not able to enter into a new arrangement forthe sale of the business and interim funding, there can be no assurance thatVIA will able to find alternative solutions to its liquidity problem. In thatevent, the Company would have insufficient funds to continue to operate theCompany as a going concern.

**Recent accounting pronouncements**

In December 2004, theFASB issued Statement of Financial Accounting Standards (“SFAS”) No. 123(revised 2004), “Share-Based Payments” or SFAS 123R. This statement eliminatesthe option to apply the intrinsic value measurement provisions of AccountingPrinciples Board (“APB”) Opinion No. 25, “Accounting for Stock Issued toEmployees” to stock compensation awards issued to employees. Rather, SFAS 123Rrequires companies to measure the cost of employee services received inexchange for an award of equity instruments based on the grant-date fair valueof the award. That cost will be recognized over the period during which anemployee is required to provide services in exchange for the award—therequisite service period (usually the vesting period). SFAS 123R applies to allawards granted after the required effective date and to awards modified,repurchased, or cancelled after that date. SFAS 123R will be effective for ourfiscal year beginning January 1, 2006. We have not yet quantified theeffect of the future adoption of SFAS 123R on a going forward basis.

**2.**  Discontinued Operations

As each of the UnitedKingdom, Brazilian, Portuguese, Cayman Islands, Swiss, Netherlands, U.S.,Spanish, French and Italian operations represented a component of an entity asdefined by Statement of Financial Accounting Standards No. 144 (“SFAS 144”),*“Accounting for the Impairment or Disposalof Long-Lived Assets”*, the Company has classified each operation asa discontinued operation for all periods presented.

*2004*

*VIA NET.WORKS UKLimited.*

On September 28, 2004, the Company sold 100% ofthe shares of VIA NET.WORKS UK Limited, which was part of the Solutionssegment, to Claranet Limited, a UK-based Internet service provider. VIANET.WORKS UK Limited results would have been reported in our Solutions segment.Claranet agreed to pay total consideration for the shares of VIA NET.WORKS UKLimited in the aggregate amount of GBP 7.3 million ($13.1 million), subject tocertain working capital and other adjustments. The Company received GBP 5.3million ($9.4 million) in cash on completion. The GBP 2.0 million ($3.8million) balance was payable, subject to the working capital and otheradjustments, as follows: GBP 1.0 million 

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($1.9 million) incash six months after completion and GBP 1.0 million ($1.9 million) in cash oneyear after completion.

On March 21, 2005, the Company resolved allcontingencies surrounding the first escrow payment, and received a payment fromClaranet of GBP 0.7 million ($1.3 million) plus accrued interest. The GBP 0.7million ($1.3 million) consideration has been recognized as gain on disposalfrom discontinued operations in the three months ended March 31, 2005.

The remaining consideration of GBP 1.0 million ($1.9million) was scheduled to be released from escrow, subject to warranty claimsof Claranet against the Company, at the end of September 2005. On April 10,2005, the Company and Claranet entered into a letter of intent for purchase ofthe remaining business operations. Upon execution of the letter of intent,Claranet delivered a deposit of $3.0 million for the rights to negotiate on anexclusive basis definitive agreements toward the sale of the Company’s businessoperations. The deposit was partially paid by the release of the remaining GBP1.0 million ($1.9 million) in escrow. As all material contingencies surroundingthe second escrow payment were resolved as at March 31, 2005, the GBP 1.0million ($1.9 million) consideration has also been recognized as gain ondisposal from discontinued operations in the three months ended March 31,2005.

Revenues related to VIANET.WORKS UK Limited were approximately $10.7 million for the six months ended June 30,2004 and $nil for the six months ended June 30, 2005. The gain, excludingaccounting for the sale transaction, related to VIA NET.WORKS UK Limited wasapproximately $3.5 million for the six months ended June 30, 2004 and nilfor the six months ended June 30, 2005.

*SURF COMPANIES*

During the year ended December 31,2004, Surftrade Ltda., Surftrade Portugal and VIA NET.WORKS Holdings Caymanwere liquidated. The results of the liquidated companies which have beenrecorded during the six months ended June 30, 2004 are nil for SurftradeLtda., Surftrade Portugal and VIA NET.WORKS Holdings Cayman. Surftrade Ltda., SurftradePortugal and VIA NET.WORKS Holdings Cayman results would have been reported inCorporate entity.

*2005*

*VIA NET.WORKSSWITZERLAND*

On April 1, 2005, the Company announced the saleof two of its Swiss companies—VIA NET.WORKS (Schweiz) AG and VIA NET.WORKSServices AG—to former managers and owners of the businesses, for a cashconsideration of CHF 3.5 million ($2.9 million). VIA NET.WORKS (Schweiz) AG andVIA NET.WORKS Services AG results would havebeen reported in our Solutions segment. The Company sold the Swiss operationsdue to working capital shortfalls. The net proceeds of the sale provided VIAwith additional liquidity to continue its operations, while the Companycontinued discussions for refinancing and sale transactions.

Revenues related to VIANET.WORKS (Schweiz) AG and VIA NET.WORKS Services AG were approximately $4.5million for the six months ended June 30, 2004 and $2.2 million for thesix months ended June 30, 2005. The loss, excluding accounting for thesale transaction, related to VIA NET.WORKS (Schweiz) AG and VIA NET.WORKSServices AG was approximately $0.1 million for the six months ended June 30,2004 and $24,000 for the six months ended June 30, 2005. Upon completionof the VIA NET.WORKS (Schweiz) AG and VIA NET.WORKS Services AG sale, theCompany recorded a loss of $1.0 million in the statement of operations in thethree months ended June 30, 2005, relating to amounts previously recordedin accumulated other comprehensive loss.

9

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*AMEN GROUP ANDLEGACY OPERATIONS IN THE UNITED STATES, THE NETHERLANDS AND PORTUGAL*

Pursuant to the Amended Sale Agreement, on July 12,2005, the Company sold its Amen group of businesses and the U.S., Dutch andPortuguese VIA NET.WORKS branded legacy operations to Claranet Group Limited(the July 12th Sale). The Amen group of businesses results would have been reported in our Amen segment. TheDutch and Portuguese VIA NET.WORKS branded legacy operations results would havebeen reported in our Solutions segment and the U.S. VIA NET.WORKS branded legacyoperation result would have been reported in our Express segment.

As of June 30,2005 assets and liabilities held for sale consisted of:
| **In thousands of U.S. dollars** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|------------|------------|------------|------------|
| Current assets                                       |       | 9,215      |       |
| Goodwill (Amen  and Express segment)                 |       | 10,628     |       |
| Total assets                                         |       | 19,843     |       |
| Accounts payable                                     |       | 3,734      |       |
| Deferred revenue                                     |       | 9,886      |       |
| Other current  liabilities                           |       | 5,439      |       |
| Long term  liabilities                               |       | 539        |       |
| Total liabilities                                    |       | 19,598     |       |

 

Revenues related to the companies sold in the July 12thsale were approximately $13.0 million for the six months ended June 30,2004 and $16.7 million for the six months ended June 30, 2005. The loss,excluding accounting for the sale transaction, related to the A Group Companieswas approximately $3.1 million for the six months ended June 30, 2004 and$10.9 million for the six months ended June 30, 2005. Income tax benefitsin connection with deferred tax liabilities relating to intangible fixed assetsrecognized for the acquisition of the Amen group of companies were approximately$0.2 million for the six months ended June 30, 2004 and $0.2 million forthe six months ended June 30, 2005. Details of the impairment chargesrecorded against the discontinued operations is set out in Note 3.

The balance sheet for thesix months ended June 30, 2005 has been reclassified to show the assetsand liabilities for the Amen group of businesses and the U.S., Dutch andPortuguese VIA NET.WORKS branded legacy operations separately as businessesheld for sale. Upon disposal, a further loss of $1.6 million will berecognized in the three months ending September 30, 2005, as a result offoreign currency translation adjustments being reclassified into the statementof operations. The comparative balance sheet as at December 31, 2004 hasnot been reclassified to show separately amounts related to discontinuedoperations.

**3.**  Impairment and Restructuring Charges

*Impairment charges:*
| ** **                                           | ** ** | **Six months ended  June 30,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------|------------|
| **In thousands of U.S. dollars** | ** ** | ** **                                    | ** ** | **2004** | ** ** | **2005** | ** ** |
| Fixed assets and  intangible assets                  |       |                                          | $          | — |   |   | $ | 1,382 |   |
| Goodwill                                             |       |                                          | —     |   |   | 8,815 |   |
| Total impairment charges                             |       |                                          | $          | — |   |   | $ | 10,197 |   |
|                                                      |            |                                               |            |  |  |  |  |  |  |  |  |

 

*2004*

There were no impairmentcharges for the six months ended June 30, 2004.

10

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*2005*

At June 30, 2005, upon completion of animpairment analysis, in accordance with SFAS 144, the Company recorded anintangible fixed asset impairment charge of $0.3 million and a tangible fixedasset impairment charge of $1.1million in relation to the Remaining Assets ofthe Group (mainly related to the Solutions segment). For definitions of thesegments, please refer to Note 12 Segment reporting.

The impairment review reflected the signing of theAmended Sale Agreement with Claranet on July 12, 2005 to sell thebusinesses of VIA NET.WORKS to Claranet, and the subsequent termination letterissued by Claranet as discussed in Note 1, which provided additionalinformation regarding the fair value of the assets.

Based on the impairment of tangible and intangiblefixed assets for the Remaining Assets, at June 30, 2005, the Companydetermined a triggering event had occurred which required the Company toperform an impairment test on the carrying value of goodwill in accordance withSFAS 142. As a result, the Company recorded an impairment of $8.7 million tothe goodwill related to its Solutions segment and an impairment of $0.1 millionto the goodwill related to the VIA U.S.A. operation, which is included in theCompany’s Express segment. The impairment charge relating to the goodwill ofthe VIA U.S.A. operation has been classified within loss from discontinuedoperations in the statement of operations for the three and six months ended June 30,2005.

The fair value of the Remaining Assets calculated asof June 30, 2005 was based on a discounted cash flow model withappropriate market and business risk factored in for the period until October 31,2005, the estimated date of completion of the sale of the Remaining Assets. Inaddition estimated sale proceeds of $17.1 million were used, which representsmanagement’s best estimate of the likely sale proceeds based on substantivediscussions with interested parties.

As a part of the process of creating the discountedcash flow model, the Company’s management was required to make estimates andassumptions regarding future revenues, costs and cash flows for the periodbetween June 30, 2005 and October 31, 2005, the estimated date ofcompletion of the sale of the Remaining Assets and the projected workingcapital position at October 31, 2005. In addition, the use of a discountedcash flow model requires management to make estimates and assumptions about thediscount factor, timing of cash flows, terminal values and future growth rates.The assumptions made in calculating the impairment charges represent management’sbest estimates based on currently available information. Changes to any ofthese assumptions can have a material impact on the discounted cash flows andtherefore have a further material impact on the level of impairment required tobe recorded.

In addition to theimpairment charges discussed above, the Company also recorded impairmentcharges of $5.9 million for the three and six months ended June 30, 2005,against assets classified as held for sale under the Amended Sale Agreement.

*Restructuring charges:*
| **In thousands of U.S. dollars** | ** ** | ** ** | ** ** | **Balance at  December 31,  2003** | ** ** | **Additions** | ** ** | **Cash  utilized** | ** ** | **Foreign  exchange** | ** ** | **Balance at  March 31,  2004** | ** ** |
|------------------------------------------------------|------------|------------|------------|----------------------------------------------|------------|---------------|------------|--------------------|------------|-----------------------|------------|-------------------------------------------|------------|
| Employee  termination payments                       |       |       | 201        |                                         |       |          | 151        |               |       |                  | (159       | )                                         |       |   | 1 |   |   |   | 194 |   |   |
| Future operating  lease obligations                  |       |       | 276        |                                         |       |          | —     |               |       |                  | (41        | )                                         |       |   | — |   |   |   | 235 |   |   |
| Other                                                |       |       | 121        |                                         |       |          | 149        |               |       |                  | (114       | )                                         |       |   | — |   |   |   | 156 |   |   |
| Total restructuring  charges                         |       |       | $          | 598                                          |       |          |       | $                  | 300        |                  |       |                                      | $          | (314 | ) |   |   | $ | 1 |   |   |   | $ | 585 |   |   |
|                                                      |            |            |            |                                              |            |               |            |                    |            |                       |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

11

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| **In thousands of U.S. dollars** | ** ** | ** ** | ** ** | **Balance at  March 31,  2004** | ** ** | **Additions** | ** ** | **Cash  utilized** | ** ** | **Foreign  exchange** | ** ** | **Balance at  June 30,  2004** | ** ** |
|------------------------------------------------------|------------|------------|------------|-------------------------------------------|------------|---------------|------------|--------------------|------------|-----------------------|------------|------------------------------------------|------------|
| Employee  termination payments                  |       |       | 194        |                                      |       |          | 73         |               |       |                  | (266       | )                                        |       |   | (1 | ) |   |   | — |   |   |
| Future operating  lease obligations                  |       |       | 235        |                                      |       |          | —     |               |       |                  | (83        | )                                        |       |   | — |   |   |   | 152 |   |   |
| Other                                                |       |       | 156        |                                      |       |          | 122        |               |       |                  | (253       | )                                        |       |   | — |   |   |   | 25 |   |   |
| Total restructuring  charges                         |       |       | $          | 585                                       |       |          |       | $                  | 195        |                  |       |                                     | $          | (602 | ) |   |   | $ | (1 | ) |   |   | $ | 177 |   |   |
|                                                      |            |            |            |                                           |            |               |            |                    |            |                       |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| **In thousands of U.S. dollars** | ** ** | ** ** | ** ** | **Balance at  December 31,  2004** | ** ** | **Additions /  releases** | ** ** | **Cash  utilized** | ** ** | **Foreign  exchange** | ** ** | **Balance at  March 31,  2005** | ** ** |
|------------------------------------------------------|------------|------------|------------|----------------------------------------------|------------|--------------------------------|------------|--------------------|------------|-----------------------|------------|-------------------------------------------|------------|
| Employee  termination payments                       |       |       | 319        |                                         |       |                           | 106        |               |       |                  | (212       | )                                         |       |   | (14 | ) |   |   | 199 |   |   |
| Future operating  lease obligations                  |       |       | 164        |                                         |       |                           | (40        | )                  |       |                  | (70        | )                                         |       |   | (4 | ) |   |   | 50 |   |   |
| Other                                                |       |       | 484        |                                         |       |                           | 176        |               |       |                  | (174       | )                                         |       |   | (16 | ) |   |   | 470 |   |   |
| Total restructuring  charges                         |       |       | $          | 967                                          |       |                           |       | $                  | 242        |                  |       |                                      | $          | (456 | ) |   |   | $ | (34 | ) |   |   | $ | 719 |   |   |
|                                                      |            |            |            |                                              |            |                                |            |                    |            |                       |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| **In thousands of U.S. dollars** | ** ** | ** ** | ** ** | **Balance at  March 31,  2005** | ** ** | **Additions /  releases** | ** ** | **Cash  utilized** | ** ** | **Foreign  exchange** | ** ** | **Balance at  June 30,  2005** | ** ** |
|------------------------------------------------------|------------|------------|------------|-------------------------------------------|------------|--------------------------------|------------|--------------------|------------|-----------------------|------------|------------------------------------------|------------|
| Employee  termination payments                       |       |       | 199        |                                      |       |                           | 1,407      |               |       |                  | (143       | )                                        |       |   | (69 | ) |   |   | 1,394 |   |   |
| Future operating  lease obligations                  |       |       | 50         |                                      |       |                           | —     |               |       |                  | (45        | )                                        |       |   | (1 | ) |   |   | 4 |   |   |
| Other                                                |       |       | 470        |                                      |       |                           | —     |               |       |                  | (97        | )                                        |       |   | (14 | ) |   |   | 359 |   |   |
| Total restructuring  charges                         |       |       | $          | 719                                       |       |                           |       | $                  | 1,407      |                  |       |                                     | $          | (285 | ) |   |   | $ | (84 | ) |   |   | $ | 1,757 |   |   |
|                                                      |            |            |            |                                           |            |                                |            |                    |            |                       |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*2004*

The Company recorded restructuring charges of $0.2million and $0.5 million during the three and six months ended June 30,2004 respectively. The restructuring charge for the three months ended March 31,2004 related to severance payments at the corporate headquarters and transitionimplementation costs for back-office and administrative outsourcinginitiatives. The restructuring charge for the three months ended June 30,2004 related to severance payments at the corporate headquarters, andtransition implementation costs for back-office and administrative outsourcinginitiatives.

The employee termination costs of $0.2 million for thethree months ended March 31, 2004 relate to five employees in finance atthe corporate headquarters. Cash payments for severance and benefits of $0.2million were made in the first quarter of 2004 by the European operations ($0.1million) and Corporate ($0.1 million). The employee termination costs of $0.1million for the three months ended June 30, 2004 relate to three employeesat corporate headquarters. Cash payments of $0.3 million were made in thequarter in respect of the March 31, 2004 accrual and costs incurred in theperiod.

The accrual for futureoperating lease obligations, relating mainly to the Reston office, has beendrawn down by the monthly payments on the office lease, which continues throughFebruary 2005, less the income from a sublease of the space. Other chargesincurred in the three and six months ended June 30, 2004 related to theimplementation costs for back-office and administrative outsourcinginitiatives.

12

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*2005*

The Company recorded restructuring charges of $1.4million and $1.6 million during the three and six months ended June 30,2005 respectively. During the three months ended March 31, 2005, theCompany recorded restructuring charges of $0.2 million. The restructuringcharge for the three months ended March 31, 2005 related to severancepayments at the corporate headquarters and transition implementation costs forback-office integration initiatives.

The employee termination costs of $0.1 million for thethree months ended March 31, 2005 relate to one employee at the corporateheadquarters. The employee termination costs of $1.4 million for the threemonths ended June 30, 2005 relate to forty one employees at the corporateheadquarters. Cash payments for severance and benefits of $0.1 million weremade in the three months ended June 30, 2005 by the corporateheadquarters. The remaining accrual of $1.4 million at June 30, 2005relates to forty two employees at the corporate headquarters.

The accrual for future operating lease obligations,relate to the Reston office and future lease obligations in the VIA Germanyoperation. As at June 30, 2005 the accrual for the future operating leaseobligations of the Reston office and the VIA Germany operation have been drawndown to nil by the monthly payments on the office lease. $40,000 of the accrualfor the future operating lease obligations has been released to the statementof operations for the three months ended March 31, 2005 after the Restonoperating lease obligation was terminated in February 2005.

Other charges incurred inthe three months ended March 31, 2005, relate to the implementation costsfor back-office integration initiatives. The remaining accrual of $0.4 millionat June 30, 2005 relates to $0.2 million implementation costs forback-office integration initiatives and $0.2 million for the termination of areseller agreement in the PSINet France operation.

**4.**  Income Tax

The provision for taxesbased on income for the six months ended June 30, 2004 and 2005 wascomputed in accordance with Interpretation No. 18 of Accounting PrinciplesBoard Opinion No. 28 on reporting taxes for interim periods and was basedon management’s expectation of an effective income tax rate of 0% for the yearending December 31, 2005.

**5.**  Comprehensive Loss

Comprehensiveloss for the three and six months ended June 30, 2004 and 2005 was asfollows:
| ** **                                              | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **In thousands of U.S. dollars**    | ** ** | ** **                                      | ** ** | **2004**                                      | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** |
| Net loss                                                |       | $                                               | (11,477    | )                                             | $          | (34,936 | ) | $ | (21,294 | ) | $ | (46,352 | ) |
| Foreign currency  translation adjustment (losses) gains |       | 607                                             |       | 9,705                                         |       | 2,533 |   | 12,033 |   |
| Comprehensive loss                                      |       | $                                               | (10,870    | )                                             | $          | (25,231 | ) | $ | (18,761 | ) | $ | (34,319 | ) |
|                                                         |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |  |  |

 

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**6.**  Property and Equipment, net

Propertyand equipment consisted of the following:
| **In thousands of U.S. dollars** | ** ** | ** ** | ** ** | **December 31,  2004** | ** ** | **June 30,  2005** | ** ** |
|------------------------------------------------------|------------|------------|------------|-----------------------------|------------|-------------------------|------------|
| Hardware and  other equipment                        |       |       | $          | 19,586                      |       |                    | $          | 6,969 |   |
| Network and data  center assets                      |       |       | 8,330      |                        |       | 4,349                   |       |
| Software                                             |       |       | 17,237     |                        |       | 15,654                  |       |
| Furniture and  fixtures                              |       |       | 1,186      |                        |       | 221                     |       |
|                                                 |       |       | 46,339     |                        |       | 27,193                  |       |
| Accumulated  depreciation                            |       |       | (33,274    | )                           |       | (20,971                 | )          |
| Property and equipment,  net                         |       |       | $          | 13,065                      |       |                    | $          | 6,222 |   |

 

Depreciation expense was$2.0 million and $2.7 million for the six months ended June 30,2004 and 2005, respectively. The Company recorded an asset impairment charge of$1.8 million and $1.1 million for the year ended December 31, 2004 and thesix months ended June 30, 2005, respectively. The table above shows thebalances, net, after the effect of the impairment charges and property andequipment at June 30, 2005 classified as Assets of businesses held forsale. The fixed asset impairment charge related to all property and equipmentcategories. (See Note 3 for further information.)

**7.**  Goodwill

Thechanges in the carrying amount of goodwill during the six months ended June 30,2005 are as follows:
| **In thousands of U.S. dollars**          | ** ** | ** ** | ** ** | **Total** | ** ** | **Solutions** | ** ** | **Amen** | ** ** | **Express** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|-----------|------------|---------------|------------|----------|------------|-------------|------------|
| Balance as of  December 31, 2004                         |       | $          | 42,466     |      |       | $             | 30,830     |     |       | $           | 10,490     |   | $ | 1,146 |   |
| Impairment  charges related to continuing operations          |       | (517       | )          |      | —     |          |       | (517     | )          | —      |       |
| Foreign exchange  adjustment                                  |       | (1,355     | )          |      | (1,607     | )             |       | 252      |       | —      |       |
| Balance as of  March 31, 2005                            |       | $          | 40,594     |      |       | $             | 29,223     |     |       | 10,225      |       | $ | 1,146 |   |
| Impairment  charges related to discontinued operations        |       | (70        | )          |      | —     |          |       | —   |       | (70         | )          |
| Impairment  charges related to continuing operations          |       | (8,815     | )          |      | (8,815     | )             |       | —   |       | —      |       |
| Goodwill  classified under assets of businesses held for sale |       | (10,628    | )          |      | —     |          |       | (9,552   | )          | (1,076      | )          |
| Foreign exchange  adjustment                                  |       | (2,247     | )          |      | (1,574     | )             |       | (673     | )          | —      |       |
| Balance as of  June 30, 2005                             |       | $          | 18,834     |      |       | $             | 18,834     |     |       | $           | —     |   | $ | — |   |

 

Impairments are discussedin greater detail within Note 3 of these consolidated financial statements.

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**8.**  Intangible Assets, net

Intangibleassets consisted of the following:
| **In thousands of U.S. dollars** | ** ** | ** ** | ** ** | **December 31,  2004** | ** ** | **June 30,  2005** | ** ** |
|------------------------------------------------------|------------|------------|------------|-----------------------------|------------|-------------------------|------------|
| Customer lists                                       |       |       | $          | 6,580                       |       |                    | $          | 3,508 |   |
| Software                                             |       |       | 2,183      |                        |       | —                  |       |
| Tradename                                            |       |       | 1,062      |                        |       | 697                     |       |
| Accumulated  amortization                            |       |       | (1,130     | )                           |       | (1,153                  | )          |
| Intangible assets , net                              |       |       | $          | 8,695                       |       |                    | $          | 3,052 |   |

 

The amortization expensefor the six-month periods ended June 30, 2004 and 2005 for continuingoperations was nil and $0.2 million, respectively. The Company amortizescustomer lists, software and trade names over three to seven years, five yearsand ten years respectively. The Company recorded an asset impairment charge of$0.1 million and $0.3 million for the year ended December 31, 2004 and thesix months ended June 30, 2005, respectively. The table above shows thebalances net after the effect of the impairment charges and intangible assetsat June 30, 2005 classified as Assets of businesses held for sale. (SeeNote 2 and 3 for further information.)

**9.**  Stock-Based Compensation

SFAS No. 123, “*Accountingfor Stock-Based Compensation*,” as amended encourages, but does notrequire companies to record compensation cost for stock-based employeecompensation plans at fair value. The Company has chosen to account forstock-based compensation using the intrinsic value method prescribed inAccounting Principles Board Opinion (“APB”) No. 25, “*Accounting for Stock Issued to Employees*,”and related Interpretations. Accordingly, compensation cost for stock optionsis measured as the excess, if any, of the estimated fair value of the Company’sstock at the date of the grant over the amount an employee must pay to acquirethe stock.

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The Company has adoptedthe “disclosure only” alternative described in SFAS No. 123, whichrequires pro forma disclosures of net income and earnings per share as if thefair value method of accounting has been applied. The following tableillustrates the effect on net loss and loss per share as if the Company hadapplied the fair value recognition provisions of SFAS No. 123 tostock-based employee compensation:
| ** **                                                                                                                      | ** ** | **For the three months  ended  June 30,** | ** ** | **For the six months  ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| **In thousands of U.S. dollars**                                                                            | ** ** | ** **                                                    | ** ** | **2004**                                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** |
| Net loss (as reported)                                                                                                          |       | $                                                             | (11,477    | )                                                           | $          | (34,936 | ) | $ | (21,294 | ) | $ | (46,352 | ) |
| Add back: Total  stock-based employee compensation expense determined under intrinsic value  method, net of related tax effects |       | —                                                        |       | —                                                      |       | 80 |   | — |   |
| Deduct: Total stock-based  employee compensation expense determined under fair value based method, net  of related tax effects  |       | (509                                                          | )          | (230                                                        | )          | (1,118 | ) | (547 | ) |
| Pro forma net loss                                                                                                              |       | $                                                             | (11,986    | )                                                           | $          | (35,166 | ) | $ | (22,332 | ) | $ | (46,899 | ) |
| Net loss per share,  basic and diluted (as reported)                                                                            |       | $                                                             | (0.19      | )                                                           | $          | (0.56 | ) | $ | (0.35 | ) | $ | (0.75 | ) |
| Net loss per share,  basic and diluted (pro forma)                                                                              |       | $                                                             | (0.20      | )                                                           | $          | (0.57 | ) | $ | (0.37 | ) | $ | (0.76 | ) |
|                                                                                                                                 |            |                                                               |            |                                                             |            |  |  |  |  |  |  |  |  |  |  |

 

During the three months endedMarch 31, 2004, a total of 37,500 shares of the Company’s common stockwere issued to two directors pursuant to the Company’s director compensationprogram. The market value of the stock as issued on the date of grant was $2.13per share. This cost to the Company has been expensed in the condensedconsolidated statement of operations for the three months ended March 31,2004.

**10.  Non-cash transactions**

On June 14, 2005, the Company issued 4,180,663shares of its common stock to Reachtown Limited. The shares were issued insatisfaction of an earn-out provision set forth in the Share Purchase Agreementmade and entered into as of January 28, 2004, among VIA, VIA NET.WORKSHoldco, Inc. and Reachtown Limited, pursuant to which the Company acquired100% of the issued and outstanding shares of the Amen group of companies.

On June 29, 2005, theCompany entered into a series of agreements (the “Agreements”) relating to therelease by Sorbie Europe B.V. (formerly PSINet Europe B.V.) (“Sorbie”) of allof the Company’s obligations related to the unsecured zero-coupon convertiblenote of Euro 6.0 million ($7.2 million) due in full November 20, 2005issued to Sorbie in connection with its acquisition of the PSINet Europecompanies on August 9, 2004. Under the Agreements, the Company and thesellers of the PSINet Europe companies mutually released all claims that eitherparty has or may have in the future have against the other party under the August 9,2004 purchase agreement. In consideration for the release, Sorbie agreed thatit will cancel the Note if VIA pays Sorbie, prior to August 31, 2005, Euro1.5 million (approximately $1.8 million) in cash and issues to Sorbie or itsdesignee shares of common stock of VIA equal to 9.9% (7,173,341 shares) of thetotal outstanding shares of the Company as of June 29, 2005. Pursuant tothe Agreements, the release and cancellation and the Company’s payment andissuance of the shares to Sorbie will occur no later than two days after thedate of completion of the sale of the Company’s business or therecapitalization of the Company with new funds.

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**11.  ** Contingencies

*Legal Proceedings*

On November 5, 2001, the Company was named as adefendant in a class action lawsuit in the District Court for the SouthernDistrict of New York against VIA NET.WORKS, Inc., certain of theunderwriters who supported our initial public offering (“IPO”) and certain ofour officers, under the title O’Leary v. Via Net.works [sic] et al [01-CV-9720](the “Complaint”). An amended complaint was filed in April 2002. TheComplaint alleges that the prospectus we filed with our registration statementin connection with our IPO was materially false and misleading because itfailed to disclose, among other things, that: (i) the named underwritershad solicited and received excessive and undisclosed commissions from certaininvestors in exchange for the right to purchase large blocks of VIA IPO shares;and (ii) the named Underwriters had entered into agreements with certainof their customers to allocate VIA IPO shares in exchange for which thecustomers agreed to purchase additional VIA shares in the aftermarket atpre-determined prices (“Tie-in Arrangements”), thereby artificially inflatingthe Company’s stock price. The Complaint further alleges violations of Sections11, 12 (a)(2) and 15 of the Securities Act of 1933 and Section 10(b) ofthe Securities Exchange Act of 1934 and Rule 10b-5 promulgated there underarising out of the alleged failure to disclose and the alleged materiallymisleading disclosures made with respect to the commissions and the Tie-inArrangements in the prospectus. The plaintiffs in this action seek monetarydamages in an unspecified amount. Approximately 300 other issuers and theirunderwriters have had similar suits filed against them, all of which areincluded in a single coordinated proceeding in the Southern District of NewYork (the “IPO Litigation”). On June 30, 2003, the special litigationcommittee of the board of directors of the Company conditionally approved theglobal settlement between all plaintiffs and issuers in the IPO Litigations. Thespecial litigation committee agreed to approve the settlement subject to anumber of conditions, including the participation of a substantial number ofother defendants in the proposed settlement, the consent of the Company’sinsurers to the settlement, and the completion of acceptable final settlementdocumentation. The settlement would provide, among other things, a release ofthe Company and of the individual defendants for the conduct alleged in theaction to be wrongful by the plaintiffs. Under the proposed settlement, theCompany would agree to undertake other responsibilities under the partialsettlement, including agreeing to assign away, not assert, or release certainpotential claims the Company may have against its underwriters. In June 2004,a motion for preliminary approval of the settlement was filed with the Court.The underwriters filed a memorandum with the Court opposing preliminaryapproval of the settlement. The court granted the preliminary approval on February 15,2005, subject to certain modifications. If the parties are able to agree uponthe required modifications, and such modifications are acceptable to the court,notice will be given to all class members of the settlement, a “fairness”hearing will be held and if the Court determines that the settlement is fair tothe class members, the settlement will be approved. Any direct financial impactof the proposed settlement is expected to be borne by our insurers.

The Company is engaged in a dispute with its formerchief executive officer, Rhett Williams, regarding the termination of hisemployment agreement. VIA terminated the agreement for cause as of April 6,2005. On May 24, 2005, Mr. Williams caused an attachment to be placedon VIA’s bank accounts in the Netherlands. In support of his application forthe attachment, Mr. Williams claimed that under his employment agreementhe was entitled to notice of termination of twelve months, an additional sixmonths separation pay, reimbursement of moving expenses and his costs inthe action, for a total claim of in excess of €950,000.In June 2005, Mr. Williams filed an action for summary judgment andimmediate payment of the claim. In a ruling of the Dutch employment tribunaldelivered on July 5, 2005, the court denied his petition. VIA secured therelease of the attachment against the bank accounts August 5, 2005. On August 8,2005, Mr. Williams served the Company with a summons for a trial on thematter. VIA believes that the suit of Mr. Williams is without merit, andthere existed sufficient grounds to terminate the employment agreement forcause. VIA has engaged counsel and intends to defend vigorously the action. If 

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the Company is determinedto be liable or if we conclude that a settlement is in its best interests, theCompany may incur substantial costs.

In August 2004, VIA acquired PSINet Belgium as apart of its acquisition of five PSINet Europe companies. PSINet Belgium is adefendant in a lawsuit filed in September 2002 by the former VicePresident Europe Sales & Marketing of PSINet Europe, based on thetermination of her employment in February 2002. In her suit filed in theBelgium employment tribunal, the claimant alleges that that she was entitled tonotice and termination pay, reimbursement for expenses incurred and otherdamages in an amount in excess of €1.7 million. In January 2003,after the tribunal delivered a ruling in favor of PSINet Belgium with regard tothe initial request of the former employee for holiday allowance, the claimantdid not prosecute the matter further; however the matter is still pending inthe Belgium employment tribunal and may be restarted at any time by the formeremployee. In June 2005, through her counsel, the claimant contacted PSINetBelgium and VIA’s chief executive officer to renew her demands for payment ofher claims, which she now claims is in excess of €2.1 million. VIA hascommunicated to the former employee its willingness to discuss the matter witha view toward reaching an appropriate settlement. However, if a settlement ofthe matter is not concluded and the matter is restarted, the Company intends todefend vigorously the action. If PSINet Belgium is determined to be liable orif the Company concludes that a settlement is in its best interests, thatsubsidiary may incur substantial costs.

PSINet Belgium, an indirect wholly-owned subsidiary ofthe Company, is a defendant in a lawsuit filed by Perceval Technologies N.V. (“Perceval”)regarding a commercial agreement entered into for the provision by Perceval ofa DSL network in Belgium, Luxembourg and France. The agreement of 15 March 2004,entered into prior to VIA’s acquisition of PSINet Belgium, was for the benefitof a customer of PSINet Belgium, and provided for a three-year term uponcompletion of a test phase. The customer was not satisfied with the results ofthe project and decided to stop the project, whereupon PSINet Belgiumterminated the agreement with Perceval. On February 28, 2005, Percevalbrought a civil action before the commercial court of Brussels for the earlytermination of the contract and claims damage in the amount of €1.4million plus €250,000moral damages, plus interests, costs and attorneys’ fees. The Company believesPSINet Belgium was entitled to terminate the agreement under the circumstancesand that the allegations are without merit and have engaged counsel to defendthe action. If PSINet Belgium is determined to be liable or if the Companyconcludes that a settlement is in its best interests, that subsidiary may incursubstantial costs.

The Company is subject to a dispute with ReachtownLtd., a UK limited liability company from whom VIA acquired the Amen group ofcompanies in January 2004. The dispute relates to the management agreementbetween the Company and Reachtown under which Reachtown provided day to dayoperational management of the Amen group of companies and other services. In April 2005,after the announcement of the letter of intent entered into between VIA andClaranet, Reachtown representatives undertook a series of actions that theCompany believes was intended to disrupt the Claranet transaction and thatadversely impacted the Amen operation. As a result of these actions, theCompany terminated the management agreement with Reachtown for cause witheffect as of April 14, 2005. On April 25, 2005, Reachtown notifiedthe Company that it disputed the allegations and the basis for the terminationfor cause and demanded payment of a termination payment of €120,000and a pro-rata portion of the contractual bonus of €200,000. The Companybelieves its actions were justified and that it has a claim against Reachtownand its representatives for damages of an amount which exceeds the claim ofReachtown. The Company has engaged counsel to defend its position.

The Company is engaged ina dispute with Claranet regarding the right of Claranet to terminate theAmended Sale Agreement and the Amended Facility Agreement. See discussion oftermination letters under Note 11 to the condensed consolidated financialstatements and ITEM. 2. MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS; ProposedSale of the Businesses; Interim Funding Arrangements.

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*Guarantees*

From time to time, theCompany enters into indemnification agreements with certain contractual partiesin the ordinary course of business, including agreements with lenders, lessors,service providers and certain vendors. All such indemnification agreements areentered into in the context of the particular agreements and are provided in anattempt to properly allocate risk of loss in connection with the consummationof the underlying contractual arrangements. Although the maximum amount offuture payments that the Company could be required to make under theseindemnification agreements is unlimited, management believes that historically,costs incurred to settle claims related to these indemnifications have not beenmaterial to the Company’s financial position, results of operations or cashflows and that this is the expectation for the future. Additionally, the fairvalue of the indemnifications that the Company issued during the year ended December 31,2004 and the six months ended June 30, 2005, respectively, were notmaterial to the Company’s financial position, results of operations or cashflows.

*Other*

The Company is subject toclaims and legal proceedings that arise in the ordinary course of its businessoperations. Each of these matters is subject to various uncertainties, and itis possible that some of these matters may be decided unfavorably to theCompany. The Company does not believe that any of these matters will have amaterial adverse affect on its business, assets or operations.

**12.**  Segment Reporting

VIA offers a variety of Internet access, managedbandwidth, web-hosting, Internet security and related services to businessesand consumers in Europe and the Americas. As of June 30, 2005, the Companyserved primary markets in six countries. These country operations generateInternet-related revenues from leased lines, dial-up Internet access,web-hosting and design, Internet security and consulting services, and sale ofthird-party hardware and software.

In prior reporting periods, the Company’s internalmanagement reporting structure was based on country operations and thereforethe Company had provided segment information based on geographic regions.

Within the last quarter of 2004, managementre-evaluated and amended its internal reporting structure and therefore changedits reportable segments and grouped all of the VIA legacy operating companies,except the US operation, and the newly acquired PSINet Europe operating companiesinto one operating segment—“Solutions”. The Company grouped its start-up VIAExpress channel operations together with the legacy VIA US operations into oneoperating segment—“Express”. The Company grouped all of the Amen operatingcompanies into one operating segment—“Amen”. The Company and its ChiefOperating Decision Makers (“CODM”) evaluates the performance of its segmentsbased on revenue and EBITDA before restructuring (“Adjusted EBITDA”). TheCompany’s CODM have been the Chief Executive Officer and the Chief FinancialOfficer throughout the year. Corporate expenses, which also include theregional companies holding Indefeasible Rights of Use (“IRU’s), are shown toreconcile to the total consolidated figures. Prior period amounts have beenreclassified to conform to the current period presentation.

Thetable below presents information about the reported revenue, adjusted EBITDAand impairment and restructuring charges from continuing operations of theCompany’s operating segments for the three and six months ended June 30, 2004and June 30, 2005. Total segment assets, as presented in the table below, aretotal assets net of intercompany funding amounts and include assets relating tothe Amen group of businesses and the U.S., Dutch and Portuguese VIA NET.WORKSbranded legacy operations, which have been classified as businesses held forsale as of June 30, 2005. Total assets relating to the Amen group of businesses,$13.7 million, have been included within the Amen segment above. Total assetsrelating to 

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the Dutch and Portuguese VIA NET.WORKS branded legacyoperations, $4.3 million, have been included within the Solutions segment.Total assets relating to the U.S. VIA NET.WORKS branded legacy operation, $1.8million, have been included within the Express segment.
| **In thousands of U.S. dollars** | ** ** | ** ** | ** ** | **Solutions** | ** ** | **Express** | ** ** | **Amen** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
|------------------------------------------------------|------------|------------|------------|---------------|------------|-------------|------------|----------|------------|---------------|------------|-----------|------------|
| Total assets as  of June 30, 2004               |       |       | $          | 31,467        |       |        | $          | 2,475    |       | $             | 20,431     |      | $          | 51,170 |   | 105,543 |   |
| Total assets as  of June 30, 2005               |       |       | 41,268     |          |       | 2,190       |       | 13,827   |       | 19,354        |       | 76,639    |       |
| Three months  ended June 30, 2004:              |       |       |       |          |       |        |       |     |       |          |       |      |       |
| Revenue                                              |       |       | 4,152      |          |       | —      |       | —   |       | —        |       | 4,152     |       |
| Adjusted EBITDA                                      |       |       | (1,146     | )             |       | (117        | )          | —   |       | (6,636        | )          | (7,899    | )          |
| Impairment and restructuring charges                 |       |       | —     |          |       | —      |       | —   |       | 195           |       | 195       |       |
| Three months  ended June 30, 2005:              |       |       |       |          |       |        |       |     |       |          |       |      |       |
| Revenue                                              |       |       | 14,100     |          |       | (135        | )          | —   |       | 92            |       | 14,057    |       |
| Adjusted EBITDA                                      |       |       | 926        |          |       | (763        | )          | —   |       | (6,493        | )          | (6,330    | )          |
| Impairment and restructuring charges                 |       |       | 8,815      |          |       | 195         |       | —   |       | 1,407         |       | 10,417    |       |
| Six months ended  June 30, 2004:                |       |       |       |          |       |        |       |     |       |          |       |      |       |
| Revenue                                              |       |       | 8,242      |          |       | —      |       | —   |       | —        |       | 8,242     |       |
| Adjusted EBITDA                                      |       |       | (2,192     | )             |       | (117        | )          | —   |       | (13,226       | )          | (15,535   | )          |
| Impairment and restructuring charges                 |       |       | —     |          |       | —      |       | —   |       | 495           |       | 495       |       |
| Six months ended  June 30, 2005:                |       |       |       |          |       |        |       |     |       |          |       |      |       |
| Revenue                                              |       |       | 29,426     |          |       | 46          |       | —   |       | 114           |       | 29,586    |       |
| Adjusted EBITDA                                      |       |       | (1,154     | )             |       | (1,135      | )          | —   |       | (12,149       | )          | (14,438   | )          |
| Impairment and  restructuring charges                |       |       | 9,822      |          |       | 197         |       | —   |       | 1,827         |       | 11,846    |       |
|                                                      |            |            |            |               |            |             |            |          |            |               |            |           |            |  |  |  |  |  |  |

 

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The reconciliation betweenAdjusted EBITDA to net loss for continuing operations is as follows:
| **Three months ended June 30, 2004** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|
| Adjusted EBITDA                                               |       | (7,899     | )          |
| Impairment and  restructuring charges                         |       | (195       | )          |
| Depreciation and  amortization                                |       | (897       | )          |
| Interest income                                               |       | 180        |       |
| Interest expense                                              |       | —     |       |
| Other income, net                                             |       | (74        | )          |
| Foreign currency losses,  net                                 |       | (544       | )          |
| Income tax benefit                                            |       | (1         | )          |
| Net loss from continuing  operations                          |       | (9,430     | )          |
| **Three months ended  June 30, 2005**                    |       |       |       |
| Adjusted EBITDA                                               |       | (6,330     | )          |
| Impairment and  restructuring charges                         |       | (10,417    | )          |
| Depreciation and  amortization                                |       | (1,386     | )          |
| Interest income                                               |       | 49         |       |
| Interest expense                                              |       | (173       | )          |
| Other income, net                                             |       | (1,212     | )          |
| Foreign currency losses,  net                                 |       | (8,598     | )          |
| Income tax expense                                            |       | (162       | )          |
| Net loss from continuing  operations                          |       | (28,229    | )          |
| **Six months ended June 30,  2004**                      |       |       |       |
| Adjusted EBITDA                                               |       | (15,535    | )          |
| Impairment and  restructuring charges                         |       | (495       | )          |
| Depreciation and  amortization                                |       | (1,995     | )          |
| Interest income                                               |       | 279        |       |
| Interest expense                                              |       | (6         | )          |
| Other income, net                                             |       | 98         |       |
| Foreign currency losses,  net                                 |       | (3,867     | )          |
| Income tax benefit                                            |       | (1         | )          |
| Net loss from continuing  operations                          |       | (21,522    | )          |
| **Six months ended June 30,  2005**                      |       |       |       |
| Adjusted EBITDA                                               |       | (14,438    | )          |
| Impairment and  restructuring charges                         |       | (11,846    | )          |
| Depreciation and  amortization                                |       | (2,911     | )          |
| Interest income                                               |       | 60         |       |
| Interest expense                                              |       | (333       | )          |
| Other income, net                                             |       | 299        |       |
| Foreign currency losses,  net                                 |       | (10,366    | )          |
| Income tax expense                                            |       | (172       | )          |
| Net loss from continuing  operations                          |       | (39,707    | )          |

 

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**13.**  Subsequent events

On July 12, 2005, VIA and Claranet entered intothe Amended Sale Agreement and the Amended Facility Agreement. Pursuant tothe Amended Sale Agreement, on July 12, 2005 the Company sold its Amengroup of businesses and the U.S., Dutch and Portuguese VIA NET.WORKS brandedlegacy operations to Claranet Group Limited for $9.3 million, less a portion ofthe deposit already paid by Claranet in connection with the Asset Sale (plusinterest on such amount), repayment to Claranet of the amounts owed by VIAunder the loan facility established on April 30, 2005, including interest,and an amount held as a deferred payment. The July 12th Saleexcluded the PSINet Europe operations and VIA’s legacy operations in France,Germany and Spain. The Amended Sale Agreement provided that theseremaining assets would be sold by Claranet in a second closing shortly afterthe Company received the requisite approval from its shareholders. Upon completion of the July 12thSale , we recorded a loss in the statementof operations for the three months ending September 30, 2005 of $1.6million, relating to the reclassification of cumulative foreign translationadjustments previously recorded in accumulated other comprehensive loss. Furtherdetails of the July 12th Sale are described under **Note 1 Basis of Presentation; Going Concern**.

On July 27, 2005, Claranet delivered a notice oftermination of the Amended Sale Agreement and the Amended Facility based onevents which allegedly occurred and gave rise to its right to terminate. TheCompany has notified Claranet that it rejects the allegations and denies thatClaranet has the right to terminate. The Company is currently engaged indiscussions with other parties and is seeking to enter into a new transactionfor the sale of Company’s businesses. See **Note 1 Basis ofPresentation; Going Concern and Note 11 Contingencies**.

On August 1, 2005, VIA’s board of directorsacknowledged the termination of employment of Cameron Mackenzie, the Company’sChief Financial Officer, as of July 31, 2005. Also on August 1, 2005,VIA’s board accepted the resignation of Dick Theunissen, Vice President,effective as of July 31, 2005. These terminations are a part of VIA’splan to prepare the Company for a potential sale.

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**ITEM. 2.**             MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussionand analysis should be read in conjunction with the condensed consolidatedfinancial statements and related notes included in Item 1 of this Form 10-Q.This discussion contains forward-looking statements, or statements that relateto future events or our future performance. These statements are onlypredictions or planned actions that are subject to a number of risks,uncertainties and other factors. Actual events or results may differmaterially. Information regarding the risks, uncertainties and other factorsthat could cause actual results to differ from the results in theseforward-looking statements are discussed in the “Risk Factors” described in Exhibit 99.1on this Form 10-Q, as well as those described in the “Risk Factors”section of VIA’s 2004 Annual Report. You are urged to carefully consider thesefactors, as well as other information contained in this Form 10-Q and inour other periodic reports and documents filed with the Securities and ExchangeCommission.

**Overview**

VIA NET.WORKS, Inc.is a provider of business communication solutions to small- and medium-sizedenterprises, or SMEs, in Europe and the United States. Through our brands VIANET.WORKS and PSINet Europe, we offer a comprehensive portfolio of businesscommunications services, including web hosting, security, connectivity,networks, voice and professional services. Our headquarters are in Amsterdamand we have operations in Belgium, France, Germany, the Netherlands, Spain andSwitzerland.

**AssetSale, Proposed Sale of the Businesses; Interim Funding Arrangements**

On April 1, 2005, we sold our Swiss companies—VIANET.WORKS (Schweiz) AG and VIA NET.WORKS Services AG—to former managers andowners of the businesses, for a cash consideration of CHF 3.5 million(approximately  $2.9 million). Uponcompletion of the VIA NET.WORKS (Schweiz) AG and VIA NET.WORKS Services AGsale, we recorded a loss of $ 1.0 million in the statement of operations in thethree months ended June 30, 2005, relating to amounts previously recordedin accumulated other comprehensive loss.

On April 30, 2005, we entered into a sale andpurchase agreement, or Sale Agreement, with Claranet Group Limited (Claranet),a privately-held European Internet services provider based in the UnitedKingdom, to sell all of our remaining business operations in Europe and theUnited States (the “Asset Sale”). The agreement followed on the letter ofintent we entered into with Claranet on April 10, 2005. The materialprovisions of the Sale Agreement were described in our Quarterly Report on Form 10-Qfor the three month period ended March 31, 2005.

The Asset Sale was conditioned upon the approval byour shareholders. On or about June 3, 2005, we mailed our definitive proxystatement on Form 14A to our shareholders of record as of May 25,2005 and scheduled a Special and Annual Meeting of the Shareholders to takeplace on June 29, 2005. In the proxy statement we delivered to ourshareholders, we requested approval of, among other things, the Asset Sale anda plan of complete dissolution and liquidation of the Company. On June 28,2005, we announced the postponement of the shareholders’ meeting until July 22,2005 in order to provide us additional time to solicit proxies from ourshareholders sufficient to obtain the affirmative vote in respect of the SaleAgreement and the Asset Sale of a majority of the voting stock of our Company. Theclosing of the Asset Sale was conditioned on receiving the requisite majorityvote of the stockholders of our Company.

On July 12, 2005, we entered into an Amendmentand Restatement with Claranet relating to the Sale Agreement of April 30,2005 (the “Amended Sale Agreement”). Pursuant to the Amended Sale Agreement, wesold our Amen group of businesses and our U.S., Dutch and Portuguese legacyoperations to Claranet for $9.3 million, less a portion of the depositalready paid by Claranet in connection with the 

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Asset Sale (plus intereston such amount), repayment to Claranet of the amounts owed by us under the loanfacility established on April 30, 2005, including interest, and an amountheld as a deferred payment (the “July 12th Sale”). The saleexcluded the PSINet Europe operations and VIA’s legacy operations in France,Germany and Spain as well as certain assets pertaining to our Company’scentralized back office and technical support systems, including employeecontracts of certain headquarters personal (the “Remaining Assets”). Noshareholder approval was necessary for the closing of the July 12thSale. Upon completion of the July 12thSale , we recorded a loss in the statementof operations for the three months ending September 30, 2005 of $1.6million, relating to amounts previously recorded in accumulated othercomprehensive loss.

In order to achieve an orderly transition of theownership of the assets sold in the July 12th Sale, we,Claranet and certain of our subsidiaries entered into a transition servicesagreement pursuant to which the U.S., Dutch and Portuguese businesses sold toClaranet continue to have the right to use the VIA brand and to receive certainservices from the remaining VIA businesses for a period of time following thecompletion of the sale. In return, we continue to have the right to receivecertain services from the sold businesses.

The Amended Sale Agreement contemplated that theRemaining Assets would be sold to Claranet in a second closing that would besubject to shareholder approval. We promptly delivered to our shareholders asupplement to our proxy materials describing, among other things, the July 12thSale, the sale of the Remaining Assets and the approval being sought at the July 22ndshareholders’ meeting. The shareholders’ meeting was convened on July 22, 2005and then adjourned until August 2, 2005 in order to provide us additionaltime to secure the requisite majority vote.

On July 27, 2005, Claranet delivered a letterpurporting to terminate the Amended Sale Agreement. Claranet alsodelivered a letter of termination that day regarding the Amended FacilityAgreement. In its letters of termination, Claranet alleged that certain eventshad occurred that permit it to terminate the Amended Sale Agreement and theAmended Facility Agreement; specifically, that VIA’s cash flow exceeded thelevel of negative cash flow permitted by the Amended Sale Agreement, thatcertain alleged new liabilities have arisen and that Claranet did not consentto our recent transaction with Sorbie Europe B.V., as noted below. We promptlydelivered a notice to Claranet disputing the assertions made by Claranet,disputing the right of Claranet to terminate the agreements and demanding thatit fully perform the agreements. While we believe that Claranet’s position isnot supported by the facts or the terms of the agreements and that it istherefore in breach of the agreements, our management also is aware thatClaranet is not willing to proceed to complete the sale and provide financingon the terms of the agreements, and that we will need to pursue a differenttransaction. We therefore have engaged Claranet in discussions toward resolvingthe dispute, and at the same time, we also have actively sought a new buyer forthe Remaining Assets, and have had substantive discussions with several interestedparties. In light of our liquidity problems and without further advances underthe Amended Facility Agreement from Claranet, we are seeking to enter into anew arrangement for the sale of the business and interim funding within thenext few weeks. Based on discussions to date, we anticipate that we will beable to conclude arrangements with a new buyer for the sale of the business andinterim financing, as well as an agreement with Claranet to resolve thedisputed termination of the sale and financing agreements, within that timeframe. However, there can be no assurances that we will be successful in theseefforts, or what value a new buyer will place on the Company’s business andassets. If, for whatever reason, we are not able to enter into a newarrangement for the sale of the business and interim funding, there can be noassurance that we will able to find alternative solutions to our liquidityproblem. In that event, we would have insufficient funds to continue to operatethe Company as a going concern.

On June 13, 2005 we received a Nasdaq StaffDetermination indicating that VIA has failed to comply with the $1.00 minimumbid price requirement for continued listing under Nasdaq’s Marketplace Rule 4310(c)4)and that therefore the Company’s common stock is subject to delisting from theNasdaq 

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SmallCap Market. Werequested a hearing before a Nasdaq Listing Qualifications Panel to review theStaff Determination and request further time to complete the sale of ourCompany or our businesses before our common stock was delisted. The hearing washeld on July 21, 2005. On August 11, 2005, Nasdaq notified VIA’s counselthat, in light of the termination of the Claranet transaction and the lack of aclear alternative to our liquidity problem at the current date, VIA’s stockwould be delisted as at August 15, 2005.

On June 14, 2005, we issued 4,180,663 shares ofour common stock to Reachtown Limited. The shares were issued in satisfactionof an earn-out provision set forth in the Share Purchase Agreement made andentered into as of January 28, 2004, among VIA, VIA NET.WORKS Holdco, Inc.and Reachtown Limited, pursuant to which we acquired 100% of the issued andoutstanding shares of the Amen group of companies.

On June 29, 2005, weentered into a series of agreements with Sorbie Europe B.V. (“Sorbie”),formerly PSINet Europe B.V., (the “Sorbie Agreements”) relating to therenegotiation of the unsecured zero-coupon convertible note of Euro 6.0 million($7.2 million) due and payable to Sorbie in full November 20, 2005. Thenote was issued to Sorbie in connection with our acquisition of the PSINetEurope companies on August 9, 2004. Under the Sorbie Agreements, each ofcertain VIA group companies and the Sorbie related parties mutually releasedeach other from all claims under the August 9, 2004 PSINet Europe purchaseagreement. In consideration for the release, Sorbie agreed that it will cancelthe Note if VIA pays Sorbie, prior to August 31, 2005,  €1.5 million (approximately$1.8 million) in cash and issues to Sorbie or its designee shares of commonstock of VIA equal to 9.9% (7,173,341 shares) of the total outstanding sharesof the Company as of June 29, 2005. Pursuant to the Sorbie Agreements, therelease and cancellation and our payment and issuance of the shares to Sorbie willoccur no later than two days after the date of completion of the sale of ourCompany’s business or the recapitalization of our Company with new funds.

**Recent Changes in Our Operations**

We acquired the Amen group of companies in January 2004which has operations in France, the United Kingdom, Spain, and Italy. Inaddition, in August 2004, we acquired certain PSINet Europe operations, inBelgium, Germany, the Netherlands, Switzerland and France. In the third quarterof 2004, we sold VIA NET.WORKS UK Ltd. and during the year ended December 31,2004, we liquidated Surftrade Ltda., Surftrade Portugal and VIA NET.WORKSHolding Cayman.

On April 1, 2005, we announced the sale of two ofour Swiss companies—VIA NET.WORKS (Schweiz) AG and VIA NET.WORKS Services AG—toformer managers and owners of the business.

On July 12, 2005, we entered into the AmendedSale Agreement. Pursuant to the Amended Sale Agreement, we sold our Amen group ofbusinesses and our U.S., Dutch and Portuguese VIA NET.WORKS branded legacyoperations to Claranet. These operations areaccounted for as discontinued operations and have been excluded from thefinancial results from continuing operations, as well as the financial resultsfor the comparative prior period.

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The following table shows the revenue contributionfrom each of our continuing operations in the Company’s countries of domicile(origin). As of June 30, 2005 we owned 100% of all our operations.

Revenuesby Country of Origin:
| **Country**     | ** ** | ** ** | ** ** | **Percentages of  Total Revenue from  continuing operations  for the Three Months  Ended June 30, 2004** | ** ** | **Percentages of  Total Revenue from  continuing operations  for the Three Months  Ended June 30, 2005** | ** ** | **Percentages of  Total Revenue from  continuing operations  for the Six Months  Ended June 30, 2004** | ** ** | **Percentages of  Total Revenue from  continuing operations  for the Six Months  Ended June 30, 2005** | ** ** |
|-----------------|------------|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| France          |       |       | 44         | %                                                                                                                                                          |       |                                                                                                                                                       | 16         | %                                                                                                                                                        |       |                                                                                                                                                     | 43         | % |   |   | 16 | % |   |
| Germany         |       |       | 46         | %                                                                                                                                                          |       |                                                                                                                                                       | 42         | %                                                                                                                                                        |       |                                                                                                                                                     | 47         | % |   |   | 39 | % |   |
| The Netherlands |       |       | 0          | %                                                                                                                                                          |       |                                                                                                                                                       | 16         | %                                                                                                                                                        |       |                                                                                                                                                     | 0          | % |   |   | 19 | % |   |
| Spain           |       |       | 10         | %                                                                                                                                                          |       |                                                                                                                                                       | 2          | %                                                                                                                                                        |       |                                                                                                                                                     | 10         | % |   |   | 3 | % |   |
| Switzerland     |       |       | 0          | %                                                                                                                                                          |       |                                                                                                                                                       | 15         | %                                                                                                                                                        |       |                                                                                                                                                     | 0          | % |   |   | 14 | % |   |
| Belgium         |       |       | 0          | %                                                                                                                                                          |       |                                                                                                                                                       | 9          | %                                                                                                                                                        |       |                                                                                                                                                     | 0          | % |   |   | 9 | % |   |
| Total           |       |       | 100        | %                                                                                                                                                          |       |                                                                                                                                                       | 100        | %                                                                                                                                                        |       |                                                                                                                                                     | 100        | % |   |   | 100 | % |   |

 

**RESULTS OF OPERATIONS**

**Three and sixmonths ended June 30, 2004 compared with the three and six months ended June 30,2005**

*Foreign CurrencyImpact*

Foreignexchange rates can vary significantly and impact our results of operations,which are reported in U.S. dollars. As a percentage of consolidated revenues,we had continuing operations conducting business in the following underlyingcurrencies:
| ** **   | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|--------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **   | ** ** | **June 30,  2004**          | ** ** | **June 30,  2005**        | ** ** | **June 30,  2004** | ** ** | **June 30,  2005** | ** ** |
| Euro         |       |                             | 100        | %                              |       |   | 84 | % |   |   | 100 | % |   |   | 85 | % |   |
| Swiss Francs |       |                             | —     | %                              |       |   | 15 | % |   |   | — | % |   |   | 14 | % |   |
| U.S. Dollars |       |                             | —     | %                              |       |   | 1 | % |   |   | — | % |   |   | 1 | % |   |
|         |       |                             | 100        | %                              |       |   | 100 | % |   |   | 100 | % |   |   | 100 | % |   |

 

The Euro varied by approximately 10% in relation tothe U.S. dollar during the second quarter of 2005 and by approximately 14% inthe six months ended June 30, 2005. The Euro varied by approximately 5% inrelation to the U.S. dollar during the second quarter of 2004 and byapproximately 10% in the six months ended June 30, 2004. The Swiss Francvaried by approximately 10% in relation to the U.S. dollar during the secondquarter of 2005 and by approximately 14% in the six months ended June 30,2005. The Swiss Franc varied by approximately 7% in relation to the U.S. dollarduring the second quarter of 2004 and by approximately 9% in the six monthsended June 30, 2004. These exchange rate fluctuations have a significantimpact on our reported results of operations, including revenue, expenses andnet loss.

The average Euro-to-U.S.dollar foreign exchange rate for the three and six months ended June 30,2005 was 4% and 5% higher respectively than the average Euro-to-U.S. dollarforeign exchange rate for the corresponding periods in 2004. The average SwissFranc-to-U.S. dollar foreign exchange rate for the three and six months ended June 30,2005 was 4% and 5% higher respectively than the average Swiss Franc-to-U.S.dollar foreign exchange rate for the corresponding periods in 2004. The effectof the weakening of the U.S. dollar is that revenues, operating costs andexpenses and operating profits and losses in operations with a functionalcurrency other than U.S. dollars translate into larger U.S. dollar amounts thanwould have been the case had foreign exchange rates remained unchanged.

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*Revenue:*
| ** ** | ** ** | **Three months ended**                         | ** ** | ** **              | ** ** | **Six months ended**                           | ** ** | ** **              | ** ** |                    |
|------------|------------|----------------------------------------------------------|------------|-------------------------|------------|----------------------------------------------------------|------------|-------------------------|------------|-------------------------|
| ** ** | ** ** | **June 30,  2004**                                  | ** ** | **June 30,  2005** | ** ** | **% Increase/  (Decrease)**                         | ** ** | **June 30,  2004** | ** ** | **June 30,  2005** | ** ** | **%Increase/  (Decrease)** | ** ** |   |
| ** ** | ** ** | **(in thousands  of  U.S. dollars)** | ** ** | ** **              | ** ** | **(in thousands  of  U.S. dollars)** | ** ** | ** **              | ** ** |                    |
| Revenue    |       |                                                     | 4,152      |                    |       |                                                     | 14,057     |                    |       |                    | 239 | % |   |   | 8,242 |   |   |   | 29,586 |   |   |   | 259 | % |   |
|            |            |                                                          |            |                         |            |                                                          |            |                         |            |                         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

We derive our revenue from the sale of Internet-relatedgoods and services, specifically third party hardware and software and Internetconnectivity services, other Internet value-added services, such ashosting, security and IP VPN, and voice services.

Revenue for the three months ended June 30, 2005was $14.1 million, up from $4.2 million for the three months ended June 30,2004. The increase in revenues quarter over quarter is partly attributable torevenues recorded in the second quarter of 2005 by the PSINet Europebusinesses, which we acquired in August 2004 (impact of approximately$10.3 million) as discussed above. In addition, the average Euro-to-U.S. dollarforeign exchange rate for the three months ended June 30, 2005 havestrengthened by approximately 4% when compared with the corresponding periodlast year, thus having a positive impact on revenues during the second quarterof 2005 of approximately $0.2 million. That positive impact offset thedecrease of $0.7 million in underlying revenue for the three months ended June 30,2005 as compared to the three months ended June 30, 2004, principally inour VIA France and VIA Germany operation. German revenues, excluding the impactof foreign exchange, decreased by 7%, or $0.2 million in the three monthsended June 30, 2005 compared to the three months ended June 30, 2004.This revenue reduction is due to customer cancellations and price erosion.French revenues, excluding the impact of foreign exchange, decreased by 23%, or$0.5 million in the three months ended June 30, 2005 compared to the threemonths ended June 30, 2004, due to customer churn and fewer hardware andsoftware sales.

Revenue for the six monthsended June 30, 2005 was $29.6 million, up from $8.2 million forthe six months ended June 30, 2004. The increase in revenues is partlyattributable to revenues recorded in the first half of 2005 by the PSINetEurope business, which we acquired in August 2004 (impact of approximately$21.5 million). In addition, the average Euro-to-U.S. dollar foreign exchangerate for the six months ended June 30, 2005 strengthened by approximately5% when compared with the corresponding period last year, thus having apositive impact on revenues during the first half of 2005 of approximately$0.4 million. That positive impact offset the decrease in underlyingrevenue for the six months ended June 30, 2005 as compared to the sixmonths ended June 30, 2004. German revenues, excluding the impact offoreign exchange, decreased by 6% (approximately $0.2 million) in the sixmonths ended June 30, 2005, compared with the corresponding period in2004. This decline in revenue is due to customer cancellations and priceerosion. French revenues, excluding the impact of foreign exchange and theacquisition of Amen’s French business, decreased by 17% (approximately $0.7million) due to customer churn and fewer hardware and software sales in thefirst quarter.

*OPERATING COSTS ANDEXPENSES:*

*Internet services:*
| ** **         | ** ** | **Three months ended**                    | ** ** | ** **              | ** ** | **Six months ended**                      | ** ** | ** **              | ** ** |
|--------------------|------------|-----------------------------------------------------|------------|-------------------------|------------|-----------------------------------------------------|------------|-------------------------|------------|
| ** **         | ** ** | **June 30,  2004**                             | ** ** | **June 30,  2005** | ** ** | **% Increase/  (Decrease)**                    | ** ** | **June 30,  2004** | ** ** | **June 30,  2005** | ** ** | **% Increase/  (Decrease)** | ** ** |
| ** **         | ** ** | **(in thousands  of  U.S. dollars)** | ** ** | ** **              | ** ** | **(in thousands  of  U.S. dollars)** | ** ** | ** **              | ** ** |
| Internet services  |       |                                                | 2,506      |                    |       |                                                | 7,065      |                    |       |   | 182 | % |   |   | 4,744 |   |   |   | 15,458 |   |   |   | 226 | % |   |
| % of Total Revenue |       |                                                | 60         | %                       |       |                                                | 50         | %                       |       |   |   |   |   |   | 58 | % |   |   | 52 | % |   |   |   |   |   |

 

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Our Internet services operating costs are the costs weincur to carry customer traffic to and over the Internet. We lease lines thatconnect our PoPs, either to our own network or to other network providers. Wepay other network providers for transit, which allows us to transmit ourcustomers’ information to or from the Internet over their networks. We also payother recurring telecommunications costs and personnel costs, including thecost of the local telephone lines our customers use to reach our PoPs andaccess our services, and costs related to customer support and care.

Our Internet servicesoperating costs were $7.1 million, or 50% of revenues, for the threemonths ended June 30, 2005, up from $2.5 million, or 60% of revenues,for the three months ended June 30, 2004. Our Internet services operatingcosts were $15.5 million, or 52% of revenues, for the six months ended June 30,2005, compared with $4.7 million, or 58% of revenues, for the six monthsended June 30, 2004. The increase in Internet services expenses is partlyattributable to the Internet services costs of the PSINet Europe businessesacquired in August 2004 (impact of approximately $4.1 million and $9.7million for the three and six months ended June 30, 2005 respectively) andpartly attributable to the translation impact of foreign currency movements(impact of approximately $0.1 million and $0.2 million for the three and sixmonths ended June 30, 2005 respectively). Excluding PSINet Europe’sInternet services costs and the adverse impact of the strengtheningEuro-to-U.S. dollar foreign currency exchange rates, Internet services costsdecreased by approximately 13% for the three months ended June 30, 2005and decreased by approximately 4% for the six months ended June 30, 2005,from the corresponding periods in 2004. The period-over-period decrease inInternet services costs in the three and six months ended June 30, 2005,excluding PSINet Europe’s Internet services costs and the adverse impact of thestrengthening Euro-to-U.S. dollar foreign currency exchange rates, is primarilydue to lower revenues from decreased customer network usage and decreasingmarket rates for network bandwidth.

*Selling, general and administrative:*
| ** **                                   | ** ** | **Three months ended**                    | ** ** | ** **              | ** ** | **Six months ended**                      | ** ** | ** **              | ** ** |
|----------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------|------------|-----------------------------------------------------|------------|-------------------------|------------|
| ** **                                   | ** ** | **June 30,  2004**                             | ** ** | **June 30,  2005** | ** ** | **% Increase/  (Decrease)**                    | ** ** | **June 30,  2004** | ** ** | **June 30,  2005** | ** ** | **% Increase/  (Decrease)** | ** ** |
| ** **                                   | ** ** | **(in thousands  of  U.S. dollars)** | ** ** | ** **              | ** ** | **(in thousands  of  U.S. dollars)** | ** ** | ** **              | ** ** |
| Selling,  general & administrative. |       |                                                | 9,545      |                    |       |                                                | 13,322     |                    |       |   | 40 | % |   |   | 19,033 |   |   |   | 28,566 |   |   |   | 50 | % |   |
| % of Total Revenue                           |       |                                                | 230        | %                       |       |                                                | 95         | %                       |       |   |   |   |   |   | 231 | % |   |   | 97 | % |   |   |   |   |   |

 

Our largest selling, general and administrative(SG&A) expenses are compensation costs, the costs associated with marketingour products and services, and professional fees paid to outside consultants.Compensation costs include salaries and related benefits, commissions, bonusesand costs associated with staff reductions in the normal course of business. Inmany of our markets, we are required to make significant mandatory payments forgovernment-sponsored social welfare programs and we have little controlover these costs. Our marketing expenses include the costs of direct mail andother mass marketing programs, advertising, customer communications, trade showparticipation, web site management and other promotional costs. Other SG&Aexpenses include the costs of travel, rent, utilities, insurance and bad debtexpense.

We incurred SG&A expenses of $13.3 millionfor the three months ended June 30, 2005, a 40% increase from the$9.5 million we incurred for the three months ended June 30, 2004.The increase in SG&A expenses quarter over quarter is partly attributableto expenses associated with the PSINet Europe business acquired in August 2004(impact of approximately $5.3 million) discussed above and partly due to thestrengthening of the Euro-to-U.S. dollar foreign currency exchange rates ofapproximately $0.1 million. Excluding PSINet’s SG&A expenses and theadverse impact of the foreign currency exchange rates, SG&A expensesdecreased by approximately 17%, or $1.6 million, for the three months ended June 30,2005, 

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compared with thecorresponding period in 2004. This is due to significant decreases incompensation costs as a result of the restructuring in previous quarters,offset by increases in marketing expenses and professional fees.

We incurred SG&A expenses of $28.6 millionfor the six months ended June 30, 2005, a 50% increase from the$19.0 million we incurred for the six months ended June 30, 2004. Theincrease in SG&A expenses year over year is partly attributable to expensesassociated with the PSINet Europe business acquired in August 2004 (impactof approximately $12.7 million) discussed above and partly due to thestrengthening of the Euro-to-U.S. dollar foreign currency exchange rates ofapproximately $0.2 million. The balance of the difference, for the six monthsended June 30, 2005 compared to the corresponding period in 2004, isattributable to significant decreases in compensation costs as a result of therestructuring in previous quarters, offset by increases in marketing expensesand professional fees.

Compensation expense accounted for approximately 55%($7.3 million) of total SG&A costs for the three months ended June 30,2005, compared with 52% ($5.0 million) for the three months ended June 30,2004. Compensation expense accounted for approximately 52% ($15.0 million) oftotal SG&A costs for the six months ended June 30, 2005, compared with55% of total SG&A costs ($10.4 million) for the six months ended June 30,2004. The increase in compensation expense of 46% and 44% for the three and sixmonths ended June 30, 2005 respectively compared to the same periods in2004 is due to the PSINet Europe acquisition in August 2004 and thestrengthening of the Euro-to-U.S. dollar foreign currency exchange rates.Excluding these factors, compensation expense decreased approximately 53% and44%, respectively, in the three and six months ended June 30, 2005compared with the corresponding periods in 2004 primarily due to head countreductions. Headcount (excluding PSINet Europe) at June 30, 2005 decreasedby approximately 48% from June 30, 2004.

In the three and six months ended June 30, 2005,marketing expenses increased by approximately $0.3 million, or 195%, and byapproximately $0.1 million, or 21%, respectively, from the correspondingperiods in 2004. For the three months ended June 30, 2004, $0.2 million ofthe increase in marketing expenses is attributable to the PSINet Europebusiness and the impact of foreign exchange rates. For the six months ended June 30,2004, $0.3 million of the increase in marketing expenses is attributable to thePSINet Europe business and the impact of foreign exchange rates.

Professional fees, relatedto legal, audit, outsourcing and other consulting fees, accounted forapproximately 24% and 23% of total SG&A for the three months ended June 30,2005 and 2004 respectively and for approximately 21% and 19% of total SG&Afor the six months ended June 30, 2005 and 2004 respectively. The increasein professional fees of 45% and 69% for the three and six months ended June 30,2005 respectively compared with the corresponding periods in 2004 relates toincreased consulting and legal fees at the corporate headquarters in connectionwith the sale of our operations and increased professional fees due to thePSINet Europe acquisition in August 2004 and the strengthening of theEuro-to-U.S. dollar foreign currency exchange rates.

*Impairment and restructuring charges:*
| ** **                            | ** ** | **Three months ended**                    | ** ** | ** **              | ** ** | **Six months ended**                      | ** ** | ** **              | ** ** |
|---------------------------------------|------------|-----------------------------------------------------|------------|-------------------------|------------|-----------------------------------------------------|------------|-------------------------|------------|
| ** **                            | ** ** | **June 30,  2004**                             | ** ** | **June 30,  2005** | ** ** | **% Increase/  (Decrease)**                    | ** ** | **June 30,  2004** | ** ** | **June 30,  2005** | ** ** | **% Increase/  (Decrease)** | ** ** |
| ** **                            | ** ** | **(in thousands  of  U.S. dollars)** | ** ** | ** **              | ** ** | **(in thousands  of  U.S. dollars)** | ** ** | ** **              | ** ** |
| Impairment and  restructuring charges |       |                                                | 195        |                    |       |                                                | 10,417     |                    |       |   | 5,242 | % |   |   | 495 |   |   |   | 11,846 |   |   |   | 2,293 | % |   |
| % of Total Revenue                    |       |                                                | 5          | %                       |       |                                                | 74         | %                       |       |   |   |   |   |   | 6 | % |   |   | 40 | % |   |   |   |   |   |

 

During the three and six months ended June 30,2005, we recorded impairment and restructuring charges of $10.4 million and$11.8 million respectively. The restructuring charge of $1.4 million for the 

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three months ended June 30,2005 related to severance payments for forty one staff at the corporateheadquarters. The restructuring charge for the three months ended March 31,2005 of $0.2 million related to severance payments to one employee at thecorporate headquarters and transition implementation costs for back-office andadministrative outsourcing initiatives.

During the first quarter of 2005, management concludedthat an impairment had occurred in our Solutions operating unit. As a result,we recorded an intangible fixed asset impairment charge of $0.3 million and atangible fixed asset impairment charge of $0.9 million. During the secondquarter of 2005, management concluded that an impairment had occurred in ourSolutions and Express operating unit. As a result, we recorded a goodwillimpairment charge of $8.8 million related to the Solutions unit and a tangiblefixed asset impairment charge of $0.2 million related to the Express unit.Refer to Note 3 to the unaudited condensed consolidated financial statementsfor further information.

During the three and sixmonths ended June 30, 2004, we recorded restructuring charges of $0.2million and $0.5 million, respectively. The restructuring charge for the threemonths ended June 30, 2004 of $0.2 million related to severance paymentsfor three staff at the corporate headquarters and implementation costs forback-office and administrative outsourcing initiatives. The restructuringcharges of $0.3 million for the three months ended March 31, 2004 relatedto severance payments to five employees in finance at the corporateheadquarters and implementation costs for back-office and administrative outsourcinginitiatives. 

*Depreciation and amortization:*
| ** **                     | ** ** | **Three months ended**                    | ** ** | ** **              | ** ** | **Six months ended**                      | ** ** | ** **              | ** ** |
|--------------------------------|------------|-----------------------------------------------------|------------|-------------------------|------------|-----------------------------------------------------|------------|-------------------------|------------|
| ** **                     | ** ** | **June 30,  2004**                             | ** ** | **June 30,  2005** | ** ** | **% Increase/  (Decrease)**                    | ** ** | **June 30,  2004** | ** ** | **June 30,  2005** | ** ** | **% Increase/  (Decrease)** | ** ** |
| ** **                     | ** ** | **(in thousands  of  U.S. dollars)** | ** ** | ** **              | ** ** | **(in thousands  of  U.S. dollars)** | ** ** | ** **              | ** ** |
| Depreciation and  amortization |       |                                                | 897        |                    |       |                                                | 1,386      |                    |       |   | 55 | % |   |   | 1,995 |   |   |   | 2,911 |   |   |   | 46 | % |   |
| % of Total Revenue             |       |                                                | 22         | %                       |       |                                                | 10         | %                       |       |   |   |   |   |   | 24 | % |   |   | 10 | % |   |   |   |   |   |

 

We recognize depreciation expense primarily related totelecommunications equipment, computers and network infrastructure. Wedepreciate telecommunications equipment and computers over their useful lives,ranging from three to five years. The cost of network infrastructure, net ofimpairment charges, purchased under indefeasible right of use agreements, orIRUs, is being amortized over the lesser of the estimated useful life or termof the agreement, 1 to 25 years. We amortize customer lists, software anda trade name over 3 years, 5 years and 10 years respectively.

Our depreciation and amortization expense was$1.4 million for the three months ended June 30, 2005, up from $0.9million for the three months ended June 30, 2004. Depreciation andamortization expense was $2.9 million for the six months ended June 30,2005, up from $2.0 million for the six months ended June 30, 2004. For thethree months ended June 30, 2005, $1.2 million related to thedepreciation of fixed assets and $0.2 million related to the amortizationof intangible assets. For the six months ended June 30, 2005,$2.7 million related to the depreciation of fixed assets and$0.2 million related to the amortization of intangible assets. For thethree and six months ended June 30, 2004, all of our depreciation andamortization expense was related to the depreciation of fixed assets. Theincrease in total depreciation and amortization expense is primarily due to theacquisition of the PSINet Europe businesses in August 2004, resulting inamortization of identified intangible assets and depreciation of tangible fixedassets totaling approximately $0.7 million and $1.3 million for the three andsix months ended June 30, 2004 respectively. Excluding the PSINet Europebusinesses, the depreciation expense decreased during the three and six monthsended June 30, 2005 compared to the same period in 2004 due to the impactof the impairment of tangible and intangible fixed assets in previous periods.

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*Interest income, net:*
| ** **            | ** ** | **Three months ended**                         | ** ** | ** **              | ** ** | **Six months ended**                           | ** ** | ** **              | ** ** |
|-----------------------|------------|----------------------------------------------------------|------------|-------------------------|------------|----------------------------------------------------------|------------|-------------------------|------------|
| ** **            | ** ** | **June 30,  2004**                                  | ** ** | **June 30,  2005** | ** ** | **% Increase/  (Decrease)**                         | ** ** | **June 30,  2004** | ** ** | **June 30,  2005** | ** ** | **% Increase/  (Decrease)** | ** ** |
| ** **            | ** ** | **(in thousands  of  U.S. dollars)** | ** ** | ** **              | ** ** | **(in thousands  of  U.S. dollars)** | ** ** | ** **              | ** ** |
| Interest income,  net |       |                                                     | 180        |                    |       |                                                     | (124       | )                       |       |   | (169 | )% |   |   | 273 |   |   |   | (273 | ) |   |   | (200 | )% |   |
| % of Total Revenue    |       |                                                     | 4          | %                       |       |                                                     | (1         | )%                      |       |   |   |   |   |   | 3 | % |   |   | (1 | )% |   |   |   |   |   |

 

For the three and sixmonths ended June 30, 2005, we incurred net interest expenses of$0.1 million and $0.3 million, down from $0.2 million and $0.3million of interest income for the three and six months ended June 30,2004. Interest income was generated from investing funds received from ourinitial public offering in February 2000, until those funds were used foracquisitions, operating expenses or capital expenditures. Net proceeds from thepublic offering were $333.0 million. The decrease in interest income isprimarily due to the decrease in the available cash for investing. Interestexpense of $0.1 million and $0.2 million incurred in the three and six monthsended June 30, 2005, respectively, relates to the imputed interest of5.27% associated with the Euro 6 million zero coupon convertible note issued inconnection with the acquisition of the PSINet Europe companies. In addition,interest expenses of $0.1 million and $0.1 million incurred in the three andsix months ended June 30, 2005 relates to the imputed interest of 7.38%associated with a long term IRU obligation.

*Other (expense) income, net:*
| ** **                   | ** ** | **Three months ended**                    | ** ** | ** **              | ** ** | **Six months ended**                      | ** ** | ** **              | ** ** |
|------------------------------|------------|-----------------------------------------------------|------------|-------------------------|------------|-----------------------------------------------------|------------|-------------------------|------------|
| ** **                   | ** ** | **June 30,  2004**                             | ** ** | **June 30,  2005** | ** ** | **% Increase/  (Decrease)**                    | ** ** | **June 30,  2004** | ** ** | **June 30,  2005** | ** ** | **% Increase/  (Decrease)** | ** ** |
| ** **                   | ** ** | **(in thousands  of  U.S. dollars)** | ** ** | ** **              | ** ** | **(in thousands  of  U.S. dollars)** | ** ** | ** **              | ** ** |
| Other (expense)  income, net |       |                                                | (74        | )                       |       |                                                | (1,212     | )                       |       |   | 1,538 | % |   |   | 98 |   |   |   | 299 |   |   |   | 205 | % |   |
| % of Total Revenue           |       |                                                | (2         | )%                      |       |                                                | (9         | )%                      |       |   |   |   |   |   | 1 | % |   |   | 1 | % |   |   |   |   |   |

 

For the three months endedJune 30, 2005, we incurred other expenses, net in the amount of $1.2 million,mainly related to intercompany charges received from group companies includedin the July 12th Sale. The results of these group companies,including the offsetting intercompany income, have been reclassified as gain(loss) from discontinued operations in the statement of operations for thethree monts ended June 30, 2005. For the six months ended June 30, 2005, weearned other income, net in the amount of $0.3 million, related to a number ofsmaller income and expenses amounts in our operations. For the three monthsended June 30, 2004, we incurred other expenses, net in the amount of $0.1million and for the six months ended June 30, 2004, we earned other income, netin the amount of $0.1 million, both related to a number of smaller amountsincurred or received in our operations.

*Foreigncurrency gains (losses), net*
| ** **                            | ** ** | **Three months ended**                    | ** ** | ** **              | ** ** | **Six months ended**                      | ** ** | ** **              | ** ** |
|---------------------------------------|------------|-----------------------------------------------------|------------|-------------------------|------------|-----------------------------------------------------|------------|-------------------------|------------|
| ** **                            | ** ** | **June 30,  2004**                             | ** ** | **June 30,  2005** | ** ** | **% Increase/  (Decrease)**                    | ** ** | **June 30,  2004** | ** ** | **June 30,  2005** | ** ** | **% Increase/  (Decrease)** | ** ** |
| ** **                            | ** ** | **(in thousands  of  U.S. dollars)** | ** ** | ** **              | ** ** | **(in thousands  of  U.S. dollars)** | ** ** | ** **              | ** ** |
| Foreign currency  gains (losses), net |       |                                                | (544       | )                       |       |                                                | (8,598     | )                       |       |   | 1,481 | % |   |   | (3,867 | ) |   | (10,366 | ) |   | 168 | % |   |
| % of Total Revenue                    |       |                                                | (13        | )%                      |       |                                                | (61        | )%                      |       |   |   |   |   |   | (47 | )% |   | (35 | )% |   |   |   |   |

 

We recognized a foreign currency loss of$8.6 million and $10.4 million for the three and six months ended June 30,2005 respectively, as compared to a loss of $0.5 million and $3.9 millionfor the three and 

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six months ended June 30,2004. The change from period to period was primarily due to the fluctuation inthe exchange rate of the Euro, Swiss Franc and British pound as compared to theU.S. dollar and its impact on the revaluation of our Euro and British pounddenominated intercompany balances held by the parent company and on our Eurodenominated cash accounts. See ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK *Foreign Currency ExchangeRisks* for more information.

We established the Eurodenominated cash accounts in connection with our initial public offering in February 2000,in which we sold shares of our common stock for both U.S. dollars and Euros. AtJune 30, 2005, the parent company held approximately Euro 0.3 millionin the Euro cash account, CHF 0.6 million in the Swiss Franc cash account andGBP 0.3 million in the GBP cash account and remains exposed to changes in theforeign currency rate.

*Income tax expense:*
| ** **                                  | ** ** | **Three months ended**                    | ** ** | ** **              | ** ** | **Six months ended**                      | ** ** | ** **              | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------|------------|-----------------------------------------------------|------------|-------------------------|------------|
| ** **                                  | ** ** | **June 30,  2004**                             | ** ** | **June 30,  2005** | ** ** | **% Increase/  (Decrease)**                    | ** ** | **June 30,  2004** | ** ** | **June 30,  2005** | ** ** | **% Increase/  (Decrease)** | ** ** |
| ** **                                  | ** ** | **(in thousands  of  U.S. dollars)** | ** ** | ** **              | ** ** | **(in thousands  of  U.S. dollars)** | ** ** | ** **              | ** ** |
| Foreign currency  gains (losses), net  |       |                                                | (1         | )                       |       |                                                | (162       | )                       |       |   | 16,100 | % |   |   | (1 | ) |   |   | (172 | ) |   |   | 17,100 | % |   |
| % of Total Revenue                          |       |                                                | 0          | %                       |       |                                                | (1         | )%                      |       |   |   |   |   |   | 0 | % |   |   | (1 | )% |   |   |   |   |   |

 

We recognized income taxexpenses of $0.2 million and $0.2 million for the three and six months ended June 30,2005 respectively, as compared to income tax expenses of $1,000 for the threeand six months ended June 30, 2004. Income tax expenses of $0.3 millionwere recorded in the three months period ended June 30, 2005 in connectionwith a ruling for the corporate headquarters with the Dutch tax authorities,offset by an income tax benefit of $0.1 million in connection with deferred taxliabilities relating to intangible fixed assets recognized for the acquisitionof the PSINet Europe companies.

*Gain (loss) fromdiscontinued operations:*

The loss from discontinuedoperations for the three months ended June 30, 2005 was $7.8 million, down froma loss from discontinued operations of $2.0 million for the three months endedJune 30, 2004. The loss from discontinued operations for the six months endedJune 30, 2005 was $10.9 million, down from a gain from discontinued operationsof $0.2 million for the six months ended June 30, 2004. We recorded impairmentcharges of $5.9 million for the three and six months ended June 30, 2005,against assets classified as held for sale under the Amended Sale Agreement,which are classified within the loss from discontinued operations for the threeand six months ended June 30, 2005.

*Liquidity andCapital Resources*

*Liquidity*

**Negative Total Cash Flow, Urgent Liquidity Needs,Proposed Sale.****  **VIA began 2005 with$15.5 million in cash and cash equivalents and $5.1 million inrestricted cash. We had a net decrease in cash and cash equivalents over thesix months ended June 30, 2005 of $12.4 million, leaving us with$3.1 million in cash and cash equivalents and $2.5 million inrestricted cash at June 30, 2005. Of the $3.1 million in cash and cashequivalents, $1.6 million was held at the group parent company. This comparesto a net decrease in cash and cash equivalents over the six months ended June 30,2004 of $23.5 million, comprised primarily of $12.0 million of net cashused in operating activities and $11.7 million of net cash used in investingactivities.

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Restricted cash of $2.5 million and $5.1 million at June 30,2005 and December 31, 2004, respectively, represents amounts held ondeposit with banking institutions as security for operating leases, leasedproperties and key suppliers.

We continue tosustain losses and net decreases of cash and cash equivalents from ourcontinuing operations. As announced on March 17, 2005, we have insufficientcash reserves to continue operations of our group parent, VIA NET.WORKS, Inc.,without new financing. We have sought, with the support of our professionaladvisors, to address this issue, by seeking new investments in the Company, newfinancing and opportunities to sell all or part of our business operations.Since Apri1 1, 2005, we have financed our continuing operations through thesale of operating units and obtaining advances of funds in connection with thesale of certain operating units.

On April 1,2005, we sold our Swiss companies—VIA NET.WORKS (Schweiz) AG and VIA NET.WORKSServices AG—to former managers and owners of the businesses, for aconsideration of CHF 3.5 million (approximately $2.9 million). Upon completion of the VIA NET.WORKS (Schweiz) AG and VIANET.WORKS Services AG sale, we recorded a loss of $ 1.0 million in thestatement of operations in the three months ended June 30, 2005, relatingto amounts previously recorded in accumulated other comprehensive loss.

On April 30, 2005, we entered into a sale andpurchase agreement, or Sale Agreement, with Claranet Group Limited (Claranet),a privately-held European Internet services provider based in the UnitedKingdom, to sell all of our remaining business operations in Europe and theUnited States (the “Asset Sale”). The agreement followed on the letter ofintent we entered into with Claranet on April 10, 2005. The materialprovisions of the Sale Agreement were described in our Quarterly Report on Form 10-Qfor the three month period ended March 31, 2005.

The Asset Sale was conditioned upon the approval byour shareholders. On or about June 3, 2005, we mailed our definitive proxystatement on Form 14A to our shareholders of record as of May 25,2005 and scheduled a Special and Annual Meeting of the Shareholders to takeplace on June 29, 2005. In the proxy statement we delivered to ourshareholders, we requested approval of, among other things, the Asset Sale anda plan of complete dissolution and liquidation of the Company. On June 28,2005, we announced the postponement of the shareholders’ meeting until July 22,2005 in order to provide us additional time to solicit proxies from ourshareholders sufficient to obtain the affirmative vote in respect of the SaleAgreement and the Asset Sale of a majority of the voting stock of our Company. Theclosing of the Asset Sale was conditioned on receiving the requisite majorityvote of the stockholders of our Company.

On July 12, 2005, we entered into an Amendmentand Restatement with Claranet relating to the Sale Agreement of April 30,2005 (the “Amended Sale Agreement”). Pursuant to the Amended Sale Agreement, wesold our Amen group of businesses and our U.S., Dutch and Portuguese legacyoperations to Claranet for $9.3 million, less a portion of the depositalready paid by Claranet in connection with the Asset Sale (plus interest onsuch amount), repayment to Claranet of the amounts owed by us under the loanfacility established on April 30, 2005, including interest, and an amountheld as a deferred payment (the “July 12th Sale”). The saleexcluded the PSINet Europe operations and VIA’s legacy operations in France,Germany and Spain as well as certain assets pertaining to our Company’scentralized back office and technical support systems, including employeecontracts of certain headquarters personal (the “Remaining Assets”). Noshareholder approval was necessary for the closing of the July 12thSale. Upon completion of the July 12thSale , we recorded a loss in the statementof operations for the three months ending September 30, 2005 of $1.6million, relating to amounts previously recorded in accumulated othercomprehensive loss.

In order to achieve an orderly transition of theownership of the assets sold in the July 12th Sale, we,Claranet and certain of our subsidiaries entered into a transition servicesagreement pursuant to which the U.S., Dutch and Portuguese businesses sold toClaranet continue to have the right to use the VIA brand 

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and to receive certainservices from the remaining VIA businesses for a period of time following thecompletion of the sale. In return, we continue to have the right to receivecertain services from the sold businesses.

On July 27, 2005, we received a letter fromClaranet purporting to terminate the Amended Sale Agreement, which includetermination of the agreement by Claranet to purchase the Remaining Assets for apurchase price of $17.1 million, subject to shareholder approval. That same daywe also received a letter of termination regarding the Amended FacilityAgreement, under which Claranet was to provide a $2.5 million secured loanfacility to us. See discussion of termination letters under ITEM. 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS; Overview; Proposed Sale of the Businesses; Interim FundingArrangements

While we believe that Claranet’s position is notsupported by the facts or the terms of the agreements and that it is thereforein breach of the agreements, our management also is aware that Claranet is notwilling to proceed to complete the sale and provide financing on the terms ofthe agreements, and that we will need to pursue a different transaction. Wetherefore have engaged Claranet in discussions toward resolving the dispute. Inthe absence of a resolution of the dispute with Claranet, we could be liable topay Claranet termination and related charges in an amount of $1.2 million, ifClaranet’s position is determined to be justified. If our position is correct,Claranet would owe us $0.5 million for a break fee and we could pursue Claranetin litigation for significant damages. At the same time, we have activelysought a new buyer for the Remaining Assets, and we have had substantive discussionswith interested parties. In light of our liquidity problems and without furtheradvances under the Amended Facility Agreement from Claranet, we are seeking toenter into a new arrangement for the sale of the business and interim fundingwithin the next few weeks. Based on discussions to date, we anticipate that wewill be able successfully to conclude arrangements with a new buyer for thesale of the business and interim financing, as well as an agreement withClaranet to resolve the disputed termination of the sale and financingagreements, within that time frame. We also anticipate that we will be able toenter into a settlement with Claranet on the dispute regarding the terminationof the Amended Sale Agreement and that settlement will provide for the paymentof a portion of the amount still owing to us from the July 12thSale.

There can be no assurances that we will be successfulin any of these efforts, or what value a new buyer will place on the Company’sbusiness and assets. If, for whatever reason, we are not able to enter into anew arrangement for the sale of the business and interim funding before the endof August 2005, there can be no assurance that we will able to findalternative solutions to its liquidity problem. In that event, we would haveinsufficient funds to continue to operate the Company as a going concern.

On June 29, 2005, we entered into a series ofagreements with Sorbie Europe B.V. (“Sorbie”), formerly PSINet Europe B.V.,(the “Sorbie Agreements”) relating to the renegotiation of the unsecuredzero-coupon convertible note of Euro 6.0 million ($7.2 million) due and payableto Sorbie in full on November 20, 2005. The note was issued to Sorbie inconnection with our acquisition of the PSINet Europe companies on August 9,2004. Under the Sorbie Agreements, each of certain VIA group companies and theSorbie related parties mutually released each other from all claims under the August 9,2004 PSINet Europe purchase agreement. In consideration for the release, Sorbieagreed that it will cancel the note if VIA pays Sorbie, prior to August 31,2005, €1.5million (approximately $1.8 million) in cash and issues to Sorbie or itsdesignee shares of common stock of VIA equal to 9.9% (7,173,341 shares) of thetotal outstanding shares of the Company as of June 29, 2005. Pursuant tothe Agreements, the release and cancellation and our payment and issuance ofthe shares to Sorbie would occur no later than two days after the date ofcompletion of the sale of our Company’s business or the recapitalization of ourCompany with new funds.

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*Capital Resources*

Since inception, we havefinanced our operations primarily through the sale of equity securities. Weraised approximately $181.0 million in aggregate through three privatepreferred stock offerings between August 1997 and April 1999. Throughour initial public offering of common stock in February 2000, we raisedapproximately $333.0 million, net of underwriting discounts andcommissions.

In connection with theacquisition of Amen in January 2004, we issued 673,652 shares of commonstock at a price of $2 per share, having a total value of approximately$1.3 million on the date of acquisition, for Amen common stock. On June 14,2005, we issued 4,180,663 shares of our common stock in satisfaction of anearn-out provision set forth in the Share Purchase Agreement made for theacquisition of Amen.

The foregoing statementsregarding our liquidity and possible need for additional capital resources areforward-looking statements based on our current expectations, whichinvolve certain risks and uncertainties. Actual results and the timing of theseevents could differ materially from these forward-looking statementsdepending upon certain factors that we cannot predict, including the nature,size and timing of future acquisitions and dispositions, if any, our future netincome and our success in executing our Strategic Plan as well as other factorsdiscussed in “Risk Factors” described in Exhibit 99-1 on this Form 10-Q,as well as those described in the “Risk Factors” section of our 2004 AnnualReport.

**ITEM3.**                QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following discussionrelates to any changes in our exposure to market risk, related to changes ininterest rates and changes in foreign exchange rates from that disclosed in our2004 Annual Report. This discussion contains forward-looking statementsthat are subject to risks and uncertainties. Actual results could differmaterially due to a number of factors, as set forth in the “Risk Factors”included as Exhibit 99.1 on this Form 10-Q and included in the “RiskFactors” section of our 2004 Annual Report.

***Foreign CurrencyExchange Risks***

*Transaction risks*

The parent company’s cashbalances consist of Euros and U.S. dollars. The Euro bank account is revaluedeach month and the resultant gain or loss is reflected in the condensedconsolidated statements of operations as “Foreign currency gains/(losses), net.”This exposes the Company to foreign currency exchange rate risk in theStatement of Operations. For example, as of June 30, 2005, a 10% increaseor decrease in the level of the Euro exchange rate against the U.S. dollar withall other variables held constant would result in a realized gain or loss ofapproximately $6.6 million. The change in exposure from period to periodis related to the change in the balance of the Euro cash and intercompanyaccounts. The parent company held approximately Euro 0.3 million in theEuro cash account, CHF 0.6 million in the Swiss Franc cash account and GBP 0.3million in the GBP cash account and remains exposed to changes in the foreigncurrency rate. However, such rate fluctuations should have a smaller impact infuture as the balances have continued to reduce.

The fluctuation in theexchange rates resulted in foreign currency gains (losses) reflected in theconsolidated statements of operations as “Foreign currency gains (losses), net”of $(8.6) million and $(10.4) million for the three and six months ended June 30,2005 respectively, and $(0.5) million and $(3.9) million for the sameperiods in 2004.

*Translation risks*

The fluctuation in theexchange rates resulted in foreign currency translation gains reflected as acomponent of accumulated other comprehensive loss in stockholders’ equity, netof $9.7 million and $12.0 million for the three and six months ended June 30,2005 respectively, and $0.6 million and $2.5 million for the same periodsin 2004.

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Exchange rates can varysignificantly. The Euro high and low rates varied by approximately 10% and 14%in relation to the U.S. dollar during the three and six months ended June 30,2005 respectively. The Swiss Franc high and low rates varied by approximately10% and 14% in relation to the U.S. dollar during the three and six monthsended June 30, 2005 respectively. This variation affects the averageexchange rates used to translate the income statements of our operatingcompanies whose functional currency is not U.S. dollars. At June 30, 2005,the Euro-to-U.S. dollar exchange rate was approximately 12% below where it wasat the beginning of the year and the Swiss Franc to U.S. dollar exchange ratewas approximately 8% above where it was at the beginning of the year. Thisvariation affects the ending exchange rates used to translate amounts on thebalance sheet of our operating companies whose functional currency is not U.S.dollars. Future changes in the value of the Euro and Swiss Franc could have amaterial impact on our financial position and results of operations. We alsoexperienced fluctuations in other exchange rates.

*Hedging againstforeign exchange risks*

For the six months ended June 30,2005 we did not actively manage our exposure to foreign currency translationrisks that affect our reported results, which result in no cash impact unlessthe operation is sold. We have in the past considered insurance and financialrisk products to manage this risk, but determined such products to beprohibitively expensive. We currently have no hedging arrangements orderivatives in place to address this form of translation risk.

The parent companymaintains a Euro cash balance, a Swiss Franc cash balance and a British Poundbalance to meet the working capital requirements of the operating subsidiarieswith a Euro, Swiss Franc or British Pound functional currency. The parentcompany maintains its remaining cash resources in U.S. dollars.

**ITEM4.**                CONTROLS ANDPROCEDURES

Our management and the Audit Committee of the board ofdirectors has engaged in regular evaluations of our internal controls, as wellas the processes we maintain to ensure that all material information relatingto us and our subsidiaries is recorded, processed, summarized, evaluated andreported within the time periods specified by rules established by theSecurities and Exchange Commission. These latter processes are known asDisclosure Controls and Procedures. Disclosure Controls and Procedures are alsodesigned to ensure that all such information is communicated to our management,including our Chief Executive Officer and Principal Financial Officer, in sucha manner as to allow timely decisions to be made regarding requireddisclosures.

We have evaluated, with the oversight of our ChiefExecutive Officer and Principal Financial Officer, the effectiveness of ourDisclosure Controls and Procedures as of June 30, 2005. In designing andevaluating the Disclosure Controls and Procedures, our management necessarilywas required to apply its judgment in evaluating the costs and benefits ofpossible controls and procedures. In addition, we recognize that DisclosureControls and Procedures by their nature can provide only reasonable assurancethat our information flow objectives are met. As of June 30, 2005 ourChief Executive Officer and Principal Financial Officer have concluded that ourDisclosure Controls and Procedures are effective in all material respects.

We have completed the back-office systemsimplementation for our newly acquired PSINet businesses during the three monthsended March 31, 2005. The remaining VIA legacy business in Switzerland wassubsequently sold on April 1, 2005 back to the former owners and istherefore now outside the scope of the back office systems migration project.

We believe that our current controls and proceduresenable us to present our financial results fairly in all material respects, asrequired by U.S. generally accepted accounting principles.

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**PART II**

**Item 1.**                        LegalProceedings

There have been nosignificant developments regarding legal proceedings since the filing of VIA’s Form 10-Kon April 26, 2005, except for a lawsuit filed by the former chiefexecutive officer of VIA NET.WORKS, Inc., regarding compensation fortermination of his employment agreement, communications received regarding apre-existing claim of a former Vice President Europe Sales & Marketingof PSINet Belgium regarding reimbursements and damages for the termination ofher employment agreement, a dispute between VIA and Reachtown Limited relatingto a management agreement and a dispute with Claranet regarding the terminationof the Amended Sale Agreement. See note 11 to the condensed consolidatedfinancial statements for further information.

**Item 2.**                        Changesin Securities and Use of Proceeds

*Changes inSecurities:*

On June 14,2005, the Company issued 4,180,663 shares of VIA common stock toReachtown Limited in satisfaction of an earn-out provision under the SharePurchase Agreement made and entered into as of January 28, 2004, amongVIA, VIA NET.WORKS Holdco, Inc. and Reachtown Limited, pursuant to whichVIA acquired 100% of the issued and outstanding shares of each of Amen Limited,Agence Des Medias Numeriques S.A.S. (Amen France) and Agencia De Media NumericaEspana, S.L. (Amen Spain). The shares were issued in reliance on Regulation Sunder the Securities Act of 1933, as amended.

**Item 3.**                        DefaultsUpon Senior Securities

None.

**Item 4.**                        Submissionof Matters to a Vote of Security Holders

On or about June 3, 2005, the Company mailed toall its shareholders of record as of May 25, 2005, a proxy statementsetting forth four proposals, including the election of directors, to besubmitted to a vote of security holders of the Company at an Annual and SpecialMeeting of the Company to be held on June 29, 2005. On June 28, 2005,the Company announced the postponement of the meeting until July 22, 2005,in order to provide time to solicit additional proxies from shareholders. Themeeting was convened, then adjourned until August 2, 2005 to providefurther time to solicit proxies. On July 27, 2005, Claranet notified VIAthat it was terminating the Amended Sale Agreement. See discussion oftermination letters under **ITEM. 2. MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS; Overview;Proposed Sale of the Businesses; Interim Funding Arrangements**. WhileVIA immediately notified Claranet that it disputed Claranet’s right toterminate the Amended Sale Agreement, Claranet made it clear in discussionsthat it had no intent to continue the transaction in accordance with the termsof the agreement, thereby making moot the proposals before the shareholders ofthe Company to consider for approval the Amended Sale Agreement and thedissolution and plan of dissolution of the Company.

On August 2, 2005, the Annual Meeting of theCompany was convened for the purpose of voting on two proposals put forth bythe Company:

(1)   theelection of two Class II directors, Jan Gesmar-Larsen and Malcolm Bell, toserve for a three-year term; and

(2)   theauthorization for our board of directors to amend, at its discretion, ouramended and restated certificate of incorporation by adopting one of twoproposed amendments to effect a reverse stock split, either a one-for-tenreverse stock split or a one-for-twenty reverse stock split, of all the issuedand outstanding shares of our common stock, par value $0.001 per share, withoutfurther approval of our 

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shareholders, upon adetermination by our board that a reverse stock split is in the best interestsof our Company and our shareholders.

At the meeting, for which proxies were solicited pursuant toRegulation 14 under the 1934 Securities and Exchange Act, all director nomineeswere elected.

The proposal to authorize the board of directors toamend our amended and restated certificate of incorporation by adopting one oftwo proposed amendments to effect a reverse stock split was approved by amajority vote of those votes represented in person or by proxy at the meetingas follows:
| ** **         | ** ** | ** ** | ** ** | **% total votes** | ** ** |
|--------------------|------------|------------|------------|-----------------------------|------------|
| Votes for          |       | 41,348,606 |       |                        | 92.8       | % |   |
| Votes against      |       | 3,029,462  |       |                        | 6.8        | % |   |
| Votes abstained    |       | 161,784    |       |                        | 0.4        | % |   |
| Total voted shares |       | 44,539,852 |       |                        |       |   |   |

 

**Item 5.**                        OtherInformation

None.

**Item 6.**                        Exhibits

**a)****              Exhibits**
| Exhibits          | ** ** | ** **                                                                                                                                    | ** ** | ** ** |
|-------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| Exhibit 31.1 |       | Section 302 Certification—Chief Executive  Officer                                                                                  |
| Exhibit 31.2 |       | Section 302 Certification—Principal Financial  Officer                                                                              |
| Exhibit 32   |       | Written Statement of Chief Executive Officer and  Principal Financial Officer Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |
| Exhibit 99.1 |       | Risk Factors                                                                                                                                  |

 

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, VIA NET.WORKS, Inc.has duly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized
|                            | VIA NET.WORKS, Inc. |
|----------------------------|--------------------------|
| * *                   | By:                      | /s/  RAY WALSH |
| * *                   |                     | *Chief  Executive Officer (Principal Executive Officer)* |
| Date: August 12, 2005 |                     | * * |
| * *                   | By:                      | /s/  PIET BOERSMA |
| * *                   |                     | *(Principal  Financial Officer)* |
| Date: August 12, 2005 |                     | * * |

 

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**EXHIBIT INDEX**
| Exhibit | ** ** | ** **                                                                                                                                    | ** ** | ** ** |
|---------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| 31.1    |       | Section 302 Certification—Chief Executive  Officer                                                                                  |
| 31.2    |       | Section 302 Certification—Principal Financial  Officer                                                                              |
| 32      |       | Written Statement of Chief Executive Officer and  Principal Financial Officer Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |
| 99.1    |       | Risk Factors                                                                                                                                  |

 

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