UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





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 September 30, 2010





OR





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





Commission
File Number: 000-23269





AboveNet,
Inc.


(Exact
Name of Registrant as Specified in Its Charter)





DELAWARE
            
            11-3168327(State
      or other jurisdiction of
              incorporation
      or organization)
            
            (I.R.S.
      Employer Identification No.)





360
HAMILTON AVENUE


WHITE
PLAINS, NY 10601


(Address
of Principal Executive Offices)





(914)
421-6700


(Registrant’s
Telephone Number, Including Area Code)








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





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  Yes 
 ̈
   No   ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.


Large
      accelerated filer   ̈
            Accelerated
      filer  x
            Non-accelerated
      filer   ̈
              (Do
      not check if a small reporting company)
            Smaller
      reporting company   ̈


Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes  ̈    No x





The
number of shares of the registrant’s common stock, par value $0.01 per share,
outstanding as of November 1, 2010, was 25,578,131.












ABOVENET,
INC.





INDEX




PagePart
      I.
            
            FINANCIAL
      INFORMATIONItem
      1.
            
            Financial
      StatementsConsolidated
      Balance SheetsAs
      of September 30, 2010 (Unaudited) and December 31, 2009
            
            1Consolidated
      Statements of Operations (Unaudited)Three
      and Nine month periods ended September 30, 2010 and 2009
            
            2Consolidated
      Statement of Shareholders’ Equity (Unaudited)Nine
      month period ended September 30, 2010
            
            3Consolidated
      Statements of Cash Flows (Unaudited)Nine
      month periods ended September 30, 2010 and 2009
            
            4Consolidated
      Statements of Comprehensive Income (Unaudited)Three
      and Nine month periods ended September 30, 2010 and 2009
            
            5Notes
      to Unaudited Consolidated Financial Statements
            
            6Item
      2.
            
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            
            34Item
      3.
            
            Quantitative
      and Qualitative Disclosures about Market Risk
            
            61Item
      4.
            
            Controls
      and Procedures
            
            62Part
      II.
            
            OTHER
      INFORMATIONItem
      1.
            
            Legal
      Proceedings
            
            63Item
      1A.
            
            Risk
      Factors
            
            63Item
      6.
            
            Exhibits
            
            64Signatures
            
            65Exhibit
      Index






- i
-




PART
I.  FINANCIAL INFORMATION





ITEM
1.  FINANCIAL STATEMENTS




ABOVENET,
INC. AND SUBSIDIARIES





CONSOLIDATED
BALANCE SHEETS


(in
millions, except share and per share information)





September 30,
                2010
              
              
              December 31,
                2009(Unaudited)ASSETS:Current
      assets:Cash
      and cash equivalents
              
              $
              194.8
              
              
              $
              165.3Restricted
      cash and cash equivalents
              
              3.6
              
              
              3.7Accounts
      receivable, net of allowances of $1.7 and $2.0 at September 30, 2010 and
      December 31, 2009, respectively
              
              18.7
              
              
              20.1Prepaid
      costs and other current assets
              
              18.9
              
              
              13.5Total
      current assets
              
              236.0
              
              
              202.6Property
      and equipment, net of accumulated depreciation and amortization of $280.2
      and $236.5 at September 30, 2010 and December 31, 2009,
      respectively
              
              511.8
              
              
              469.1Deferred
      tax assets
              
              151.3
              
              
              183.0Other
      assets
              
              9.5
              
              
              7.3Total
      assets
              
              $
              908.6
              
              
              $
              862.0LIABILITIES:Current
      liabilities:Accounts
      payable
              
              $
              5.9
              
              
              $
              10.7Accrued
      expenses
              
              73.5
              
              
              68.4Deferred
      revenue - current portion
              
              25.3
              
              
              27.3Note
      payable - current portion
              
              7.6
              
              
              7.6Total
      current liabilities
              
              112.3
              
              
              114.0Note
      payable
              
              44.1
              
              
              49.7Deferred
      revenue
              
              89.0
              
              
              93.8Other
      long-term liabilities
              
              10.2
              
              
              10.3Total
      liabilities
              
              255.6
              
              
              267.8Commitments
      and contingenciesSHAREHOLDERS’
      EQUITY:Preferred
      stock, 9,500,000 shares authorized, $0.01 par value, none issued or
      outstanding
              
              —
              
              
              —Junior
      preferred stock, 500,000 shares authorized, $0.01 par value, none issued
      or
                outstanding
              
              —
              
              
              —Common
      stock, 200,000,000 shares authorized, $0.01 par value, 26,192,348 issued
      and 25,576,231 outstanding at September 30, 2010 and 30,000,000 shares
      authorized, $0.01 par value, 25,271,788 issued and 24,750,560 outstanding
      at December 31, 2009
              
              0.3
              
              
              0.3Additional
      paid-in capital
              
              325.6
              
              
              308.2Treasury
      stock at cost, 616,117  and 521,228 shares at September 30, 2010
      and December 31, 2009, respectively
              
              (22.3
              )
              
              (16.7
              )Accumulated
      other comprehensive loss
              
              (9.1
              )
              
              (9.0
              )Retained
      earnings
              
              358.5
              
              
              311.4Total
      shareholders’ equity
              
              653.0
              
              
              594.2Total
      liabilities and shareholders’ equity
              
              $
              908.6
              
              
              $
              862.0






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






- 1
-




ABOVENET,
INC. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF OPERATIONS


(in
millions, except share and per share information)





(Unaudited)





Three
      Months Ended September 30,
            
            
            Nine
      Months Ended September 30,2010
            
            
            2009
            
            
            2010
            
            
            2009Revenue
            
            $
            103.7
            
            
            $
            92.4
            
            
            $
            301.6
            
            
            $
            265.8Costs
      of revenue (excluding depreciation and  amortization, shown
      separately below)
            
            
            35.7
            
            
            
            33.9
            
            
            
            102.9
            
            
            
            95.6Selling,
      general and administrative expenses
            
            
            23.1
            
            
            
            20.3
            
            
            
            69.7
            
            
            
            61.1Depreciation
      and amortization
            
            
            15.8
            
            
            
            13.5
            
            
            
            46.5
            
            
            
            37.7Operating
      income
            
            
            29.1
            
            
            
            24.7
            
            
            
            82.5
            
            
            
            71.4Other
      income (expense):Interest
      income
            
            
            0.1
            
            
            
            —
            
            
            
            0.1
            
            
            
            0.3Interest
      expense
            
            
            (1.3
            )
            
            
            (1.3
            )
            
            
            (3.7
            )
            
            
            (3.6
            )Other
      income (expense), net
            
            
            1.0
            
            
            
            (0.5
            )
            
            
            0.6
            
            
            
            1.9Income
      before income taxes
            
            
            28.9
            
            
            
            22.9
            
            
            
            79.5
            
            
            
            70.0Provision
      for (benefit from) income taxes
            
            
            11.7
            
            
            
            0.2
            
            
            
            32.4
            
            
            
            (4.7
            )Net
      income
            
            $
            17.2
            
            
            $
            22.7
            
            
            $
            47.1
            
            
            $
            74.7Income
      per share, basic:Basic
      income per share
            
            $
            0.68
            
            
            $
            0.96
            
            
            $
            1.88
            
            
            $
            3.22Weighted
      average number of common shares
            
            
            25,340,842
            
            
            
            23,500,655
            
            
            
            25,144,979
            
            
            
            23,151,861Income
      per share, diluted:Diluted
      income per share
            
            $
            0.66
            
            
            $
            0.88
            
            
            $
            1.80
            
            
            $
            2.96Weighted
      average number of common shares
            
            
            26,249,408
            
            
            
            25,612,176
            
            
            
            26,225,131
            
            
            
            25,230,937






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




- 2
-





ABOVENET,
INC. AND SUBSIDIARIES





CONSOLIDATED
STATEMENT OF SHAREHOLDERS’ EQUITY


(in
millions, except share information)





(Unaudited)





Common
      Stock
            
            
            Treasury
      Stock
            
            
            Other Shareholders’
      EquityShares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Additional
              Paid-in
              Capital
            
            
            Accumulated
              Other
              Comprehensive
              Loss
            
            
            Retained
              Earnings
            
            
            Total
              Shareholders’
              EquityBalance
      at January 1, 2010
            
            
            25,271,788
            
            
            $
            0.3
            
            
            
            521,228
            
            
            $
            (16.7
            )
            
            $
            308.2
            
            
            $
            (9.0
            )
            
            $
            311.4
            
            
            $
            594.2Issuance
      of common stock from exercise of warrants
            
            
            858,530
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            10.3
            
            
            
            —
            
            
            
            —
            
            
            
            10.3Issuance
      of common stock from vested restricted stock
            
            
            14,000
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Issuance
      of common stock from exercise of options to purchase shares of common
      stock
            
            
            48,084
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            0.6
            
            
            
            —
            
            
            
            —
            
            
            
            0.6Purchase
      of treasury stock
            
            
            —
            
            
            
            —
            
            
            
            5,459
            
            
            
            (0.3
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (0.3
            )Deemed
      purchase of treasury stock in cashless exercises of stock
      warrants
            
            
            —
            
            
            
            —
            
            
            
            89,430
            
            
            
            (5.3
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (5.3
            )Foreign
      currency translation
              adjustments
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (0.5
            )
            
            
            —
            
            
            
            (0.5
            )Change
      in fair value of interest rate swap contracts
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            0.4
            
            
            
            —
            
            
            
            0.4Amortization
      of stock-based compensation expense for restricted stock units and
      employee stock purchase plan
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            6.5
            
            
            
            —
            
            
            
            —
            
            
            
            6.5Shares
      cancelled
            
            
            (54
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Net
      income
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            47.1
            
            
            
            47.1Balance
      at September 30, 2010
            
            
            26,192,348
            
            
            $
            0.3
            
            
            
            616,117
            
            
            $
            (22.3
            )
            
            $
            325.6
            
            
            $
            (9.1
            )
            
            $
            358.5
            
            
            $
            653.0






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




- 3
-





ABOVENET,
INC. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF CASH FLOWS


(in
millions)





(Unaudited)





Nine
      Months Ended September 30,2010
            
            
            2009Cash
      flows provided by operating activities:Net
      income
            
            $
            47.1
            
            
            $
            74.7Adjustments
      to reconcile net income to net cash provided by
operations:Depreciation
      and amortization
            
            
            46.5
            
            
            
            37.7Loss
      on sale or disposition of property and equipment, net
            
            
            0.1
            
            
            
            1.0Provision
      for equipment impairment
            
            
            0.4
            
            
            
            0.9Non-cash
      stock-based compensation expense
            
            
            6.5
            
            
            
            8.3Provision
      for bad debts
            
            
            0.4
            
            
            
            0.4Change
      in deferred tax assets
            
            
            31.6
            
            
            
            —Changes
      in operating working capital:Accounts
      receivable
            
            
            0.9
            
            
            
            (3.4
            )Prepaid
      costs and other current assets
            
            
            (5.4
            )
            
            
            (3.7
            )Other
      assets
            
            
            (2.2
            )
            
            
            (1.5
            )Accounts
      payable
            
            
            (4.8
            )
            
            
            (9.2
            )Accrued
      expenses
            
            
            2.6
            
            
            
            (7.1
            )Deferred
      revenue and other long-term liabilities
            
            
            (6.4
            )
            
            
            6.9Net
      cash provided by operating activities
            
            
            117.3
            
            
            
            105.0Cash
      flows used in investing activities:Proceeds
      from sales of property and equipment
            
            
            0.3
            
            
            
            —Purchases
      of property and equipment
            
            
            (88.0
            )
            
            
            (80.0
            )Net
      cash used in investing activities
            
            
            (87.7
            )
            
            
            (80.0
            )Cash
      flows (used in) provided by financing activities:Proceeds
      from exercise of warrants
            
            
            5.0
            
            
            
            4.8Proceeds
      from exercise of options to purchase shares of common
stock
            
            
            0.6
            
            
            
            7.7Change
      in restricted cash and cash equivalents
            
            
            0.1
            
            
            
            —Principal
      payment - note payable
            
            
            (5.6
            )
            
            
            (2.2
            )Principal
      payment - capital lease obligation
            
            
            —
            
            
            
            (0.2
            )Purchase
      of treasury stock
            
            
            (0.3
            )
            
            
            (0.3
            )Net
      cash (used in) provided by financing activities
            
            
            (0.2
            )
            
            
            9.8Effect
      of exchange rates on cash
            
            
            0.1
            
            
            
            0.6Net
      increase in cash and cash equivalents
            
            
            29.5
            
            
            
            35.4Cash
      and cash equivalents, beginning of period
            
            
            165.3
            
            
            
            87.1Cash
      and cash equivalents, end of period
            
            $
            194.8
            
            
            $
            122.5Supplemental
      cash flow information:Cash
      paid for interest
            
            $
            2.3
            
            
            $
            2.0Cash
      paid for income taxes
            
            $
            0.4
            
            
            $
            2.8Supplemental
      non-cash financing activities:Issuance
      of shares of common stock in cashless exercise of stock purchase
      warrants
            
            $
            5.3
            
            
            $
            —Non-cash
      purchase of shares into treasury in cashless exercise of stock purchase
      warrants
            
            $
            5.3
            
            
            $
            —






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




- 4
-




ABOVENET,
INC. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME


(in
millions)





(Unaudited)




Three
      Months Ended September 30,
            
            
            Nine
      Months Ended September 30,2010
            
            
            2009
            
            
            2010
            
            
            2009Net
      income
            
            $
            17.2
            
            
            $
            22.7
            
            
            $
            47.1
            
            
            $
            74.7Foreign
      currency translation adjustments
            
            
            —
            
            
            
            (0.5
            )
            
            
            (0.5
            )
            
            
            —Change
      in fair value of interest rate swap contracts
            
            
            0.2
            
            
            
            —
            
            
            
            0.4
            
            
            
            0.2Comprehensive
      income
            
            $
            17.4
            
            
            $
            22.2
            
            
            $
            47.0
            
            
            $
            74.9




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




- 5
-




ABOVENET,
INC. AND SUBSIDIARIES





NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


(in
millions, except share and per share information)





NOTE
1:    BACKGROUND AND ORGANIZATION





The
Company is a facilities-based provider of technologically advanced,
high-bandwidth, fiber optic communications infrastructure and co-location
services to communications carriers and corporate and government customers,
principally in the United States (“U.S.”) and United Kingdom
(“U.K.”).





NOTE
2:    BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING
POLICIES





A summary
of the basis of presentation and the significant accounting policies followed in
the preparation of these consolidated financial statements is as
follows:





Stock
Split




On August
3, 2009, the Board of Directors of the Company authorized a two-for-one common
stock split, effected in the form of a 100% stock dividend, which was
distributed on September 3, 2009.  Each shareholder of record on
August 20, 2009 received one additional share of common stock for each share of
common stock held on that date.  All share and per share information
for prior periods, including warrants, options to purchase common shares,
restricted stock units, warrant and option exercise prices, shares reserved
under the Company’s 2003 Incentive Stock Option and Stock Unit Grant Plan (the
“2003 Plan”) and the Company’s 2008 Equity Incentive Plan  (the “2008
Plan”), weighted average fair value of options granted, common stock and
additional paid-in capital accounts on the consolidated balance sheets and
consolidated statement of shareholders’ equity, have been retroactively
adjusted, where applicable, to reflect the two-for-one stock split.





Basis
of Presentation and Use of Estimates




The
accompanying unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America (“U.S. GAAP”) and pursuant to the rules and regulations of the
Securities and Exchange Commission (the “SEC”).  These consolidated
financial statements include the accounts of the Company, as
applicable.  They do not include all of the information and footnotes
required by U.S. GAAP for complete financial statements.  In the
opinion of management, all adjustments (consisting of normal recurring
accruals), considered necessary for a fair presentation have been
included.  These unaudited consolidated financial statements should be
read in conjunction with the Company’s consolidated financial statements and
related notes included in the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2009.  Operating results for the
three and nine months ended September 30, 2010 are not necessarily indicative of
the results that may be expected for the year ending December 31,
2010.





The
preparation of consolidated financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities as of the date of the consolidated financial
statements, the disclosure of contingent assets and liabilities in the
consolidated financial statements and the accompanying notes and the reported
amounts of revenue and expenses during the periods
presented.  Estimates are used when accounting for certain items such
as accounts receivable allowances, property taxes, transaction taxes and
deferred taxes.  The estimates the Company makes are based on
historical factors, current circumstances and the experience and judgment of the
Company’s management.  The Company evaluates its assumptions and
estimates on an ongoing basis and may employ outside experts to assist in the
Company’s evaluations.  Actual amounts and results could differ from
such estimates due to subsequent events which could have a material effect on
the Company’s financial statements covering future periods.




- 6
-




ABOVENET,
INC. AND SUBSIDIARIES




NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(in
millions, except share and per share information)





Fresh
Start Accounting





On
May 20, 2002, Metromedia Fiber Network, Inc. (“MFN”) and substantially
all of its domestic subsidiaries (each a “Debtor” and collectively, the
“Debtors”) filed voluntary petitions for reorganization under Chapter 11 of the
United States Bankruptcy Code (the “Bankruptcy Code”) with the United States
Bankruptcy Court for the Southern District of New York (the “Bankruptcy
Court”).  The Debtors remained in possession of their assets and
properties and continued to operate their businesses and manage their properties
as debtors-in-possession under the jurisdiction of the Bankruptcy
Court.





On
July 1, 2003, the Debtors filed an amended Plan of Reorganization (“Plan of
Reorganization”) and amended Disclosure Statement (“Disclosure
Statement”).  On July 2, 2003, the Bankruptcy Court approved the
Disclosure Statement and related voting procedures.  On
August 21, 2003, the Bankruptcy Court confirmed the Plan of
Reorganization.





The
Debtors emerged from proceedings under Chapter 11 of the Bankruptcy Code on
September 8, 2003 (the “Effective Date”).  In accordance with its
Plan of Reorganization, MFN changed its name to AboveNet, Inc. (together
with its subsidiaries, the “Company”) on August 29, 2003.  Equity
interests in MFN received no distribution under the Plan of Reorganization and
the equity securities of MFN were cancelled.





On
September 8, 2003, the Company authorized 10,000,000 shares of preferred
stock (with a $0.01 par value) and 30,000,000 shares of common stock (with a
$0.01 par value).  On June 24, 2010, the shareholders approved an
amendment to the Company’s certificate of incorporation, increasing the number
of authorized shares of common stock from 30,000,000 to
200,000,000.  See Note 8, “Shareholders’ Equity - Amendment to the
Company’s Amended and Restated Certificate of Incorporation.”





The
holders of common stock are entitled to one vote for each issued and outstanding
share, and will be entitled to receive dividends, subject to the rights of the
holders of preferred stock when and if declared by the Board of
Directors.  Preferred stock may be issued from time to time in one or
more classes or series, each of which classes or series shall have such
distributive designation as determined by the Board of
Directors.  During 2006, the Company reserved for issuance, from the
10,000,000 shares authorized of preferred stock described above, 500,000 shares
of $0.01 par value junior preferred stock in connection with the adoption of the
Amended and Restated Rights Agreement (as defined in Note 8, “Shareholders’
Equity,” below).  In the event of any liquidation, the holders of the
common stock will be entitled to receive the assets of the Company available for
distribution, after payments to creditors and holders of preferred
stock.





In 2003,
the Company issued 17,500,000 shares of common stock, of which 17,498,276 were
delivered and 1,724 shares were determined to be undeliverable and were
cancelled, the rights to purchase 3,338,420 shares of common stock at a price of
$14.97715 per share, under a rights offering (of which rights to purchase
3,337,984 shares of common stock have been exercised), five year stock purchase
warrants to purchase 1,418,918 shares of common stock exercisable at a price of
$10.00 per share, and seven year stock purchase warrants to purchase 1,669,316
shares of common stock exercisable at a price of $12.00 per share.  In
addition, 2,129,912 shares of common stock were originally reserved for issuance
under the Company’s 2003 Plan.  See Note 7, “Stock-Based
Compensation.”





The
Company’s emergence from bankruptcy resulted in a new reporting entity with no
retained earnings or accumulated losses, effective as of September 8,
2003.  Although the Effective Date of the Plan of Reorganization was
September 8, 2003, the Company accounted for the consummation of the Plan
of Reorganization as if it occurred on August 31, 2003 and implemented
fresh start accounting as of that date.  There were no significant
transactions during the period from August 31, 2003 to September 8,
2003.  Fresh start accounting requires the Company to allocate the
reorganization value of its assets and liabilities based upon their estimated
fair values, in accordance with Statement of Position 90-7, “Financial Reporting
by Entities in Reorganization under the Bankruptcy Code” (now known as Financial
Accounting Standards Board Accounting Standards Codification (“FASB ASC”)
852-10).  The Company developed a set of financial projections, which
were utilized by an expert to assist the Company in estimating the fair value of
its assets and liabilities.  The expert utilized various valuation
methodologies, including (1) a comparison of the Company and its projected
performance to that of comparable companies; (2) a review and analysis of
several recent transactions of companies in similar industries to the Company;
and (3) a calculation of the enterprise value based upon the future cash
flows of the Company’s projections.




- 7
-




ABOVENET,
INC. AND SUBSIDIARIES




NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(in
millions, except share and per share information)





Adopting
fresh start accounting resulted in material adjustments to the historical
carrying values of the Company’s assets and liabilities.  The
reorganization value was allocated by the Company to its assets and liabilities
based upon their fair values.  The Company engaged an independent
appraiser to assist the Company in determining the fair market value of its
property and equipment.  The determination of fair values of assets
and liabilities was subject to significant estimates and
assumptions.  The unaudited fresh start adjustments reflected at
September 8, 2003 consisted of the following: (i) reduction of
property and equipment; (ii) reduction of indebtedness;
(iii) reduction of vendor payables; (iv) reduction of the carrying
value of deferred revenue; (v) increase of deferred rent to fair market
value; (vi) cancellation of MFN’s common stock and additional paid-in
capital, in accordance with the Plan of Reorganization; (vii) issuance of
new AboveNet, Inc. common stock and additional paid-in capital; and
(viii) elimination of the comprehensive loss and accumulated deficit
accounts.





Principles
of Consolidation




The
consolidated financial statements include the accounts of the Company, and its
wholly-owned subsidiaries.  Consolidation is generally required for
investments of more than 50% of the outstanding voting stock of an investee,
except when control is not held by the majority owner.  All
significant intercompany accounts and transactions have been eliminated in
consolidation.





Revenue
Recognition




The
Company follows SEC Staff Accounting Bulletin ("SAB") No. 101, “Revenue
Recognition in Financial Statements,” (now known as FASB ASC 605-10), as amended
by SEC SAB No. 104, “Revenue Recognition,” (also now known as FASB ASC
605-10).





Revenue
derived from leasing fiber optic telecommunications infrastructure and the
provision of telecommunications and co-location services is recognized as
services are provided.  Non-refundable payments received from
customers before the relevant criteria for revenue recognition are satisfied are
included in deferred revenue in the accompanying consolidated balance sheets and
are subsequently amortized into income over the fixed contract
term.





Prior to
October 1, 2009, the Company generally amortized revenue related to installation
services on a straight-line basis over the contracted customer relationship (two
to twenty years).  In the fourth quarter of 2009, the Company
completed a study of its historic customer relationship period.  As a
result, commencing October 1, 2009, the Company began amortizing revenue related
to installation services on a straight-line basis generally over the estimated
customer relationship period (generally ranging from three to twenty
years).





Contract
termination revenue is recognized when a customer discontinues service prior to
the end of the contract period for which the Company had previously received
consideration and for which revenue recognition was
deferred.  Contract termination revenue is also recognized when
customers have made early termination payments to the Company to settle
contractually committed purchase amounts that the customer no longer expects to
meet or when the Company renegotiates or discontinues a contract with a customer
and as a result is no longer obligated to provide services for consideration
previously received and for which revenue recognition has been
deferred.  Additionally, the Company includes receipts of bankruptcy
claim settlements from former customers as contract termination revenue when
received.  Contract termination revenue amounted to $0.7 and $0.3 in
the three months ended September 30, 2010 and 2009, respectively, and $2.3 and
$3.0 in the nine months ended September 30, 2010 and 2009,
respectively.




- 8
-




ABOVENET,
INC. AND SUBSIDIARIES




NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(in
millions, except share and per share information)





Non-Monetary
Transactions




The
Company may exchange capacity with other capacity or service
providers.  In December 2004, the FASB issued Statement of
Financial Accounting Standards (“SFAS”) No. 153, “Exchanges of Nonmonetary
Assets - An Amendment of APB Opinion No. 29,” (“SFAS No. 153”), (now
known as FASB ASC 845-10).  SFAS No. 153 amends Accounting
Principles Board Opinion No. 29, “Accounting for Nonmonetary Transactions,”
(“APB No. 29”) (also now known as FASB ASC 845-10) to eliminate the
exception for nonmonetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of nonmonetary assets that do not have
commercial substance.  SFAS No. 153 is to be applied
prospectively for nonmonetary exchanges occurring in fiscal periods beginning
after June 15, 2005.  The Company’s adoption of SFAS No. 153
on July 1, 2005 did not have a material effect on the consolidated
financial position or results of operations of the Company.  Prior to
the Company’s adoption of SFAS No. 153, nonmonetary transactions were
accounted for in accordance with APB No. 29, where an exchange for similar
capacity is recorded at a historical carryover basis and dissimilar capacity is
accounted for at fair market value with recognition of any gain or
loss.  There were no gains or losses from nonmonetary transactions for
the three and nine months ended September 30, 2010 and 2009.





Operating
Leases




The
Company leases office and equipment space, and maintains equipment rentals,
right-of-way contracts, building access fees and network capacity under various
non-cancelable operating leases.  The lease agreements, which expire
at various dates through 2023, are subject, in many cases, to renewal options
and provide for the payment of taxes, utilities and
maintenance.  Certain lease agreements contain escalation clauses over
the term of the lease related to scheduled rent increases resulting from the
pass through of increases in operating costs, property taxes and the effect on
costs from changes in consumer price indices.  In accordance with SFAS
No. 13, “Accounting for Leases,” (now known as FASB ASC 840), the Company
recognizes rent expense on a straight-line basis and records a liability
representing the difference between straight-line rent expense and the amount
payable as an increase or decrease to a deferred liability.  Any
leasehold improvements related to operating leases are amortized over the lesser
of their economic lives or the remaining lease term.  Rent-free
periods and other incentives granted under certain leases are recorded as
reductions to rent expense on a straight-line basis over the related lease
terms.





Cash
and Cash Equivalents and Restricted Cash and Cash Equivalents




For the
purposes of the consolidated statements of cash flows, the Company considers
cash in banks and short-term highly liquid investments with an original maturity
of three months or less to be cash and cash equivalents.  Cash and
cash equivalents and restricted cash and cash equivalents are stated at cost,
which approximates fair value.  Restricted cash and cash equivalents
are comprised of amounts that secure outstanding letters of credit issued in
favor of various third parties.





Accounts
Receivable, Allowance for Doubtful Accounts and Sales Credits




Accounts
receivable are customer obligations for services sold to such customers under
normal trade terms.  The Company’s customers are primarily
communications carriers, and corporate enterprise and government customers,
located primarily in the U.S. and U.K.  The Company performs periodic
credit evaluations of its customers’ financial condition.  The Company
provides allowances for doubtful accounts and sales
credits.  Provisions for doubtful accounts are recorded in selling,
general and administrative expenses, while allowances for sales credits are
recorded as reductions of revenue.  The adequacy of the reserves is
evaluated utilizing several factors including length of time a receivable is
past due, changes in the customer’s creditworthiness, customer’s payment
history, the length of the customer’s relationship with the Company, current
industry trends and the current economic climate.




- 9
-




ABOVENET,
INC. AND SUBSIDIARIES




NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(in
millions, except share and per share information)





Property
and Equipment




Property
and equipment owned at the Effective Date are stated at their estimated fair
values as of the Effective Date based on the Company’s reorganization value, net
of accumulated depreciation and amortization incurred since the Effective
Date.  Purchases of property and equipment subsequent to the Effective
Date are stated at cost, net of depreciation and amortization.  Major
improvements are capitalized, while expenditures for repairs and maintenance are
expensed when incurred.  Costs incurred prior to a capital project’s
completion are reflected as construction in progress and are part of network
infrastructure assets, as described below and included in property and equipment
on the respective balance sheets.  At September 30, 2010 and December
31, 2009, the Company had $40.7 and $26.9, respectively, of construction in
progress.  Certain internal direct labor costs of constructing or
installing property and equipment are capitalized.  Capitalized direct
labor is determined based upon a core group of project managers, field
engineers, network infrastructure engineers and equipment
engineers.  Capitalized direct labor is based upon time spent on
capitalized projects and consists of salary, plus related
benefits.  These individuals’ capitalized labor costs are directly
associated with the construction and installation of network infrastructure and
equipment and customer installations.  The salaries and related
benefits of non-engineers and supporting staff that are part of the operations
and engineering departments are not considered part of the pool subject to
capitalization.  Capitalized direct labor amounted to $2.0 and $2.8
for the three months ended September 30, 2010 and 2009, respectively, and
$7.8 and $8.4 for the nine months ended September 30, 2010 and 2009,
respectively.  Depreciation and amortization is provided on a
straight-line basis over the estimated useful lives of the assets, with the
exception of leasehold improvements, which are amortized over the lesser of the
estimated useful lives or the term of the lease.





Estimated
useful lives of the Company’s property and equipment are as
follows:




Network
      infrastructure assets and storage huts (except for risers, which are 5
      years)
                        20
      yearsHVAC
      and power equipment
                        
                        
                        12
      to 20 yearsSoftware
      and computer equipment
                        
                        
                        3
      to 4 yearsTransmission
      and IP equipment
                        
                        
                        5
      to 7 yearsFurniture,
      fixtures and equipment
                        
                        
                        3
      to 10 yearsLeasehold
      improvements
                        
                        Lesser
      of estimated useful life or the lease
term





When
property and equipment is retired or otherwise disposed of, the cost and
accumulated depreciation is removed from the accounts, and resulting gains or
losses are reflected in net income.




From time
to time, the Company is required to replace or re-route existing fiber due to
structural changes such as construction and highway expansions, which is defined
as “relocation.”  In such instances, the Company fully depreciates the
remaining carrying value of network infrastructure removed or rendered unusable
and capitalizes the costs of the new fiber and associated construction placed
into service.  In certain circumstances, the local municipality or
agency is responsible for some or all of such amounts.  The Company
records its share of relocation costs in property and equipment and records the
third party portion of such costs as accounts receivable.  The Company
capitalized relocation costs amounting to $0.6 and $0.9 for the three months
ended September 30, 2010 and 2009, respectively, and $1.0 and $2.6 for the nine
months ended September 30, 2010 and 2009, respectively.  The Company
fully depreciated the remaining carrying value of the network infrastructure
rendered unusable, which on an original cost basis, totaled $0.09 and $0.14
($0.06 and $0.10 on a net book value basis) for the three and nine months ended
September 30, 2010, respectively, and, which on an original cost basis, totaled
$0.10 and $0.30 ($0.06 and $0.20 on a net book value basis) for the three and
nine months ended September 30, 2009, respectively.  To the extent
that relocation requires only the movement of existing network infrastructure to
another location, the related costs are included in the Company’s results of
operations.


In
accordance with SFAS No. 34, “Capitalization of Interest Cost,” (now known as
FASB ASC 835-20), interest on certain construction projects would be
capitalized.  Such amounts were considered immaterial, and
accordingly, no such amounts were capitalized during the three and nine months
ended September 30, 2010 and 2009.




- 10
-




ABOVENET,
INC. AND SUBSIDIARIES




NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(in
millions, except share and per share information)





In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” (now known as FASB ASC 360-10-35), the Company periodically
evaluates the recoverability of its long-lived assets and evaluates such assets
for impairment whenever events or circumstances indicate that the carrying
amount of such assets (or group of assets) may not be
recoverable.  Impairment is determined to exist if the estimated
future undiscounted cash flows are less than the carrying value of such
asset.  The Company considers various factors to determine if an
impairment test is necessary.  The factors include: consideration of
the overall economic climate, technological advances with respect to equipment,
its strategy and capital planning.  Since June 30, 2006, no event has
occurred nor has the business environment changed to trigger an impairment test
for assets in revenue service and operations.  The Company also
considers the removal of assets from the network as a triggering event for
performing an impairment test.  Once an item is removed from service,
unless it is to be redeployed, it may have little or no future cash flows
related to it.  The Company performed annual physical counts of such
assets that are not in revenue service or operations (e.g., inventory, primarily
spare parts) at September 30, 2010 and 2009.  With the assistance of a
valuation report of the assets in inventory, prepared by an independent
third party on a basis consistent with SFAS No. 157, “Fair Value
Measurements,” (now known as FASB ASC 820-10), and pursuant to FASB ASC
360-10-35, the Company determined that the fair value of certain of these assets
was less than the carrying value and accordingly, recorded a provision for
equipment impairment of $0.4 for the year ended December 31,
2009.  The Company also recorded a provision for equipment impairment
of $0.8 in the year ended December 31, 2009 to record the loss in value of
certain equipment, most of which was eventually sold to an unaffiliated third
party.  See Note 3, “Change in Estimate.”  For the nine
months ended September 30, 2010, the Company provided allowances for impairment
of $0.4, of which $0.2 was recorded in the three months ended September 30,
2010.  For the nine months ended September 30, 2009, the Company
provided allowances for impairment of $0.5, none of which was recorded in the
three months ended September 30, 2009.





Treasury
Stock




Treasury
stock is accounted for under the cost method.





Asset
Retirement Obligations




In
accordance with SFAS No. 143, “Accounting for Asset Retirement
Obligations,” (now known as FASB ASC 410-20), the Company recognizes the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred if a reasonable estimate of fair value can be
made.  The Company has asset retirement obligations related to the
de-commissioning and removal of equipment, restoration of leased facilities and
the removal of certain fiber and conduit systems.  Considerable
management judgment is required in estimating these
obligations.  Important assumptions include estimates of asset
retirement costs, the timing of future asset retirement activities and the
likelihood of contractual asset retirement provisions being
enforced.  Changes in these assumptions based on future information
could result in adjustments to these estimated liabilities.





Asset
retirement obligations are generally recorded as “other long-term liabilities,”
are capitalized as part of the carrying amount of the related long-lived assets
included in property and equipment, net, and are depreciated over the life of
the associated asset.  Asset retirement obligations aggregated $7.7
and $7.3 at September 30, 2010 and December 31, 2009, respectively, of which
$4.2 and $4.0 were included in “Accrued expenses,” and $3.5 and $3.3 were
included in “Other long-term liabilities” at such dates.  Accretion
expense, which is included in “Interest expense,” amounted to $0.07 and $0.10
for the three months ended September 30, 2010 and 2009, respectively, and
$0.21 and $0.20 for the nine months ended September 30, 2010 and 2009,
respectively.




- 11
-




ABOVENET,
INC. AND SUBSIDIARIES




NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(in
millions, except share and per share information)





Income
Taxes




The
Company accounts for income taxes in accordance with SFAS No. 109, “Accounting
for Income Taxes,” (now known as FASB ASC 740).  Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between financial statement carrying amounts of existing assets and
liabilities and their respective tax basis, net operating losses and tax credit
carryforwards, and tax contingencies.  Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled.  After an evaluation of the realizability of the
Company’s deferred tax assets, the Company reduced its valuation allowance by
$183.0 during the fourth quarter of 2009.  See Note 5, “Income Taxes,”
for a further discussion of the Company’s provision for income
taxes.





The
Company is subject to audits by various taxing authorities, and these audits may
result in proposed assessments where the ultimate resolution results in the
Company owing additional taxes.  The Company is required to establish
reserves under FASB Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes,” (now known as FASB ASC 740-10), when the Company believes there is
uncertainty with respect to certain positions and the Company may not succeed in
realizing the tax benefit.  The Company believes that its tax return
positions are appropriate and supportable under relevant tax law.  The
Company has evaluated its tax positions for items of uncertainty in accordance
with FASB ASC 740-10 and has determined that its tax positions are highly
certain within the meaning of FASB ASC 740-10.  The Company believes
the estimates and assumptions used to support its evaluation of tax benefit
realization are reasonable.  Accordingly, no adjustments have been
made to the consolidated financial statements for the three and nine months
ended September 30, 2010 and 2009.  The provision for income taxes,
income taxes payable and deferred income taxes are provided for in accordance
with the liability method.  Deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax basis of
assets and liabilities and are measured by applying enacted tax rates and laws
to taxable years in which such differences are expected to reverse.





The
Company’s reorganization resulted in a significantly modified capital structure
as a result of applying fresh-start accounting in accordance with FASB ASC
852-10 on the Effective Date.  Fresh start accounting has important
consequences on the accounting for the realization of valuation allowances,
related to net deferred tax assets that existed on the Effective Date but which
arose in pre-emergence periods.  Prior to 2009, fresh start accounting
required the reversal of these allowances to be recorded as a reduction of
intangible assets until exhausted and thereafter as additional paid in
capital.  Beginning in 2009, in accordance with SFAS141(R), “Business
Combinations (Revised),” (now known as FASB ASC 805), future utilization of such
benefit will reduce income tax expense.  This treatment does not
result in any change in liabilities to taxing authorities or in cash
flows.





Undistributed
earnings of the Company’s foreign subsidiaries are considered to be indefinitely
reinvested and therefore, no provision for domestic taxes has been provided
thereon.  Upon repatriation of those earnings, in the form of
dividends or otherwise, the Company would be subject to domestic income taxes,
offset (all or in part) by foreign tax credits, related to income and
withholding taxes payable to the various foreign
countries.  Determination of the amount of unrecognized deferred
domestic income tax liability is not practicable due to the complexities
associated with its hypothetical calculation; however, unrecognized foreign tax
credit carryforwards would be available to reduce some portion of the domestic
liability.




The
Company’s policy is to recognize interest and penalties accrued as a component
of operating expense.  As of the date of adoption of FASB ASC 740-10,
the Company did not have any accrued interest or penalties associated with any
unrecognized income tax benefits, nor was any interest expense recognized during
the three and nine months ended September 30, 2010 and 2009.




- 12
-




ABOVENET,
INC. AND SUBSIDIARIES




NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(in
millions, except share and per share information)





Foreign
Currency Translation and Transactions




The
Company’s functional currency is the U.S. dollar.  For those
subsidiaries not using the U.S. dollar as their functional currency, assets and
liabilities are translated at exchange rates in effect at the balance sheet date
and income and expense transactions are translated at average exchange rates
during the period.  Resulting translation adjustments are recorded
directly to a separate component of shareholders’ equity and are reflected in
the accompanying consolidated statements of comprehensive income.  The
Company’s foreign exchange transaction gains (losses) are generally included in
“other income (expense), net” in the consolidated statements of
operations.





Stock
Options




On
September 8, 2003, the Company adopted the fair value provisions of SFAS No.
148, “Accounting for Stock-Based Compensation Transition and Disclosure,” (“SFAS
No. 148”), (now known as FASB ASC 718-10).  SFAS No. 148
amended SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS
No. 123”), (also now known as FASB ASC 718-10), to provide alternative
methods of transition to SFAS No. 123’s fair value method of accounting for
stock-based employee compensation.  See Note 7, “Stock-Based
Compensation.”





Under the
fair value provisions of SFAS No. 123, the fair value of each stock-based
compensation award is estimated at the date of grant, using the Black-Scholes
option pricing model for stock option awards.  The Company did not
have a historical basis for determining the volatility and expected life
assumptions in the model due to the Company’s limited market trading history;
therefore, the assumptions used for these amounts are an average of those used
by a select group of related industry companies.  Most stock-based
awards have graded vesting (i.e. portions of the award vest at different dates
during the vesting period).  The Company recognizes the related
stock-based compensation expense of such awards on a straight-line basis over
the vesting period for each tranche in an award.  Upon consummation of
the Company’s Plan of Reorganization, all then outstanding stock options were
cancelled.





Effective
January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based
Payment,” (“SFAS No. 123(R)”), (now known as FASB ASC 718), using the
modified prospective method.  SFAS No. 123(R) requires all
share-based awards granted to employees to be recognized as compensation expense
over the vesting period, based on fair value of the award.  The fair
value method under SFAS No. 123(R) is similar to the fair value method
under SFAS No. 123 with respect to measurement and recognition of
stock-based compensation expense except that SFAS No. 123(R) requires an
estimate of future forfeitures, whereas SFAS No. 123 allowed companies to
estimate forfeitures or recognize the impact of forfeitures as they
occur.  As the Company recognized the impact of forfeitures as they
occurred under SFAS No. 123, the adoption of SFAS No. 123(R) did
result in different accounting treatment, but it did not have a material impact
on the Company’s consolidated financial statements.





There
were no options to purchase shares of common stock granted during the three and
nine months ended September 30, 2010 and 2009.





Restricted
Stock Units




Compensation
cost for restricted stock unit awards that are not performance-based is measured
based upon the quoted closing market price for the Company’s stock on the date
of grant.  The related compensation cost is recognized on a straight-line
basis over the vesting period.  Compensation expense for
performance-based restricted stock unit awards is measured based upon the quoted
market price for the Company’s stock on the date that the performance targets
have been established and communicated to the grantee.  Related
compensation cost is recognized based upon a review of the performance targets
and determination that such performance targets have been achieved, on a
straight-line basis over the vesting period.  See Note 7, “Stock-Based
Compensation.”




- 13
-




ABOVENET,
INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(in
millions, except share and per share information)





Stock
Warrants




In
connection with the Plan of Reorganization described in Note 1, “Background and
Organization,” the Company issued to holders of general unsecured claims as part
of the settlement of such claims (i) five year warrants to purchase
1,418,918 shares of common stock with an exercise price of $10.00 per share
(expired September 8, 2008) and (ii) seven year warrants to purchase
1,669,316 shares of common stock with an exercise price of $12.00 per share
(expired September 8, 2010).  The stock warrants were treated as
equity upon their exercise based upon the terms of the warrant and cash
received.  Seven year stock warrants to purchase 858,530 and 404,208
shares of common stock were exercised during the nine months ended September 30,
2010 and 2009, respectively, of which 420,896 and 390,586 shares of common stock
were exercised during the three months ended September 30, 2010 and
2009.





Under the terms of the five
year and seven year warrant agreements (collectively, the “Warrant Agreements”),
if the market price of the Company’s common stock, as defined in the Warrant
Agreements, 60 days prior to the expiration date of the respective warrants, was
greater than the warrant exercise price, the Company was required to give each
warrant holder notice that at the warrant expiration date, thewarrants would bedeemed to have been
exercised pursuant to the net exercise provisions of the respective Warrant
Agreements (the “Net Exercise”), unless the warrant holder elected, by written
notice, to not exercise its warrants.  Under the Net Exercise, shares
issued to the warrant holders would be reduced by the number of shares necessary
to cover the aggregate exercise price of the shares, valuing such shares at the
current market price, as defined in the Warrant Agreements.  Any
fractional shares, otherwise issuable, would be paid in cash.At September 8,
2010, the expiration date of the seven year warrants, the required conditions
were met for the Net Exercise and accordingly, seven year warrants to purchase
13,626 shares of common stock were exercised at expiration, of which 10,409
shares were issued to warrant holders and 3,217 shares were returned to treasury
and $0.004 was paid to recipients for fractional shares.  In total,
seven year warrants to purchase 443,504 shares of common stock were deemed
exercised on a net exercise basis, of which 353,598 shares were issued to the
warrant holders, 89,906 shares were returned to treasury and $0.004 was paid to
recipients for fractional shares.  In addition, seven year warrants to
purchase 26 shares of common stock were determined to be undeliverable and were
cancelled.




Derivative
Financial Instruments




The
Company utilizes derivative financial instruments known as interest rate swaps
(“derivatives”) to mitigate its exposure to interest rate risk.  The
Company purchased the first interest rate swap on August 4, 2008 to hedge the
interest rate on the $24.0 (original principal) portion of the Term Loan (as
such term is defined in Note 4, “Note Payable”) and the Company purchased a
second interest rate swap on November 14, 2008 to hedge the interest rate on the
additional $12.0 (original principal) portion of the Term Loan provided by
SunTrust Bank.  The Company accounted for the derivatives under SFAS
No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (now
known as FASB ASC 815).  FASB ASC 815 requires that all derivatives be
recognized in the financial statements and measured at fair value regardless of
the purpose or intent for holding them.  By policy, the Company has
not historically entered into derivatives for trading purposes or for
speculation.  Based on criteria defined in FASB ASC 815, the interest
rate swaps were considered cash flow hedges and were 100%
effective.  Accordingly, changes in the fair value of derivatives are,
and will be, recorded each period in accumulated other comprehensive
loss.  Changes in the fair value of the derivatives reported in
accumulated other comprehensive loss will be reclassified into earnings in the
period in which earnings are impacted by the variability of the cash flows of
the hedged item.  The ineffective portion of all hedges, if any, is
recognized in current period earnings.  The unrealized net loss
recorded in accumulated other comprehensive loss at September 30, 2010 and
December 31, 2009 was $0.8 and $1.2, respectively, for the interest rate
swaps.  The mark-to-market value of the cash flow hedges will be
recorded in current assets, current liabilities, other non-current assets or
other long-term liabilities, as applicable, and the offsetting gains or losses
in accumulated other comprehensive loss.





On
January 1, 2009, the Company adopted SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement No. 133,”
(now known as FASB ASC 815-10).  FASB ASC 815-10 changes the
disclosure requirements for derivatives and hedging
activities.  Entities are required to provide enhanced disclosures
about (i) how and why an entity uses derivatives; (ii) how derivatives and
related hedged items are accounted for under FASB ASC 815; and (iii) how
derivatives and related hedged items affect an entity’s financial position and
cash flows.




- 14
-




ABOVENET,
INC. AND SUBSIDIARIES




NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(in
millions, except share and per share information)





The
Company minimizes its credit risk relating to counterparties of its derivatives
by transacting with multiple, high-quality counterparties, thereby limiting
exposure to individual counterparties, and by monitoring the financial condition
of its counterparties.





All
derivatives were recorded on the Company’s consolidated balance sheets at fair
value.  Accounting for the gains and losses resulting from changes in
the fair value of derivatives depends on the use of the derivative and whether
it qualifies for hedge accounting in accordance with FASB ASC 815.  At
September 30, 2010, the Company’s consolidated balance sheet included net
interest rate swap derivative liabilities of $0.8, of which $0.6 is included in
“Accrued expenses,” and $0.2 is included in “Other long-term liabilities,” and
at December 31, 2009, the Company’s consolidated balance sheet included net
interest rate swap derivative liabilities of $1.2, which is included in “Other
long-term liabilities.”





Derivatives
recorded at fair value in the Company’s consolidated balance sheets as of
September 30, 2010 and December 31, 2009 consisted of the
following:





Derivative
      LiabilitiesDerivatives
      designated as hedging instruments
            
            September
      30, 2010
            
            
            December
      31, 2009Interest
      rate swap agreement expiring August 1, 2011 (*)
            
            $
            0.6
            
            
            $
            0.9Interest
      rate swap agreement expiring November 1, 2011 (*)
            
            $
            0.2
            
            
            $
            0.3Total
      derivatives designated as hedging instruments
            
            $
            0.8
            
            
            $
            1.2





(*)
            The
      derivative liabilities are two interest rate swap agreements each with
      original three year terms.  The interest rate swap agreement
      expiring August 1, 2011 is included in “Accrued expenses,” and the
      interest rate swap agreement expiring November 1, 2011 is included in
      “Other long-term liabilities,” in the Company’s consolidated balance sheet
      at September 30, 2010.





Interest
Rate Swap Agreements




The
notional amounts provide an indication of the extent of the Company’s
involvement in such agreements but do not represent its exposure to market
risk.  The following table shows the notional amount outstanding,
maturity date, and the weighted average receive and pay rates of the interest
rate swap agreement as of September 30, 2010.




Weighted
      Average RateNotional
      Amount
            
            Maturity
      Date
            
            Pay
            
            Receive$19.7
            
            August
      2011
            
            3.65%
            
            0.77%9.8
            
            November
      2011
            
            2.635%
            
            0.42%$29.5




Interest
expense under these agreements, and the respective debt instruments that they
hedge, are recorded at the net effective interest rate of the hedged
transaction.





The
notional amounts of the swap arrangements have since been reduced by amounts
corresponding to reductions in the outstanding principal balances.




- 15
-




ABOVENET,
INC. AND SUBSIDIARIES




NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(in
millions, except share and per share information)





Fair
Value of Financial Instruments




The
Company adopted SFAS No. 157, “Fair Value Measurements,” (now known as FASB ASC
820-10), for the Company’s financial assets and liabilities effective January 1,
2008.  This pronouncement defines fair value, establishes a framework
for measuring fair value, and requires expanded disclosures about fair value
measurements.  FASB ASC 820-10 emphasizes that fair value is a
market-based measurement, not an entity-specific measurement, and defines fair
value as the price that would be received to sell an asset or transfer a
liability in an orderly transaction between market participants at the
measurement date.  FASB ASC 820-10 discusses valuation techniques,
such as the market approach (comparable market prices), the income approach
(present value of future income or cash flow) and the cost approach (cost to
replace the service capacity of an asset or replacement cost), which are each
based upon observable and unobservable inputs.  Observable inputs
reflect market data obtained from independent sources, while unobservable inputs
reflect the Company’s market assumptions. FASB ASC 820-10 utilizes a fair value
hierarchy that prioritizes inputs to fair value measurement techniques into
three broad levels:




Level
      1:
            Observable
      inputs such as quoted prices for identical assets or liabilities in active
      markets.Level
      2:
            Observable
      inputs other than quoted prices that are directly or indirectly observable
      for the asset or liability, including quoted prices for similar assets or
      liabilities in active markets; quoted prices for similar or identical
      assets or liabilities in markets that are not active; and model-derived
      valuations whose inputs are observable or whose significant value drivers
      are observable.Level
      3:
            Unobservable
      inputs that reflect the reporting entity’s own
  assumptions.





The
Company’s investment in overnight money market institutional funds, which
amounted to $180.9 and $154.1 at September 30, 2010 and December 31, 2009,
respectively, is included in cash and cash equivalents on the accompanying
balance sheets and is classified as a Level 1 asset.





The
Company is party to two interest rate swaps, which are utilized to modify the
Company’s interest rate risk.  The Company recorded the mark-to-market
value of the interest rate swap contracts of $0.8 (of which $0.6 is
included in “Accrued expenses” and $0.2 is included in “Other long-term
liabilities”) in the Company’s consolidated balance sheet at September 30, 2010,
and $1.2 (which is included in “Other long-term liabilities”) in the Company’s
consolidated balance sheet at December 31, 2009.  The Company used
third parties to value each of the interest rate swap agreements at September
30, 2010 and December 31, 2009, as well as its own market analysis to determine
fair value.  The fair value of the interest rate swap contracts
are classified as Level 2 liabilities.




The
Company’s consolidated balance sheets include the following financial
instruments: short-term cash investments, trade accounts receivable, trade
accounts payable and note payable.  The Company believes the carrying
amounts in the financial statements approximate the fair value of these
financial instruments due to the relatively short period of time between the
origination of the instruments and their expected realization or the interest
rates which approximate current market rates.




- 16
-




ABOVENET,
INC. AND SUBSIDIARIES





NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(in
millions, except share and per share information)





Concentration
of Credit Risk




Financial
instruments which potentially subject the Company to concentration of credit
risk consist principally of temporary cash investments and accounts
receivable.  The Company does not enter into financial instruments for
trading or speculative purposes.  The Company’s cash and cash
equivalents are invested in investment-grade, short-term investment instruments
with high quality financial institutions.  The Company’s trade
receivables, which are unsecured, are geographically dispersed, and no single
customer accounts for greater than 10% of consolidated revenue or accounts
receivable, net.  The Company performs ongoing credit evaluations of
its customers’ financial condition.  The allowance for non-collection
of accounts receivable is based upon the expected collectability of all accounts
receivable.  The Company places its cash and cash equivalents
primarily in commercial bank accounts in the U.S.  Account balances
generally exceed federally insured limits.





401(k) and
Other Post-Retirement Benefits




The
Company has a Profit Sharing and 401(k) Plan (the “Plan”) for its
employees in the U.S., which permits employees to make contributions to the Plan
on a pre-tax salary reduction basis in accordance with the provisions of the
Internal Revenue Code and permits the employer to provide discretionary
contributions.  All full-time U.S. employees are eligible to
participate in the Plan at the beginning of the month following three months of
service.  Eligible employees may make contributions subject to the
limitations defined by the Internal Revenue Code.  The Company matches
50% of a U.S. employee’s contributions, up to the amount set forth in the
Plan.  Matched amounts vest based upon an employee’s length of
service.  The Company’s subsidiaries in the U.K. have a different plan
under which contributions are made up to a maximum of 8% when U.K. employee
contributions reach 5% of salary.  Under the U.K. plan, contributions
are made at two levels.  When a U.K. employee contributes 3% or more
but less than 5% of their salary to the plan, the Company’s contribution is
fixed at 5% of the salary.  When a U.K. employee contributes over 5%
of their salary to the plan, the Company’s contribution is fixed at 8% of the
salary (regardless of the percentage of the contribution in excess of
5%).





The
Company contributed $0.3 for each of the three months ended September 30, 2010
and 2009 and contributed $1.2 for each of the nine months ended September 30,
2010 and 2009, net of forfeitures for its obligations under these
plans.





Taxes
Collected from Customers




In
June 2006, the Emerging Issues Task Force (“EITF”) ratified the consensus
on EITF No. 06-3, “How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income Statement (That Is,
Gross versus Net Presentation),” (“EITF No. 06-3”), (now known as FASB ASC
605-45).  FASB ASC 605-45 requires that companies disclose their
accounting policies regarding the gross or net presentation of certain
taxes.  Taxes within the scope of FASB ASC 605-45 are any taxes
assessed by a governmental authority that are directly imposed on a
revenue-producing transaction between a seller and a customer and may include,
but are not limited to, sales, use, value added and some excise
taxes.  In addition, if such taxes are significant, and are presented
on a gross basis, the amounts of those taxes should be disclosed.  The
Company adopted EITF No. 06-3 effective January 1, 2007.  The Company
records Universal Service Fund (“USF”) contributions relating to certain
services it provides on a net basis in accordance with the guidelines of EITF
No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an
Agent,”  (also now known as FASB ASC 605-45).  The Company’s
policy is to record all such fees, contributions and taxes within the scope of
FASB ASC 605-45 on a net basis.





Reclassifications




Certain
reclassifications have been made to the consolidated financial statements for
the three and nine months ended September 30, 2009 to conform to the
classifications used for the three and nine months ended September 30,
2010.




- 17
-




ABOVENET,
INC. AND SUBSIDIARIES





NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(in
millions, except share and per share information)





Recently
Issued Accounting Pronouncements




During
the third quarter of 2009, the Company adopted the FASB Accounting Standards
Update No. 2009-01, “Amendments based on SFAS No. 168 - The  FASB Accounting
Standards Codification TM and the
Hierarchy of Generally Accepted Accounting Principles,” (the
“Codification”).  The Codification became the single source of
authoritative GAAP in the U.S., other than rules and interpretative releases
issued by the SEC.  The Codification reorganized GAAP into a topical
format that eliminates the previous GAAP hierarchy and instead established two
levels of guidance – authoritative and nonauthoritative.  All
non-grandfathered, non-SEC accounting literature that was not included in the
Codification became nonauthoritative.  The adoption of the
Codification did not change previous GAAP, but rather simplified user access to
all authoritative literature related to a particular accounting topic in one
place.  Accordingly, the adoption had no impact on the Company’s
financial position, results of operations or cash flows.  All
references to previous GAAP citations in the Company’s consolidated financial
statements have been updated for the new references under the
Codification.





In
September 2006, the FASB issued SFAS No. 157, “The Fair Value Measurements,”
(“SFAS No. 157”), (now known as FASB ASC 820-10), effective for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal
years.  FASB ASC 820-10 establishes a framework for measuring fair
value under accounting principles generally accepted in the U.S. and expands
disclosures about fair value measurement.  In February 2008, the FASB
deferred the adoption of SFAS No. 157 as provided by FASB Staff Position
No. FAS 157-2, (also now known as FASB ASC 820-10), for one year as it
applies to certain items, including assets and liabilities initially measured at
fair value in a business combination, reporting units and certain assets and
liabilities measured at fair value in connection with goodwill impairment tests
in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” (now
known as FASB ASC 350), and long-lived assets measured at fair value for
impairment assessments under SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets,” (now known as FASB ASC 360-10-35). 
The Company adopted this statement on January 1, 2008 with respect to its
financial assets and liabilities, as discussed above.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities,” (now known as FASB ASC
825).  FASB ASC 825 gives entities the option to carry most financial
assets and liabilities at fair value, with changes in fair value recorded in
earnings.  This statement, which was effective in the first quarter of
fiscal 2009, did not have a material impact on the Company’s consolidated
financial position, results of operations or cash flows.





In
December 2007, the SEC issued SAB No. 110, “Certain Assumptions Used in
Valuation Methods – Expected Term,” (now known as FASB ASC
718-10).  FASB ASC 718-10 allows companies to continue to use the
simplified method, as defined in SAB No. 107, “Share-Based Payment,” (also now
known as FASB ASC 718-10), to estimate the expected term of stock options under
certain circumstances.  The simplified method for estimating expected
term uses the mid-point between the vesting term and the contractual term of the
stock option.  The Company has analyzed the circumstances in which the
use of the simplified method is allowed.  The Company has opted to use
the simplified method for stock options it granted in 2008 because management
believes that the Company does not have sufficient historical exercise data to
provide a reasonable basis upon which to estimate the expected term due to the
limited period of time the Company’s shares of common stock have been publicly
traded.  There were no options to purchase shares of common stock
granted during the three and nine months ended September 30, 2010 and
2009.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities – an amendment of FASB Statement No. 133,” (“SFAS No.
161”), (now known as FASB ASC815), which requires additional disclosures about
the objectives of using derivative instruments, the method by which the
derivative instruments and related hedged items are accounted for under FASB
Statement No. 133, (also now known as FASB ASC 815) and its related
interpretations; and the effect of derivative instruments and related hedged
items on financial position, financial performance and cash
flows.  This statement also requires disclosure of the fair values of
derivative instruments and their gains and losses in a tabular
format.  This statement is effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008, with
early adoption encouraged. The adoption of this statement did not have a
material impact on the Company’s financial position, results of operations or
cash flows.




- 18
-




ABOVENET,
INC. AND SUBSIDIARIES





NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(in
millions, except share and per share information)





In April
2008, the FASB issued EITF No. 07-5, “Determining Whether an Instrument (or
Embedded Feature) Is Indexed to an Entity’s Own Stock,” (“EITF No. 07-5”), (now
known as FASB ASC 815-40).  FASB ASC 815-40 provides guidance on
determining what types of instruments or embedded features in an instrument held
by a reporting entity can be considered indexed to its own stock for the purpose
of evaluating the first criteria of the scope exception in paragraph 11 (a) of
SFAS No. 133.  This issue is effective for financial statements issued
for fiscal years beginning after December 15, 2008 and early application is not
permitted.  The adoption of this issue did not have a material impact
on the Company’s financial position, results of operations or cash
flows.





In June
2008, the FASB issued EITF No. 08-3, “Accounting by Lessees for Maintenance
Deposits under Lease Agreements,” (“EITF No. 08-3”), (now known as FASB ASC
840-10).  FASB ASC 840-10 mandates that all nonrefundable maintenance
deposits should be accounted for as a deposit.  When the underlying
maintenance is performed, the deposit is expensed or capitalized in accordance
with the lessee’s maintenance accounting policy.  This issue is
effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2008.  The adoption of this issue did not
have a material impact on the Company’s financial position, results of
operations or cash flows.





In June
2008, the FASB issued EITF No. 03-6-1, “Determining Whether Instruments Granted
in Shared-Based Payment Transactions are Participating Securities,” (“EITF No.
03-6-1”), (now known as FASB ASC 260-10).  FASB ASC 260-10 provides
that unvested share-based payment awards that contain non-forfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are participating
securities and shall be included in the computation of earnings per share
pursuant to the two-class method.  This issue is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years.  Upon adoption, a
company is required to retrospectively adjust its earnings per share date
(including any amounts related to interim periods, summaries of earnings and
selected financial data) to conform to provisions of FASB ASC
260-10.  The adoption of this issue did not have a material impact on
the Company’s financial position, results of operations or cash
flows.





In April
2009, the FASB issued Staff Position No. FAS 107-1 and APB 28-1, “Interim
Disclosures about Fair Value of Financial Instruments,” (“FSP No. FAS 107-1
and APB 28-1”), (now known as FASB ASC 825).  This
statement amends SFAS No. 107, “Disclosures about Fair Value of
Financial Instruments,” (now known as FASB ASC 825-10), to require disclosures
about fair value of financial instruments in interim as well as in annual
financial statements.  This statement also amends APB Opinion No. 28,
“Interim Financial Reporting,” (now known as FASB ASC 270-10-50), to
require those disclosures in all interim financial results, financial position
and financial statement disclosures.  This statement became effective
for the Company for the three months ended June 30, 2009.  This
statement did not have a material impact on the Company’s financial position,
results of operations or cash flows.





In May
2009, the FASB issued SFAS No. 165, "Subsequent Events," ("SFAS No. 165"), (now
known as FASB ASC 855-10), effective for interim or annual financial periods
ending after June 15, 2009.  For calendar year entities, SFAS No. 165
became effective for the three months ended June 30, 2009.  The
objective of FASB ASC 855-10 is to establish general standards of accounting for
and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued.  In
particular, FASB ASC 855-10 sets forth (1) the period after the balance sheet
date during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements; (2) the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements; and (3) the disclosures that an entity should make about
events or transactions that occurred after the balance sheet
date.  The adoption of this statement did not have a material impact
on the Company’s financial position, results of operations or cash
flows.





In August
2009, the FASB issued ASU No. 2009-5, "Fair Value Measurements and Disclosures
(Topic 820) - Measuring Liabilities at Fair Value."  ASU No. 2009-5
provides clarification that in circumstances in which a quoted price in an
active market for the identical liability is not available, a reporting entity
is required to measure fair value using a valuation technique that uses the
quoted price of the identical liability when traded as an asset, quoted prices
for similar liabilities or similar liabilities when traded as assets, or another
valuation technique that is consistent with the principles of ASC Topic
820.  ASU No. 2009-5 is effective for the first reporting period
(including interim periods) beginning after issuance.  The adoption of
ASU No. 2009-5 did not have a material impact on the Company’s financial
position, results of operations or cash flows.




- 19
-




ABOVENET,
INC. AND SUBSIDIARIES





NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(in
millions, except share and per share information)





In
October 2009, the FASB issued ASU No. 2009-13, "Revenue Recognition (Topic 605)
- Multiple Deliverable Revenue Arrangements." ASU No. 2009-13 eliminates the
residual method of allocation and requires that arrangement consideration be
allocated at the inception of the arrangement to all deliverables using the
relative selling price method and expands the disclosures related to
multiple-deliverable revenue arrangements.  ASU No. 2009-13 is
effective prospectively for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010, with earlier
adoption permitted.  The adoption of ASU No. 2009-13 did not have a
material impact on the Company’s financial position, results of operations or
cash flows.





In
January 2010, the FASB issued ASU No. 2010-02, "Consolidation (Topic 810) -
Accounting and Reporting for Decreases in Ownership of a Subsidiary - a Scope
Clarification." ASU No. 2010-02 clarifies that the scope of the decrease in
ownership provisions of Topic 810 applies to a subsidiary or group of assets
that is a business, a subsidiary that is a business that is transferred to an
equity method investee or a joint venture or an exchange of a group of assets
that constitutes a business for a noncontrolling interest in an entity and does
not apply to sales in substance of real estate.  ASU No. 2010-02 is
effective as of the beginning of the period in which an entity adopts SFAS No.
160 or, if SFAS No. 160 has been previously adopted, the first interim or annual
period ending on or after December 15, 2009, applied retrospectively to the
first period that the entity adopted SFAS No. 160.  The adoption of
ASU No. 2010-02 did not have a material impact on the Company’s financial
position, results of operations or cash flows.





In
January 2010, the FASB issued ASU No. 2010-06, "Fair Value Measurements and
Disclosures (Topic 820) - Improving Disclosures about Fair Value
Measurements."  ASU 2010-06 requires new disclosures regarding
transfers in and out of the Level 1 and 2 and activity within Level 3 fair value
measurements and clarifies existing disclosures of inputs and valuation
techniques for Level 2 and 3 fair value measurements.  ASU 2010-06
also includes conforming amendments to employers' disclosures about
postretirement benefit plan assets.  The new disclosures and
clarifications of existing disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosure
of activity within Level 3 fair value measurements, which is effective for
fiscal years beginning after December 15, 2010, and for interim periods within
those years.  The adoption of ASU No. 2010-06 did not have a material
impact on the Company’s financial position, results of operations or cash
flows.





In
February 2010, the FASB issued ASU 2010-09, "Subsequent Events (Topic 855) -
Amendments to Certain Recognition and Disclosure Requirements."  ASU
2010-09 requires an entity that is an SEC filer to evaluate subsequent events
through the date that the financial statements are issued and removes the
requirement that an SEC filer disclose the date through which subsequent events
have been evaluated.  ASU 2010-09 was effective upon
issuance.  The adoption of ASU 2010-09 had no effect on the Company’s
financial position, results of operations or cash flows.





In April
2010, the FASB issued ASU 2010-13, "Compensation - Stock Compensation (Topic
718) - Effect of Denominating the Exercise Price of a Share-Based Payment Award
in the Currency of the Market in Which the Underlying Equity Security
Trades."  ASU 2010-13 provides amendments to Topic 718 to clarify that
an employee share-based payment award with an exercise price denominated in the
currency of a market in which a substantial portion of the entity's equity
securities trades should not be considered to contain a condition that is not a
market, performance, or service condition.  Therefore, an entity would
not classify such an award as a liability if it otherwise qualifies as
equity.  The amendments in ASU 2010-13 are effective for fiscal years,
and interim periods within those fiscal years, beginning on or after December
15, 2010.  The adoption of ASU 2010-13 will not have a material impact
on the Company’s financial position, results of operations or cash
flows.




- 20
-





ABOVENET,
INC. AND SUBSIDIARIES





NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(in
millions, except share and per share information)





NOTE
3: CHANGE IN ESTIMATE




Effective
January 1, 2008, the Company changed the estimated useful lives for its spare
parts (which are classified as inventory) from five years to the respective
asset class lives of such parts, which range from seven to twenty
years.  The effect of this change was not
material.  Effective October 1, 2009, the Company changed the
estimated useful lives for certain HVAC and power equipment from 20 years to 12
to 15 years and certain components of infrastructure (risers) from 20 years to 5
years.  Effective January 1, 2010, the Company changed the estimated
useful lives for its IP equipment from 7 years to 5
years.  Additionally, the Company changed the estimated useful lives
for certain capitalized labor from 20 years to 7 years.  The effect of
these changes on the Company’s future operating results will not be
material.





NOTE
4:  NOTE PAYABLE





Secured
Credit Facility





On
February 29, 2008, the Company, excluding certain foreign subsidiaries, entered
into a Credit and Guaranty Agreement (as amended, the “Credit Agreement”)
providing for a $60.0 senior secured credit facility (the “Secured Credit
Facility”), consisting of an $18.0 revolving credit facility (the “Revolver”)
and a $42.0 term loan facility (the “Term Loan”).  The initial lenders
under the Secured Credit Facility were Societe Generale and CIT Lending Services
Corporation.  The Secured Credit Facility is secured by substantially
all of the Company’s domestic assets.  The Term Loan was comprised of
$24.0, which was advanced at closing and up to $18.0 of which originally could
be drawn within nine months of closing at the Company’s option (the “Delayed
Draw Term Loan”).  In September 2008, the Delayed Draw Term Loan
option, which was originally scheduled to expire on November 25, 2008, was
extended to June 30, 2009 and then subsequently extended to December 31,
2009.  The Revolver and the Term Loan each have a term of five years
from the closing date of the Secured Credit Facility.  The Company
paid a non-refundable work fee of $0.1 to the lenders, which was credited
against the upfront fee of 1.5% ($0.9) of the total amount of the Secured Credit
Facility that was paid at closing and paid $0.3 to its unaffiliated third party
financial advisors who assisted the Company.  Additionally, the
Company is liable for an unused commitment fee of 0.75% per annum, which may be
reduced to 0.50% per annum, based upon the utilization of the
Revolver.  Interest accrues at LIBOR (30, 60, 90 or 180 day rates) or
at the announced base rate of the administrative agent at the Company’s option,
plus the applicable margins, as defined.  The Company has chosen 30
day LIBOR as the interest rate during the term of the interest rate swap (30 day
LIBOR was 0.25938% at September 30, 2010).  Additionally, the Company
was originally required to maintain an unrestricted cash balance at all times of
at least $20.0.  On February 29, 2008, the Company received proceeds
of $24.0, before the deduction of debt acquisition costs, under the Term
Loan.  As required under the provisions of the Term Loan, the initial
advance was at the base rate of interest, plus the margin (8.25% at February 29,
2008) and converted to LIBOR, plus 3.25% per annum (6.26%) on March 5,
2008.





The
Company’s ability to draw upon the available commitments under the Revolver is
subject to compliance with all of the covenants contained in the Credit
Agreement and the Company’s continued ability to make certain representations
and warranties.  Among other things, these covenants impose limits on
annual capital expenditures (through 2010), provide that the Company’s net total
funded debt ratio cannot at any time exceed a specified amount and require that
the Company maintain a minimum consolidated fixed charges coverage
ratio.  In addition, the Credit Agreement prohibits the Company from
paying dividends (other than in its own shares or other equity securities) and
from making certain other payments, including payments to acquire the Company’s
equity securities other than under specified circumstances, which include the
repurchase of the Company’s equity securities from employees and directors in an
aggregate amount not to exceed $15.0.  The Company was in compliance
with all of its debt covenants as of September 30, 2010.




- 21
-





ABOVENET,
INC. AND SUBSIDIARIES





NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(in
millions, except share and per share information)





On
September 26, 2008, the Company executed a joinder agreement to the Secured
Credit Facility that added SunTrust Bank as an additional lender and increased
the amount of the Secured Credit Facility to $90.0 effective October 1,
2008.  In connection with the joinder agreement, the Company paid a
$0.45 fee at closing and an aggregate of $0.25 of advisory fees.  The
availability under the Revolver increased to $27.0, the Term Loan increased to
$36.0 and the available Delayed Draw Term Loan increased to
$27.0.  The additional amount of the Term Loan of $12.0 was advanced
on October 1, 2008.





Effective
August 4, 2008, the Company entered into a swap arrangement under which it fixed
its borrowing costs with respect to the $24.0 (original principal) Term Loan
outstanding for three years at 3.65%, plus the applicable margin of 3.25%, which
was reduced to 3.00% on September 30, 2008 upon the filing of the Company’s
Annual Report on Form 10-K for the year ended December 31, 2007.





On
November 14, 2008, the Company entered into a swap arrangement under which it
fixed its borrowing costs with respect to the additional $12.0 (original
principal) under the Term Loan borrowed on October 1, 2008 for three years at
2.635% per annum, plus the applicable margin of 3.00%.





On June
29, 2009, the Company and the Lenders entered into an amendment to the Credit
Agreement, which extended the availability of the Delayed Draw Term Loan
commitments from June 30, 2009 to December 31, 2009, and provided for the
reduction of these commitments by $0.81 on each of June 30, 2009, September 30,
2009 and December 31, 2009.  In addition, the Company’s obligation to
maintain a minimum balance of $20.0 in cash deposits at all times was
eliminated.





On
December 31, 2009, the Company borrowed $24.57 under the Delayed Draw Term
Loan.  The borrowings under the Delayed Draw Term Loan bear interest
at 30 day LIBOR (0.25938% at September 30, 2010) plus the applicable margin of
3.00%.  The Delayed Draw Term Loan provides for monthly payments of
interest and quarterly payments of principal of $0.81, which commenced on March
31, 2010, increasing to $1.08 starting on June 30, 2012 with the balance of
$14.04, plus accrued interest due on February 28, 2013.





The Term
Loan provides for monthly payments of interest and quarterly installments of
principal of $1.08, which commenced on June 30, 2009.  The quarterly
installment of principal increased to $1.89 beginning March 31, 2010 to take
into consideration the Delayed Draw Term Loan repayment schedule.  The
aggregate quarterly principal repayment increases to $2.52 on June 30, 2012 with
the balance of $32.76, plus accrued unpaid interest, due on February 28,
2013.





The
Company executed a $1.0 standby letter of credit in favor of New York City to
secure the Company’s franchise agreement, which is collateralized by $1.0 of
availability under the Revolver.  The standby letter of credit,
originally scheduled to expire May 1, 2010, was renewed and extended until May
1, 2011.  At September 30, 2010, the Company had $26.0 available under
the Revolver.




- 22
-




ABOVENET,
INC. AND SUBSIDIARIES





NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(in
millions, except share and per share information)





NOTE
5:  INCOME TAXES





Income
taxes have been provided based upon the tax laws and rates in the countries in
which operations are conducted and income is earned.  The provision
for (benefit from) income taxes for the three and nine months ended September
30, 2010 and 2009 are as follows:




Three
      Months Ended September 30,
            
            
            Nine
      Months Ended September 30,2010
            
            
            2009
            
            
            2010
            
            
            2009Federal
            
            $
            9.1
            
            
            $
            —
            
            
            $
            26.2
            
            
            $
            (5.3
            )State
            
            
            1.9
            
            
            
            0.2
            
            
            
            4.6
            
            
            
            0.6Foreign
            
            
            0.7
            
            
            
            —
            
            
            
            1.6
            
            
            
            —Total
      provision for (benefit from) income taxes
            
            $
            11.7
            
            
            $
            0.2
            
            
            $
            32.4
            
            
            $
            (4.7
            )





At the
end of each interim period, the Company estimates the annual effective tax rate
and applies that rate to its ordinary quarterly earnings.  The tax expense
or benefit related to significant, unusual or extraordinary items that will be
separately reported or reported net of their related tax effect, are
individually computed and are recognized in the interim period in which those
items occur.  In addition, the effect of changes in enacted tax laws or
rates or tax status is recognized in the interim period in which the change
occurs.





The
computation of the annual estimated effective tax rate at each interim period
requires certain estimates and significant judgment including, but not limited
to, the expected operating income for the year, projections of the proportion of
income earned and taxed in various jurisdictions, permanent and temporary
differences, and the likelihood of recovering deferred tax assets generated in
the current year.  The accounting estimates used to compute the provision
for income taxes may change as new events occur, more experience is acquired,
additional information is obtained or as the tax environment
changes.




As part
of the Company’s evaluation of deferred tax assets in the fourth quarter of
2009, the Company recognized a tax benefit of $183.0 at December 31, 2009
relating to the reduction of certain valuation allowances previously established
in the U.S. and the U.K.  The Company believes it is more likely than
not that it will utilize these deferred tax assets to reduce or eliminate tax
payments in future periods.  This reduction in valuation allowances
had the effect of increasing net income by $183.0 for the year ended December
31, 2009.  The Company’s evaluation encompassed (i) a review of
its recent history of profitability in the U.S. and the U.K. for the past three
years; and (ii) a review of internal financial forecasts demonstrating its
expected capacity to utilize deferred tax assets.The Company reviews its deferred tax
assets and liabilities on a quarterly basis as part of its FASB ASC 740
review.Significant and continuous judgment of management is
required in determining the provision for income tax, deferred tax assets and
liabilities, and related valuation allowances established against the deferred
tax assets.  It is possible that the valuation allowances could be
further adjusted, as necessary, in the near term.




For the
three months ended September 30, 2010 and 2009, the effective income tax rates
were 40.5% and 0.9%, respectively. For the nine months ended
September 30, 2010 and 2009, the effective income tax rates
were 40.8% and (6.7)%, respectively.
  - 23
-





ABOVENET,
INC. AND SUBSIDIARIES





NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(in
millions, except share and per share information)





NOTE
6:  INCOME PER COMMON SHARE





Basic net
income per common share is computed as net income divided by the weighted
average number of common shares outstanding for the period.  Total
weighted average shares utilized in computing basic net income per common share
were 25,340,842 and 23,500,655 for the three months ended September 30, 2010 and
2009, respectively.  Total weighted average shares utilized in
computing diluted net income per common share were 26,249,408 and 25,612,176 for
the three months ended September 30, 2010 and 2009,
respectively.  Dilutive securities include options to purchase shares
of common stock, restricted stock units and stock warrants.  For both
the three months ended September 30, 2010 and 2009, there were no potentially
dilutive securities excluded from the calculation of diluted income per common
share.  For the nine months ended September 30, 2010 and 2009, total
weighted average shares utilized in computing basic net income per common share
were 25,144,979 and 23,151,861, respectively.  For the nine months
ended September 30, 2010 and 2009, total weighted average shares utilized in
computing diluted net income per common share were 26,225,131 and 25,230,937,
respectively.  For the nine months ended September 30, 2010, there
were no potentially dilutive securities excluded from the calculation of diluted
income per common share.  For the nine months ended September 30,
2009, potentially dilutive securities to acquire 12,900 shares of common stock
were excluded from the calculation of diluted income per share as they were
anti-dilutive.





NOTE
7:   STOCK-BASED COMPENSATION




2008
Equity Incentive Plan





On August
29, 2008, the Board of Directors of the Company approved the Company’s 2008
Plan.  The 2008 Plan is administered by the Company’s Compensation
Committee.  Any employee, officer, director or consultant of the
Company or subsidiary of the Company selected by the Compensation Committee is
eligible to receive awards under the 2008 Plan.  Stock options,
restricted stock, restricted and unrestricted stock units and stock appreciation
rights may be awarded to eligible participants on a stand alone, combination or
tandem basis.  1,500,000 shares of the Company’s common stock may be
issued pursuant to awards granted under the 2008 Plan.  The number of
shares available for grant and the terms of outstanding grants are subject to
adjustment for stock splits, stock dividends and other capital
adjustments.





Stock-based
compensation expense for each period relates to share-based awards granted
under the Company’s 2008 Plan described above and the Company’s 2003 Plan, and
reflect awards outstanding during such period, including awards granted both
prior to and during such period.  The 2003 Plan became effective on
September 8, 2003.  Under the 2003 Plan, the Company was
authorized to issue, in the aggregate, share-based awards of up to 2,129,912
common shares to employees, directors and consultants who are selected to
participate.  Under the 2003 Plan, as of September 30, 2010, 1,169,432
common shares had been issued pursuant to vested restricted stock units
(including shares repurchased by the Company), 788,710 shares had been issued
pursuant to options exercised to purchase common shares, 137,592 common shares
were reserved pursuant to outstanding options to purchase shares of common stock
and 34,178 common shares were cancelled.  No shares are available for
future grants under the 2003 Plan.





Under the
2008 Plan, as of September 30, 2010, 2,000 common shares had been issued
pursuant to the exercise of options to purchase shares of common stock, 307,862
common shares were issued pursuant to the delivery of vested restricted stock
units (including shares repurchased by the Company), 8,000 common shares were
reserved pursuant to outstanding options to purchase shares of common stock,
635,372 were reserved pursuant to outstanding restricted stock units and 546,766
common shares were reserved for future grants.




- 24
-





ABOVENET,
INC. AND SUBSIDIARIES





NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(in
millions, except share and per share information)





Stock
Options





There
were no options to purchase shares of common stock granted during the three and
nine months ended September 30, 2010 and 2009.





The
Company recognized non-cash stock-based compensation expense amounting to $0.1
for the nine months ended September 30, 2009 with respect to stock options
granted in prior periods.  The Company did not recognize stock-based
compensation expense for the three and nine months ended September 30, 2010 and
for the three months ended September 30, 2009.





Restricted
Stock Units





The
Company did not award any restricted stock units during the three and nine
months ended September 30, 2010 and 2009.  The Company recognized non-cash
stock-based compensation expense related to restricted stock units granted in
prior periods of $2.3 and $2.5 for the three months ended September 30, 2010 and
2009, respectively, which had the effect of decreasing net income by $0.05 per
basic and diluted common share for the three months ended September 30, 2010 and
by $0.11 per basic common share and by $0.10 per diluted common share for the
three months ended September 30, 2009.  The Company recognized
non-cash stock-based compensation expense related to restricted stock units of
$6.5 and $8.2 for the nine months ended September 30, 2010 and 2009,
respectively, which had the effect of decreasing net income by $0.15 per basic
and diluted common share for the nine months ended September 30, 2010 and by
$0.35 per basic common share and by $0.32 per diluted common share for the nine
months ended September 30, 2009.  Additionally, during the three
months ended March 31, 2010, the Company delivered 14,000 shares of common stock
to its Chief Executive Officer, William LaPerch, pursuant to vested
performance-based restricted stock units granted to him in September
2008.  In accordance with the terms of Mr. LaPerch’s stock unit
agreement, the Company purchased an aggregate of 5,459 shares of common stock
from Mr. LaPerch at $54.73 per share, the closing price of the Company’s common
stock on the date of delivery, in order to satisfy minimum tax withholding
obligations.





NOTE
8:   SHAREHOLDERS’ EQUITY





Stock
Split




On August
3, 2009, the Board of Directors of the Company authorized a two-for-one common
stock split, effected in the form of a 100% stock dividend, which was
distributed on September 3, 2009.  Each shareholder of record on
August 20, 2009 received one additional share of common stock for each share of
common stock held on that date.  All share and per share information
for prior periods, including warrants, options to purchase common shares,
restricted stock units, warrant and option exercise prices, shares reserved
under the 2003 Plan and the 2008 Plan, weighted average fair value of options
granted, common stock and additional paid-in capital accounts on the
consolidated balance sheets and consolidated statement of shareholders’ equity,
have been retroactively adjusted, where applicable, to reflect the two-for-one
stock split.





Amendment
to the Company’s Amended and Restated Certificate of Incorporation





On June
24, 2010, the Company’s stockholders approved an amendment to the Company’s
Amended and Restated Certificate of Incorporation (the “Amendment”) to increase
the number of authorized shares of our common stock, par value $0.01 per share,
from 30 million to 200 million.  The number of authorized shares of
preferred stock remained at 10 million.





The
increase in the number of our authorized shares of common stock could have an
anti-takeover effect by discouraging or hindering efforts to acquire control of
the Company.  The Company would be able to use the additional shares
to oppose a hostile takeover attempt or delay or prevent changes in control or
management of the Company.  This was not the intent of the Board of
Directors in adopting the Amendment, nor has the Amendment been adopted in
response to any known threat to acquire control of the Company.





The
increase in the authorized shares of common stock became effective upon the
filing of the Amendment with the Secretary of State of the State of Delaware on
June 24, 2010.




- 25
-




ABOVENET,
INC. AND SUBSIDIARIES





NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(in
millions, except share and per share information)





Rights
Agreement





On August
3, 2006, the Company entered into a Rights Agreement (the “Rights Agreement”)
with American Stock Transfer & Trust Company, as rights agent, which was
amended and restated on August 3, 2009 and subsequently amended as of January
26, 2010 (as amended, the “Amended and Restated Rights
Agreement”).  The Amended and Restated Rights Agreement was ratified
by the Company’s stockholders at its annual meeting on June 24,
2010.  As a result, the Rights (as defined below) under the Amended
and Restated Rights Agreement will remain in effect until August 7, 2012, unless
sooner terminated by the Company’s Board of Directors.  The following
description of the Amended and Restated Rights Agreement does not purport to be
complete and is qualified in its entirety by reference to the Amended and
Restated Rights Agreement included as Exhibit 4.1 to the Company’s Current
Report on Form 8-K filed with the SEC on August 3, 2009, and the Amendment to
Amended and Restated Rights Agreement, dated as of January 26, 2010, between
AboveNet, Inc. and American Stock Transfer & Trust Company, LLC
included as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with
the SEC on January 28, 2010.





In
connection with the initial Rights Agreement, the Company’s Board of Directors
declared a dividend distribution of one preferred share purchase right (a
“Right”) for each then outstanding share of the Company’s common stock, par
value $0.01 per share (the “Common Shares”).  The dividend was paid on
August 7, 2006 to the stockholders of record on that date.





Until the
earlier to occur of (i) the date that is 10 days following the date of a public
announcement that a person, entity or group of affiliated or associated persons
have acquired beneficial ownership of 15% or more of the outstanding Common
Shares (an “Acquiring Person”) or (ii) 10 business days (or such later date as
may be determined by action of the Company’s Board of Directors prior to such
time as any person or entity becomes an Acquiring Person) following the
commencement of, or announcement of an intention to commence, a tender offer or
exchange offer the consummation of which would result in any person or entity
becoming an Acquiring Person (the earlier of such dates being called the
“Distribution Date”), the Rights will be evidenced by the Common Share
certificates or book-entry shares.





The
Rights are not exercisable until the Distribution Date.  Each Right,
upon becoming exercisable, will entitle the holder to purchase from the Company
a specified fraction of a share of the Company’s Series A Junior Participating
Preferred Stock (the “Preferred Shares”) at the then effective purchase
price.  The Rights will expire on August 7, 2012, unless earlier
redeemed or exchanged.





The
number of outstanding Rights and the number of Preferred Shares issuable upon
exercise of the Rights are also subject to adjustment in the event of a
stock split of the Common Shares or a stock dividend on the Common Shares
payable in Common Shares or subdivisions, consolidation or combinations of the
Common Shares occurring, in any case, prior to the Distribution Date.  The
purchase price payable and the number of preferred shares or other securities or
other property issuable upon exercise of the Rights are subject to adjustment
from time to time to prevent dilution as described in the Amended and Restated
Rights Agreement.  As a result of the Company’s stock split discussed
above, appropriate adjustments under the Amended and Restated Rights Agreement
have been made.




- 26
-





ABOVENET,
INC. AND SUBSIDIARIES





NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(in
millions, except share and per share information)





In the
event that any person or group of affiliated or associated persons becomes an
Acquiring Person, proper provision will be made so that each holder of a Right,
other than Rights beneficially owned by the Acquiring Person and its associates
and affiliates (which will thereafter be void), will have the right to receive
upon exercise, in lieu of Preferred Shares, that number of Common Shares having
a market value of two times the then effective exercise price of the Right (or,
if such number of shares is not and cannot be authorized, the Company may issue
preferred shares, cash, debt, stock or a combination thereof in exchange for the
Rights).





In the
event that the Company is acquired in a merger or other business combination
transaction or 50% or more of its consolidated assets or earning power are sold
to an Acquiring Person, its associates or affiliates or certain other persons,
proper provision will be made so that each holder of a Right, other than Rights
beneficially owned by the Acquiring Person and its associates and affiliates
(which will thereafter be void), will thereafter have the right to receive, upon
the exercise thereof at the then current exercise price of the Right, in lieu of
Preferred Shares, that number of shares of common stock of the acquiring
company, which at the time of such transaction will have a market value of two
times the then effective exercise price per Right.





At any
time after a person becomes an Acquiring Person and prior to the acquisition by
such Acquiring Person of 50% or more of the outstanding Common Shares, the
Company may exchange the Rights (other than Rights owned by such Acquiring
Person or group which have become void), in whole or in part, at an exchange
ratio of one share of common stock per Right (or, at the election of the
Company, the Company may issue cash, debt, stock or a combination thereof in
exchange for the Rights), subject to adjustment.





At any
time prior to the earlier of (i) such time that a person has become an Acquiring
Person or (ii) the final expiration date, the Company may redeem all, but not
less than all, of the outstanding Rights at a price of $0.005 per Right (the
“Redemption Price”).  The Rights may also be redeemed at certain other
times as described in the Amended and Restated Rights
Agreement.  Immediately upon any redemption of the Rights, the right
to exercise the Rights will terminate and the only right of the holders of
Rights will be to receive the Redemption Price.





The terms
of the Rights may be amended by the Company’s Board of Directors without the
consent of the holders of the Rights, except that from and after such time as
the rights are distributed no such amendment may adversely affect the interest
of the holders of the Rights other than the interests of an Acquiring Person or
its affiliates or associates.





Until a
Right is exercised, the holder thereof, as such, will have no rights as a
stockholder of the Company, including, without limitation, the right to vote or
to receive dividends.




- 27
-





ABOVENET,
INC. AND SUBSIDIARIES





NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(in
millions, except share and per share information)





2010
Employee Stock Purchase Plan




On June
24, 2010, the Company’s stockholders approved the AboveNet, Inc. 2010 Employee
Stock Purchase Plan, which was adopted by the Board of Directors on April 28,
2010 (as amended, the “Stock Purchase Plan”).  The Stock Purchase Plan
is administered by the Compensation Committee of the Board of
Directors.  The aggregate number of shares of common stock that may be
issued pursuant to the Stock Purchase Plan is 300,000, subject to increase or
decrease by reason of stock splits, reclassifications, stock dividends, or
similar corporate events as determined by the Compensation
Committee.


Eligibility
and Participation





All
employees of the Company, or any of its designated subsidiaries, who have
completed at least ninety (90) days of employment on or before the first day of
the applicable offering period are eligible to participate in the Stock Purchase
Plan, subject to certain limitations imposed by the Internal Revenue Code and
certain other limitations set forth in the Stock Purchase Plan.  An
employee may not participate in the Stock Purchase Plan if, immediately after he
or she joined, he or she would own stock and/or hold rights to purchase stock
possessing 5% or more of the total combined voting power or value of all classes
of stock of the Company or of any subsidiary of the Company.  Officers
of the Company that are subject to the reporting requirements of Section 16(a)
under the Securities Exchange Act of 1934 (“Section 16 Officers”) are also not
eligible to participate.  The Stock Purchase Plan also limits an
employee’s rights to purchase stock under all employee stock purchase plans
(those subject to Section 423 of the Internal Revenue Code) of the Company and
its subsidiaries so that such rights may not accrue at a rate that exceeds
$0.025 at fair market value of such stock (determined as of the first day of the
offering period) for each calendar year in which such right to purchase stock is
outstanding at any time.  In addition, no employee may purchase more
than 200 shares of common stock under the Stock Purchase Plan in any offering
period (and no more than 100 shares of common stock in the offering period for
2010).  Employees may withdraw from the Stock Purchase Plan at any
time prior to the end of the then current offering period.  As of
September 1, 2010, we had a total of approximately 660 employees who would have
been eligible to participate in the Stock Purchase Plan.





Offering
Periods; Purchase Price





The Stock
Purchase Plan operates by a series of offering periods of approximately 10
months duration commencing on each January 16 and ending on November 15 (except
that the 2010 offering period will be from September 1, 2010 to November 15,
2010).  The purchases are made for participants at the end of each
offering period by applying payroll deductions accumulated over the course of
the offering period towards such purchases.  The payroll deductions
accumulated over the course of the offering period are included in “Accrued
expenses” in the Company’s consolidated balance sheet at September 30,
2010.  The price at which these purchases will be made will equal 85%
of the lesser of the fair market value of the common stock as of the first day
of the offering period or the fair market value on the last day of the offering
period.





2010
Offering Period





86
employees participated in the September 1, 2010 to November 15, 2010 offering
pursuant to which $0.2 is expected to be withheld over the 2010 offering
period.  The Company follows FASB Technical Bulletin No. 97-1,
“Accounting under Statement 123 for Certain Employee Stock Purchase Plans with a
Look-Back Option,” (now known as FASB ASC 718) and SFAS No. 123(R) (also
now known as FASB ASC 718) to account for the Stock Purchase
Plan.  Because the Stock Purchase Plan provides for a discount greater
than 5%, it is a compensatory plan and qualifies for fair value
accounting.  Accordingly, the fair market value of the grant is
calculated as of the grant date in accordance with SFAS No.
123(R).  Additionally, the fair value of the look-back option is
calculated on a similar basis.  The Company also estimates future
forfeitures (withdrawals) from the Stock Purchase Plan as provided under FASB
ASC 718.  Stock-based compensation expense recognized with respect to
the Stock Purchase Plan in the three and nine months ended September 30, 2010
was $0.02.




- 28
-




ABOVENET,
INC. AND SUBSIDIARIES





NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(in
millions, except share and per share information)





NOTE
9:  LITIGATION





The
Company is subject to various legal proceedings and claims which arise in the
normal course of business.  The Company evaluates, among other things,
the degree of probability of an unfavorable outcome and reasonably estimates the
amount of potential loss.





Global
Voice Networks Limited (“GVN”)





AboveNet
Communications UK Limited, the Company’s U.K. operating subsidiary (“ACUK”), was
a party to a duct purchase and fiber lease agreement (the “Duct Purchase
Agreement”) with EU Networks Fiber UK Ltd, formerly GVN.  A dispute
between the parties arose regarding the extent of the network duct that was sold
and fiber that was leased to GVN pursuant to the Duct Purchase
Agreement.  As a result of this dispute, in 2006, GVN filed a claim
against ACUK in the High Court of Justice in London seeking ownership of the
disputed portion of the network duct, the right to lease certain fiber and
associated damages.  In December 2007, the court ruled in favor
of GVN with respect to the disputed duct and fiber.  In early
February 2008, ACUK delivered most of the disputed duct and fiber to
GVN.  Additionally, under the original ruling, the Company was also
required to construct the balance of the disputed duct and fiber and deliver it
to GVN pursuant to a schedule ordered by the court.  Additional
portions of the disputed duct and fiber were constructed and subsequently
delivered and other portions are scheduled for delivery.  The Company
also had certain repair and maintenance obligations that it must perform with
respect to such duct.  GVN was also seeking to enforce an option
requiring ACUK to construct 180 to 200 chambers for GVN along the
network.  In June 2008, the Company paid $3.0 in damages pursuant to
the liability trial.  Additionally, the Company reimbursed GVN $1.8
for legal fees.  Additionally, the Company’s legal fees aggregated
$2.4.  Further, the Company has incurred or is obligated for costs
totaling $2.7 to build additional network.  In early August 2008, the
Company reached a settlement agreement under which the Company paid GVN $0.6 and
agreed to provide additional construction of duct at an estimated cost of $1.2
and provide GVN limited additional access to ACUK’s network.  GVN and
ACUK provided mutual releases of all claims against each other, including ACUK’s
repair obligation and chamber construction obligations discussed
above.  The Company recorded a loss on litigation of $11.7 at December
31, 2007, of which $0.8, $8.5 and $0.7 was paid in 2007, 2008 and 2009,
respectively, and $0.6 was included in accrued expenses at December 31,
2009.  The obligation was denominated in British Pounds; therefore, the
amounts have been affected by currency fluctuations.  The Company had
a remaining accrual balance of $0.4 for this loss on litigation included in the
Company’s consolidated balance sheet at September 30, 2010.





SBC
Telecom, Inc. (“SBC”)





The
Company was a party to a fiber lease agreement with SBC, a subsidiary of
AT&T, entered into in May 2000.  The Company believed that SBC was
obligated under this agreement to lease 40,000 fiber miles, reducible to 30,000
under certain circumstances, for a term of 20 years at a price set forth in the
agreement, which was subject to adjustment based upon the number of fiber miles
leased (the higher the volume of fiber miles leased, the lower the price per
fiber mile).  SBC disagreed with such interpretation of the agreement
and in 2003 the issue was litigated before the Bankruptcy Court.  In
November 2003, the Bankruptcy Court agreed with the Company’s interpretation of
the agreement, which decision SBC did not appeal.  Subsequently, SBC
also alleged that the Company was in breach of its obligations under such
agreement and that therefore the Company was unable to assume the agreement upon
its emergence from bankruptcy.  The Company disagreed with SBC’s
position, however in December 2005, the Bankruptcy Court agreed with
SBC.  In 2006, the Company appealed certain aspects of the decision to
the District Court for the Southern District of New York but the District Court
denied the Company’s appeal.  In March 2007, the Company filed a
notice of appeal to the Second Circuit Court of Appeals seeking relief with
respect to the Bankruptcy Court’s determination that the Company was in default
of the agreement with SBC.  During the term of the agreement, SBC has
paid the Company at the higher rate per fiber mile to reflect the reduced volume
of services SBC believes it was obligated to take, in accordance with its
understanding of the fiber lease agreement.  However, for financial
statement purposes, the Company billed and recorded revenue based on the lower
amount per fiber mile for the fiber miles accepted by SBC, which was $2.3 and
$2.0, for the years ended December 31, 2008 and 2007, respectively.




- 29
-




ABOVENET,
INC. AND SUBSIDIARIES





NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(in
millions, except share and per share information)





In July
2008, the Company and SBC entered into the “Stipulation and Release Agreement”
under which a new service agreement was executed for the period from July 10,
2008 to December 31, 2010.  Under this new service agreement, SBC
agreed to continue to purchase the existing services at the current rate for
such services.  Further, SBC will have a fixed minimum payment
commitment, which declines over the contract term.  SBC may cancel
service at any time, subject to the notice provisions, but is subject to the
payment commitment.  The payment commitment may be satisfied by the
existing services or SBC may order new services.  Additionally, the
May 2000 fiber lease agreement with SBC was terminated and the Company and SBC
released each other from any claims related to that agreement.  The
difference between the amount paid by SBC and the amount recognized by the
Company as revenue, which aggregated $3.5 at July 10, 2008 ($3.2 at December 31,
2007), was recorded as contract termination revenue for the year ended December
31, 2008.





Southeastern
Pennsylvania Transportation Authority (“SEPTA”)




In
October 2008, SEPTA filed a claim in the Philadelphia County Court of Common
Pleas against the Company for trespass with regard to portions of the Company’s
network allegedly residing on SEPTA property in Pennsylvania.  SEPTA
seeks unspecified damages for trespass and/or a determination that the Company’s
network must be removed from SEPTA’s property.  The Company has
responded to the claim and also filed a motion in the Bankruptcy Court seeking a
determination that the claim is barred based on the discharge of claims and
injunction contained in the Plan of Reorganization.  The Company
believes that it has meritorious defenses to SEPTA’s claims.




Liquidity
Solutions, Inc. (“LSI”)
 
 In
October 2010, LSI filed a motion in the chapter 11 cases captioned as In re 360networks (USA) inc. et al,S.D.N.Y. Bankr. No.: 01-13721 (ALG) (the “360 Cases”),
requesting that the court compel the court appointed representative of the
360networks estates to commence a legal action against the members of the
official committee of unsecured creditors (the "Committee") in the 360 Cases for
breach of fiduciary duty, negligence, gross negligence and fraud based on the
facts and circumstances giving rise to the theft of approximately $40 held on
behalf of the Committee by its counsel, Dreier LLP.  These funds were
stolen by Dreier LLP’s managing partner Marc Dreier.  Alternatively, LSI
has requested that the court grant authority to LSI to file its own claims
against the members of the Committee on behalf of the 360networks estates. 
The Company served as one of the members of the Committee in the 360
Cases.  To date, no legal proceeding has been filed against the
Company.  In the event that such a proceeding is filed, the Company
believes that it would have substantial defenses.


NOTE
10:  RELATED PARTY TRANSACTIONS





A member
of the Company’s Board of Directors, Richard Postma, is also the Co-Chairman,
Chief Executive Officer and co-founder of a telecommunications
company.  The Company sold services and/or material in the normal
course of business to this telecommunications company in the amount of $0.1 for
each of the three months ended September 30, 2010 and 2009, and $0.3 for each of
the nine months ended September 30, 2010 and 2009.  No amounts were
outstanding at each of September 30, 2010 and December 31,
2009.  Mr. Postma also serves as the Chief Executive Officer of and
holds a minority ownership interest in a construction company.  The
Company purchased certain installation and construction services totaling $0.03
in 2009 and $0.13 in 2008 from such construction firm.  All activities
between the Company and these entities were conducted as independent arms length
transactions consistent with similar terms and circumstances with any other
customers or vendors.  All accounts between the two parties are
settled in accordance with invoice terms.




- 30
-




ABOVENET,
INC. AND SUBSIDIARIES





NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(in
millions, except share and per share information)





NOTE
11:  SEGMENT REPORTING





SFAS
No. 131, “Disclosures about Segments of an Enterprise and Related
Information,” (now known as FASB ASC 280-10), defines operating segments as
components of an enterprise for which separate financial information is
available and which is evaluated regularly by the Company’s chief operating
decision maker in deciding how to assess performance and allocate
resources.  The Company operates its business as one operating
segment.





Geographic
Information




Below
is the Company’s revenue based on the location of its entity providing service.
 Long-lived assets are based on the physical location of the
assets.  The following table presents revenue and long-lived asset
information for geographic areas:




Three
      Months Ended September 30,
              
              
              Nine
      Months Ended September 30,2010
              
              
              2009
              
              
              2010
              
              
              2009RevenueUnited
      States
              
              $
              94.6
              
              
              $
              83.9
              
              
              $
              275.0
              
              
              $
              242.9United
      Kingdom
              
              
              10.4
              
              
              
              9.6
              
              
              
              30.5
              
              
              
              25.7Other
              
              
              0.1
              
              
              
              —
              
              
              
              0.1
              
              
              
              —Eliminations
              
              
              (1.4
              )
              
              
              (1.1
              )
              
              
              (4.0
              )
              
              
              (2.8
              )Consolidated
      Worldwide
              
              $
              103.7
              
              
              $
              92.4
              
              
              $
              301.6
              
              
              $
              265.8




As
      ofSeptember
      30, 2010
              
              
              December
      31, 2009Long-lived
      assetsUnited
      States
              
              $
              480.9
              
              
              $
              440.8United
      Kingdom
              
              
              30.9
              
              
              
              28.3Consolidated
      Worldwide
              
              $
              511.8
              
              
              $
              469.1




NOTE
12: OTHER INCOME (EXPENSE), NET





Other
income (expense), net consists of the following:





Three
      Months Ended
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,2010
            
            
            2009
            
            
            2010
            
            
            2009Gain
      on settlement or reversal of liabilities
            
            $
            —
            
            
            $
            —
            
            
            $
            0.4
            
            
            $
            0.7Gain
      on settlement of insurance claim
            
            
            —
            
            
            
            —
            
            
            
            0.2
            
            
            
            —Gain
      (loss) on foreign currency
            
            
            1.1
            
            
            
            (0.5
            )
            
            
            (0.1
            )
            
            
            2.1Loss
      on sale or disposition of property and equipment
            
            
            (0.1
            )
            
            
            (0.2
            )
            
            
            (0.1
            )
            
            
            (1.1
            )Other
            
            
            —
            
            
            
            0.2
            
            
            
            0.2
            
            
            
            0.2Total
            
            $
            1.0
            
            
            $
            (0.5
            )
            
            $
            0.6
            
            
            $
            1.9






- 31
-




ABOVENET,
INC. AND SUBSIDIARIES





NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(in
millions, except share and per share information)





NOTE
13: COMMITMENTS AND CONTINGENCIES





Employment
Contracts




The
Company maintains employment agreements with its key executives.  The
agreements include, among other things, certain change in control and severance
provisions.





In
September 2008, the Company entered into new employment agreements with certain
of its senior officers (the “Executive Officers”).  Each of the
employment agreements is for a term which ends November 16, 2011 with automatic
extensions for an additional one-year period unless cancelled by the executive
or the Company in writing at least 120 days prior to the end of the applicable
term.  Each of the contracts provides for a base rate of compensation,
which may increase (but cannot decrease) during the term of the
contract.  Additionally, each contract provides for incentive cash
bonus targets for each executive.  Each of the Executive Officers will
generally be entitled to the same benefits offered to the Company’s other
executives.  Each of the employment contracts provides for the payment
of severance and the provision of certain other benefits in connection with
certain termination events.  The employment contracts also include
confidentiality, non-compete and assignment of intellectual property covenants
by each of the Executive Officers.





In
October 2008, the Company entered into an employment agreement with Mr. Joseph
P. Ciavarella under which Mr. Ciavarella agreed to become the Company’s Senior
Vice President and Chief Financial Officer.  The employment agreement
is on substantially the same general terms as the September 2008 employment
agreements described above.





Internal
Revenue Service





In
September 2008, the Company was notified by the Internal Revenue Service (the
“IRS”) that it was reclassifying certain individuals, classified by the Company
as independent contractors, to employees and, accordingly, assessing certain
payroll taxes and penalties totaling $0.3.  The Company disputed this
position citing relief provided by IRC Section 530 and IRC Section
3509.  On January 13, 2009, the IRS made a settlement offer to the
Company, which the Company executed on March 10, 2009 and the IRS countersigned
on May 11, 2009.  Under the terms of the proposed settlement
agreement, the Company agreed to pay $0.015 to the IRS to fully discharge any
federal employment tax liability it may owe for 2005.  The IRS agreed
not to dispute the classification of “such workers” for federal employment tax
purposes for any period from January 1, 2005 to March 31,
2009.  Beginning April 1, 2009, the Company agreed to treat
“Consultants,” as described in the settlement agreement, who perform equivalent
duties as employees of the Company as employees.  Finally, the Company
agreed to extend the statute of limitations with respect to federal employment
tax payments for the period covered by the settlement agreement (January 1, 2005
to March 31, 2009) to April 1, 2012.




- 32
-




ABOVENET,
INC. AND SUBSIDIARIES





NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(in
millions, except share and per share information)





New
York City Franchise Agreement





As a
result of certain ongoing litigation with a third party, the Department of
Information Technology and Telecommunications of the City of New York (“DOITT”)
has informed the Company that they have temporarily suspended any discussions
regarding renewals of telecommunications franchises in the City of New
York.  As a result, it is the Company’s understanding that DOITT has
not renewed any recently expired franchise agreement, including the Company’s
franchise agreement which expired on December 20, 2008.  Prior to the
expiration of the Company’s franchise agreement, the Company sought out and
received written confirmation from DOITT that the Company’s franchise agreement
provides a basis for the Company to continue to operate in the City of New York
pending conclusion of renewal discussions.  The Company intends to
continue to operate under its expired franchise agreement pending any
renewal.  The Company believes that a number of other operators in the
City of New York are operating on a similar basis.  Based on the
Company’s discussions with DOITT and the written confirmation that the Company
has received, the Company does not believe that DOITT intends to take any
adverse actions with respect to the operation of any telecommunications
providers as the result of their expired franchise agreements and, that if it
attempted to do so, it would face a number of legal
obstacles.  Nevertheless, any attempt by DOITT to limit the Company’s
operations as the result of its expired franchise agreement could have a
material adverse effect on the Company’s business, financial condition and
results of operations.





Capital
Investments and Network Expansion





The
Company, from time to time, commits capital for, among other things, (i)
customer capital (to connect customers to the network); (ii) expansion and
improvement of infrastructure; and (iii) equipment.  The Company also
commits capital for investments in selected markets and has announced its
intention to open up Denver as a market and expand into Paris, Amsterdam and
Frankfurt in Europe.  Based upon the Company’s investment plans, its
capital expenditures for 2010 are expected to be between $130 and $145, of which
$88.0 was spent during the nine months ended September 30, 2010.  The
Company believes it has sufficient liquidity to fund these
investments.




- 33
-




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




The
following discussion and analysis should be read together with the Company’s
consolidated financial statements and related notes appearing in this Quarterly
Report on Form 10-Q and in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2009.





Business





Overview





AboveNet,
Inc. (which together with its subsidiaries is sometimes hereinafter referred to
as the “Company,” “AboveNet,” “we,” “us,” “our” or “our Company”) provides
high-bandwidth connectivity solutions primarily to large corporate enterprise
clients and communication carriers, including Fortune 1000 and FTSE 500
companies, in the United States (“U.S.”) and the United Kingdom (“U.K.”). 
Our communications infrastructure and global Internet protocol (“IP”) network
are used by a broad range of companies such as commercial banks, brokerage
houses, insurance companies, investment banks, media companies, social
networking companies, web-centric companies, law firms and medical and health
care institutions.  Our customers rely on our high speed, private
optical network for electronic commerce and other mission-critical services,
such as business Internet applications, regulatory compliance, disaster recovery
and business continuity.  We provide lit broadband services over our
metro networks, long haul network and global IP network utilizing equipment that
we own and operate.  In addition, we also provide dark fiber services
to selected customers.  Unlike competitive local exchange carriers
(“CLECs”), we do not provide voice services, services to residential customers
or a wide range of lower-bandwidth services.  We also resell equipment
and provide certain other services to customers, which are sold at our cost,
plus a margin.





Metro networks.We
are a facilities-based provider that operates fiber-optic networks in 15 markets
in the U.S., plus the U.K. (London).  We refer to these networks as
our metro networks.  These metro networks have significant reach and
breadth.  They consist of over 2.0 million fiber miles across over
7,000 cable route miles in the U.S. and in London.  In addition, we
have built an inter-city fiber network between New York and Washington D.C. of
over 177,000 fiber miles.  In mid-2010, we announced plans to open the
Denver market by the end of 2010 in conjunction with a customer network
build.  We also plan to provide certain services in Paris,
Amsterdam and Frankfurt through a dense wavelength-division multiplexing
(“DWDM”) system operating on a leased fiber network.





Long haul
network.  Through construction, acquisition and leasing
activities, we have created a nationwide fiber-optic communications network
spanning approximately 12,000 cable route miles that connects each of our U.S.
metro networks.  We run DWDM equipment over this fiber to provide
large amounts of bandwidth capability between our metro networks for our
customer needs and for our IP network.  We use capacity on the
Japan-US Cable Network (“JUS”) to provide connectivity from the U.S. to Japan
and capacity on the Trans-Atlantic undersea telecommunications network
(“TAT-14”) and other trans-Atlantic cables to provide connectivity from the U.S.
to Europe.  We refer to this network as our long haul
network.  In mid-2010, we connected Miami to the long haul network and
our planned Denver metro network is already connected to the long haul
network.  We also plan to connect Paris, Amsterdam and Frankfurt to
the long haul network through a DWDM system operating on a leased fiber network
by January 2011.





IP network.We operate a
Tier 1 IP network over our metro and long haul networks with connectivity to the
U.S., Europe and Japan.  Our IP network operates using advanced
routers and switches that facilitate the delivery of IP transit services and
IP-based virtual private network (“VPN”) services.  A hallmark of our IP
network is that we have direct connectivity to a large number of IP networks
operated by others through peering agreements and to many of the most important
bandwidth centers and peering exchanges.




- 34
-





Business
Strategy




Our
primary strategy is to become the preferred provider of high-bandwidth
connectivity solutions in our target markets.  Specifically, we are
focused on the sale of high-bandwidth transport solutions to enterprise
customers.  The following are the key elements of our
strategy:





·
            Connect
      to data centers where many enterprise customers locate their information
      technology infrastructure.·
            Target
      broadband communications infrastructure customers who have significant
      bandwidth requirements and high security needs.·
            Provide
      a high level of customization of our services in order to meet our
      customers’ requirements.·
            Deliver
      the services we offer over our metro networks, which often provide our
      customers with a dedicated pair of fibers.  This use of
      dedicated fiber is a low latency, physically secure, flexible and
      scalable communications solution, which we believe is difficult for
      many of our competitors to replicate because most of their networks do not
      have comparable fiber density.·
            Use
      our metro fiber assets to drive the adoption of leading edge inter-city
      wide area network (WAN) services such as IP VPN services and long haul
      connectivity solutions.·
            Intensify
      our focus on sales to media companies with high-bandwidth
      requirements.·
            Fulfill
      the needs of customers that are required to comply with financial and
      other regulations related to data availability, disaster recovery and
      business continuity.·
            Target
      Internet connectivity customers that can leverage the scalability and
      flexibility of fiber access to their premises to drive their electronic
      commerce and other high-bandwidth applications, such as social networking,
      gaming and digital media
transmission.





We are
able to provide high quality, customized services at competitive prices as a
result of a number of factors, including:





·
            Our
      significant experience providing high-end customized network solutions for
      enterprises and telecommunications carriers (also referred to as
      carriers).·
            Our
      focus on providing certain core optical services rather than the full
      range of telecommunications services.·
            Our
      metro networks typically include fiber cables with 432, and in some cases
      864, fibers in each cable, which is substantially more fiber than we
      believe most of our competitors have installed, and provide us with
      sufficient fiber inventory to supply dedicated fiber services to
      customers.·
            Our
      modern networks with advanced fiber-optic technology are less costly to
      operate and maintain than older networks.·
            Our
      employment of state-of-the-art technology in all elements of our networks,
      from fiber to optical and IP equipment, provides leading edge solutions to
      customers.·
            The
      architecture of our metro networks, which facilitates high performance
      solutions in terms of loss and latency.·
            The
      spare conduit we install, where practical, allows us to install additional
      fiber-optic cables on many routes without the need for additional
      rights-of-way, which reduces expansion and upgrade costs in the future,
      and provides significant capacity for future
  growth.






- 35
-




Our
Networks and Technology




Metro
Networks




The
foundation of our business is our metro fiber optic networks in the following
domestic metropolitan areas and London in the U.K.





·
            Boston·
            New
      York City metro·
            Philadelphia·
            Baltimore·
            Washington,
      D.C./Northern Virginia corridor·
            Atlanta·
            Houston·
            Dallas·
            Austin·
            Phoenix·
            Los
      Angeles·
            San
      Francisco Bay area·
            Portland·
            Seattle·
            Chicago





Including
fiber acquired by us through leases and indefeasible rights-of-use (“IRUs”), as
well as fiber provided by us to others through leases and IRUs, our metro
networks consist of over 2.0 million fiber miles and over 7,000 cable route
miles.  The network footprint typically allows us to serve central
offices, carrier hotels, network POPs, data centers, enterprise locations and
traffic aggregation points, not just in the central business district but across
the entire metropolitan area in each market.  Within our metro
networks, our infrastructure provides ample opportunity to access many
additional buildings by virtue of its extensive footprint coverage and over
5,900 network access points that can be utilized to build laterals or connect to
other networks, thereby providing access to additional locations.





We are
planning to open our metro network in Denver by the end of 2010.  We
also plan to provide certain services in Paris, Amsterdam and Frankfurt by the
end of 2010 through a DWDM system operating on a leased fiber
network.





Key
Metro Network Attributes




·
            Network Density -Our
      metro networks typically contain 432 and up to 864 fiber strands in each
      cable.  We believe that this fiber density is significantly
      greater than that of most of our competitors.  This high fiber
      count allows us to add new customers in a timely and cost effective manner
      by focusing incremental construction and capital expenditures on the
      laterals that serve customer premises, as opposed to fiber and capacity
      upgrades in our core networks.  Thus, we have spare network
      capacity available for future growth to connect an increasing number of
      customers.





·
            Modern Fiber –We have
      deployed modern, high-quality optical fiber that can be used for a wide
      range of network applications.  Standard single mode fiber is
      typically included on most cables while longer routes also contain
      non-zero dispersion shifted fiber that is optimized for longer distance
      applications operating in the 1550 nm range.  Much of our
      network is well positioned to support the more stringent requirements of
      transport at rates of 40 Gbps and
above.







- 36
-






·
            High Performance Architecture
      – We design customer networks with direct, optimum routing between
      key areas and in a manner that minimizes the number of POP locations,
      which enables us to deliver our services at a high level of
      performance.  Because most of our metro lit services are
      delivered over dedicated fibers not shared with other customers, each
      customer’s private network can be optimized for its specific
      application.  Further, by using dedicated fiber, we can deliver
      our services without the need to transition between various shared or
      legacy networks.  As a result, our customers experience enhanced
      performance in terms of parameters such as latency and jitter, which can
      be caused by equipment interface transitions.  The use of
      dedicated fibers for customers also permits us to address future
      technology changes that may take place on a customer specific
      basis.





·
            Extensive Reach – Our
      metro markets typically have significant footprints and cover a wide
      geography.  For example, the New York market includes a
      significant Manhattan presence and extends from Stamford, CT in the north
      through Delaware in the south, covering a large part of New
      Jersey.  Similarly, the San Francisco market extends through to
      San Jose and the Dallas network incorporates the Fort Worth
      area.





On-Net
Buildings




Our metro
networks connect to approximately 2,500 buildings in the U.S. and the U.K.
through our lateral cables, which cover approximately 1,100 route miles and over
130,000 fiber miles (which are part of the 2.0 million fiber miles previously
described).  These connected buildings are referred to as on-net
buildings.





·
            Enterprise Buildings -Our network extends to over 1,900 enterprise locations, many of
      which house some of the biggest corporate users of network services in the
      world.  These locations also include many private data centers
      and hub locations that are mission-critical for our
    customers.




·
            Network POPs -We
      operate over 120 network POPs with functionality ranging from simple,
      passive cross-connect locations to sites that offer interconnectivity to
      other service providers and co-location facilities for customer equipment,
      including over 20 Type 1 POPs.  These POPs are typically larger
      presences located in major carrier hotels complete with network
      co-location and interconnectivity
services.




·
            Central Offices, Carrier Hotels
      and Data Centers -Our network connects to over 200 central offices
      in the markets that we serve.  The network also has a presence
      in most significant carrier hotels and data centers within our active
      markets.




·
            Additional Buildings -In addition to the on-net buildings that we connect to with our own
      fiber laterals, we have access to additional buildings through other
      network providers with which we have agreements to provide fiber
      connectivity to our customers.





Long
Haul Network




We
operate a nationwide long haul network interconnecting each of our metro
networks that spans approximately 12,000 route miles.  With the
exception of the route between New York and Washington, D.C., which we
constructed and own, our domestic long haul network is based on fiber either
leased or acquired, typically under long-term agreements.  We have
deployed DWDM equipment along this network that provides significant bandwidth
capability between our metro networks.  This network is based on ultra
long haul technology that requires fewer intermediate regeneration points to
deliver our services between major cities and expands our high-bandwidth service
capability between our metro markets.  We connected Miami to the long
haul network in July, 2010 and our planned Denver metro network is already
connected to the long haul network.





In
addition to our U.S.-based facilities, we are a member of the TAT-14 consortium,
which, together with other capacity leased by us on other trans-Atlantic cables,
provides us with undersea capacity between the U.S. and Europe.  We
are also currently a member of the JUS consortium which provides us with
undersea capacity between the U.S. and Japan.  We use leased circuit
capacity in continental Europe to provide connectivity to Paris, Amsterdam and
Frankfurt.  We plan to replace that circuit capacity with a leased
fiber long haul network over which we will operate DWDM equipment by January
2011.  We also operate lit networks in the U.S. connecting to certain
key undersea cable landing stations including Manasquan and Tuckerton in New
Jersey to connect to the TAT-14 and have leased capacity to Morrow Bay,
California to connect to the JUS.  In the U.K., we have leased fiber
between the TAT-14 landing stations in Bude and London over which we operate a
high-capacity DWDM system.  Together, these networks provide us with
high-bandwidth capability among our metro networks and certain key markets in
Europe and Japan.




- 37
-




IP
Network




We
operate a global Tier 1 IP network with connectivity in the U.S., Europe and
Japan.  In the U.S., most of our metro networks have multiple IP hubs
where we can provide Internet connectivity.  We peer and provide
connectivity in high-bandwidth data centers and Internet exchange locations,
including many of those operated by the major providers, such as Equinix. 
We have extended our ability to provide IP connectivity through our metro
networks by using our fiber to bring our services to a wider set of
customers.  In addition to the U.S., the IP network has a presence in
each of Tokyo, London, Paris, Amsterdam and Frankfurt, including the major
exchanges in these markets such as LINX, AMS-IX and JPIX.  We
established an IP presence in Miami in August, 2010 and plan to add additional
IP locations in London, Paris and Amsterdam.





The core
portion of our IP backbone network is based on multiple 10 Gbps long haul links
and utilizes advanced Juniper and Cisco routers and switches to direct traffic
to appropriate destinations.  Our IP core infrastructure is based on
next generation equipment that supports advanced IP services such as VPNs and is
optimized to support high-bandwidth customers.




As a Tier
1 IP network provider, we have peering arrangements with most other providers
which allow us to exchange traffic with these other IP networks.  We
have devoted a substantial amount of time and resources to building our
substantial peering infrastructure and relationships.  We believe that
this extensive peering fabric combined with our advanced network results in a
positive customer experience.





Network
Management




Our
network management center (“NMC”) is located in Herndon, Virginia and provides
round-the-clock surveillance, provisioning and customer service.  Our
metro networks, long haul network, IP network and the private networks we set up
for our customers, which link together two or more of their locations, are
constantly monitored in order to respond to any degrading network conditions and
network outages.  Our NMC responds to all customer network inquiries
via a trouble ticketing system.  The NMC’s staff serves as the focal
point for managing our service level agreements, or SLAs, with our customers and
coordinating network maintenance activities.





Rights-of-Way




We obtain
right-of-way agreements and governmental authorizations to enable us to install,
operate, access and maintain our networks, which are located on both public and
private property.  In some jurisdictions, a construction permit from
the local municipality is all that is required for us to install and operate
that portion of the network.  In other jurisdictions, a license
agreement, permit or franchise may also be required.  These licenses,
permits and franchises are generally for a term of limited
duration.  Where necessary, we enter into right-of-way agreements for
use of private property, often under multi-year agreements.  We lease
underground conduit and overhead pole space and license rights-of-way from
entities such as incumbent local exchange carriers (“ILECs”), utilities,
railroads, state highway authorities, local governments and transit
authorities.  We strive to obtain rights-of-way that afford us the
opportunity to expand our networks as our business further
develops.





Services




Initially,
our primary business was to lease dark fiber to telecommunications carriers,
enterprises, Internet and web-centric businesses and other customers that wanted
to operate their own networks, often under long term
agreements.  Since 2003, we have shifted the focus of our business by
leveraging our extensive fiber footprint and deploying capital to extend our
fiber footprint to customers with high-bandwidth requirements within and between
our metro markets.  This transformation has allowed us to serve a much
larger marketplace with differentiated services principally provided over our
dedicated fiber.  Unlike CLECs, we do not provide voice services,
services to residential customers or a wide range of lower-bandwidth
services.





In late
2008, we modified our service groupings and related revenue to more accurately
reflect our focus on delivering high-bandwidth services.  These groups
are: fiber infrastructure services, metro services and WAN
services.





We also
resell equipment and provide technical services to customers, which are sold at
our cost, plus a margin.




- 38
-





Fiber Infrastructure
Services




Our fiber
infrastructure services focus on the lease of dedicated dark fiber to
telecommunications carriers, enterprises, Internet and web-centric businesses
and other customers that operate their own networks independent of the incumbent
telecom companies.  In addition to leasing dark fiber, we offer
maintenance of dark fiber networks, the provisioning of co-location and
in-building interconnection services, typically at our POP locations, and also
provide certain telecommunication services on a time and materials
basis.





Our fiber
infrastructure services feature:




·
            An
      extensive network footprint that extends well beyond the central business
      district in most markets.·
            The
      expertise and capability to add off-net locations to the network in a cost
      competitive manner.·
            Modern,
      high quality fiber that meets stringent technical
      requirements.·
            Customized
      ring configurations and redundancy requirements in a private dedicated
      service.·
            7x24
      monitoring of the network by our
NMC.





Demand
for fiber services is driven by key business initiatives including business
continuity and disaster recovery, network consolidation and convergence, growth
of wireless communications, and industry-specific applications such as high
definition video transport and patient record management.  Typically,
Fortune 1000 and FTSE 500 enterprises with telecom intensive needs in industries
such as financial services, social networking, technology, media, retail, energy
and healthcare comprise the target customer base for our fiber optic
infrastructure offerings.





Metro
Services




We offer
a number of high-bandwidth metro service offerings in our active metro markets
ranging from 100 Mbps to 40 Gbps connectivity.  These services range
from simple point-to-point ethernet connectivity to complex multi-node
wavelength-division multiplexing (“WDM”) solutions.  Our metro
services have a number of important features that differentiate us from many of
our competitors:





·
            A
      substantial portion of our metro services are deployed over dedicated
      fiber from end-to-end, representing a private network for each
      customer.·
            This
      dedicated fiber provides customers with significant scalability for any
      increasing traffic demand.·
            A
      service based on dedicated fiber provides a high level of security, a key
      concern for many high-bandwidth customers across a range of
      industries.·
            The
      absence of a shared network eliminates many of the equipment interfaces of
      most other networks that can impact performance such as latency and cause
      service interruptions.·
            Some
      of our metro services are offered without the need for the customer to
      provide space and power, which may be difficult or expensive to obtain in
      many data centers.





We offer
private, customized optical network deployments that we build for our largest
customers with very specific needs.  These customers are typically
large enterprise companies that have significant bandwidth requirements and
value a completely private solution.  These solutions often involve
extensive network construction to specific critical customer locations such as
private data centers and trading platforms with dedicated WDM equipment
configured in accordance with the customer’s needs.





In the
past several years, we have expanded our metro services capability beyond
customers with very high-bandwidth (multiple wave) requirements by offering a
number of wave and ethernet products aimed to serve more moderate
bandwidth/circuit requirements.  These offerings include basic and
enhanced wave services, which are based on dedicated, private fiber and
equipment infrastructure from end-to-end and provide a solution for customers
looking for a WDM-based service between two metro locations.  The
Basic Wave offering provides our lowest cost wave service, while our Enhanced
Wave service has a slightly higher initial cost, but provides the customer
substantial ability to expand its service capabilities.





We have
also expanded our WDM solutions in a number of markets through our Core Wave
offering, which provides wave services through pre-positioned equipment and
allows faster turn up of services and greater flexibility of use.




- 39
-





We also
offer a full range of Metro Ethernet services including point-to-point and
multi-point service configurations at 100 Mbps, 1000 Mbps and 10,000 Mbps
speeds.  We offer three different classes of our Metro Ethernet
services with three different price points (higher, middle and lower) based upon
level of service: (1) Private Metro Ethernet which utilizes customer dedicated
equipment and fiber to deliver a completely private service with all of the
associated operational, performance and security benefits; (2) Dedicated Metro
Ethernet which utilizes shared equipment with reserved/guaranteed capacity,
delivered to the customer location through dedicated fiber; and (3) Standard
Metro Ethernet which utilizes shared equipment on a shared capacity basis,
delivered to the customer location through dedicated fiber.





WAN
Services




We offer
a number of wave, ethernet and IP-based services within our WAN Services
offering.  Most of these services provide connectivity solutions
between our metro markets and target high-bandwidth customers requiring
transmission speeds of at least 100 Mbps.  In addition, we provide
high-speed Internet connectivity to our customers including high-end enterprise,
web-centric and carrier/cable companies.  Each of our WAN services is
differentiated by our significant metro fiber resources that allow us to extend
the capability of our core networks to the customer in a secure and
cost-effective manner.





Our long
haul services provide inter-city connectivity between our U.S. metro markets at
a variety of speeds ranging from 1 Gbps to 10 Gbps on our ultra long haul
network.  Our service offerings require a minimum of regeneration
sites, which improves our ability to be competitive from both a price and speed
of installation perspective while reducing the number of equipment interfaces
required to deliver our service.





The
attractiveness of our long haul services to our customers is further enhanced by
our ability to extend the service from our long haul POP to the customer’s
premises through our metro networks, thereby providing an end-to-end
solution.  This flexibility and reach enables us to provide our long
haul services on a differentiated basis.





We
operate a Tier 1 IP network that provides high quality Internet connectivity for
enterprise, web-centric, Internet and cable companies.  We offer
connectivity to the Internet at 100 Mbps, 1 Gbps and 10 Gbps port levels in most
of our active metro markets in the U.S. and in London and in other cities in
Europe.  We believe our extensive number of peering partners, global
reach and uncongested network approach result in a positive experience for our
customers.  In addition to selling IP connectivity at data centers and
other major IP exchanges, we offer our Metro IP service where we combine our
metro fiber reach to deliver Internet connectivity to customer
premises.  This service offering extends our significant IP
capability, without the dilutive impact of traditional, shared access methods,
to the customer location over dedicated fiber that will support full port
speeds.





We also
offer a suite of advanced ethernet and IP VPN services that provide connectivity
between multiple locations in different cities for our
customers.  These services provide flexibility such as the ability to
prioritize different traffic streams and the ability to converge multiple
services across the same infrastructure.  These advanced VPN services,
which include VPLS services, offer point-to-point and multipoint
connectivity solutions based on MPLS technologies with the same high-bandwidth
scalability that our IP connectivity service allows.  Unlike most of
our competitors, these services can be extended from our POPs to customer
locations within one of our metro markets through dedicated fiber, thereby
avoiding transitions through shared or legacy networks that can reduce
performance quality.





Sales
and Marketing




Our sales
force is based across most of our current U.S. metro markets and
London.  We recently added a sales presence in each of Paris,
Amsterdam and Frankfurt.  Our U.S. sales force is comprised
of approximately 80 sales professionals and is supported by a team of sales
engineers who provide technical support during the sales process.  Our
sales force primarily focuses on enterprise customers, including Fortune 1000
companies in the U.S. and FTSE 500 companies in London, that have large
bandwidth requirements.  This represents a change from our focus on
wholesale sales to carrier customers in previous years.  Since 2004,
the vast majority of our new sales have been to enterprise
customers.




- 40
-




Our sales
strategy includes:




·
            Positioning
      ourselves as a premier provider of private fiber optic transport solutions
      and Internet connectivity services.·
            Focusing
      on Fortune 1000 enterprises as well as content rich data companies (i.e.
      media, health care and financial services) that require customized private
      optical solutions.·
            Expanding
      our sales reach through independent sales agents who specialize in
      specific geographic and vertical markets.·
            Emphasizing
      the high quality, cost effective, secure and scalable nature of our
      private optical solutions.·
            Communicating
      our capabilities through targeted marketing communication campaigns aimed
      at specific vertical markets to increase our brand awareness in a cost
      effective manner.





Customers




We serve
a broad array of customers including leading companies in the financial
services, web-centric, media/entertainment, and telecommunications sectors, as
well as certain local, state and federal government entities, in some cases
through third party integrators.  Our networks meet the requirements
of many large enterprise customers with high data transfer and storage needs and
stringent security demands.  Major web-centric companies similarly
have needs for significant bandwidth and reliable networks.  Media and
entertainment companies that deliver bandwidth-intensive video and multimedia
applications over their networks are also a growing component of our customer
base.  Telecommunications service providers continue to utilize our
metro fiber networks to connect to their customers, as well as to data centers
and other traffic aggregation points.  Key drivers for growth in the
consumption of telecommunications and bandwidth services include the increasing
demand for disaster recovery and business continuity solutions, compliance
requirements under complex regulations such as the Sarbanes-Oxley Act or the
Health Insurance Portability and Accountability Act (“HIPAA”) and exponential
growth in data transmissions due to new modalities for communications, media
distribution and commerce.





Executive
Summary





Overview





The
components of our operating income are revenue, costs of revenue, selling and
general and administrative expenses and depreciation and
amortization.  Below is a description of these components.  We
are reporting operating income for the three and nine months ended September 30,
2010 and 2009, as shown in our unaudited consolidated statements of operations
included elsewhere in this Quarterly Report on Form 10-Q.





Industry




The
demand for high-bandwidth telecommunications services continues to
increase.  We believe that our experience in the provision of these
services, our customer base and our robust and extensive network should enable
us to take advantage of this growing demand.  Although the competitive
landscape in the telecommunications industry is challenging and constantly
shifting, we believe that we are well positioned for continued growth in the
future.




Key
Performance Indicators





Our
senior management reviews a group of financial and non-financial performance
metrics in connection with the management of our business.  These
metrics facilitate timely and effective communication of results and key
decisions, allowing management to react quickly to changing requirements and
changes in our key performance indicators.  Some of the key financial
indicators we use include cash flow, monthly expense analysis, new customer
installations, net new revenue booked, capital committed and expended and net
revenue attrition.  We define net revenue attrition as the reduction
in monthly recurring revenue (“MRR”) for customers with net decreases in MRR (as
a result of terminations, price declines and other decreases, which are offset
by any increases) divided by total revenue (excluding contract termination
revenue) over a given period.





Some of
the most important non-financial performance metrics measure headcount, IP
traffic growth, installation intervals and network service performance
levels.  We manage our employee headcount changes to ensure sufficient
resources are available to service our customers and control
expenses.  All employees have been categorized into, and are managed
within, integrated groups such as sales, operations, engineering, finance, legal
and human resources.  Our worldwide headcount was 677 as of September
30, 2010, 592 of which were employed in the U.S., 82 in the U.K., one in the
Netherlands, one in Germany and one in Japan.




- 41
-




2010
Highlights




Our
consolidated revenue increased by $35.8 million, or 13.5%, from $265.8 million
for the nine months ended September 30, 2009 to $301.6 million for the nine
months ended September 30, 2010, which included a $14.7 million increase in our
domestic metro services.  Additionally, in the U.S., our revenue from
fiber infrastructure and WAN services increased by $8.3 million and $9.2
million, respectively, for the nine months ended September 30, 2010 compared to
the nine months ended September 30, 2009.  Other revenue (which
includes contract termination revenue) was $5.2 million for the nine months
ended September 30, 2010, compared to $5.4 million for the nine months ended
September 30, 2009.  Revenue from our foreign operations, primarily in
the U.K., increased by $3.8 million for the nine months ended September 30, 2010
compared to the nine months ended September 30, 2009.





For the
nine months ended September 30, 2010, we generated operating income of $82.5
million and net income of $47.1 million, compared to operating income of
$71.4 million and net income of $74.7 million for the nine months ended
September 30, 2009.  At September 30, 2010, we had $194.8 million of
unrestricted cash, compared to $165.3 million of unrestricted cash at
December 31, 2009, an increase in liquidity of $29.5
million.  The increase in unrestricted cash at September 30, 2010
was primarily attributable to cash provided by operating activities of
$117.3 million and cash generated by the exercise of stock purchase warrants and
options to purchase shares of common stock totaling $5.6 million, partially
offset by the use of cash to purchase property and equipment of $88.0 million
and for the scheduled debt service payments totaling $5.6
million.  See below in this Item 2 under “Liquidity and Capital
Resources” for further discussion.





For the
nine months ended September 30, 2010, our cash flow generated by operating
activities increased as a result of the improvement in operating
results described above.  We believe, based on our business plan,
that our existing cash, cash from our operating activities and funds available
under our Secured Credit Facility will be sufficient to fund our operations,
planned capital expenditures and other liquidity requirements at least through
September 30, 2011.  See below in this Item 2 under “Liquidity and
Capital Resources” for further information relating to the Secured Credit
Facility.




Outlook




We
believe that based upon our contracted projects awaiting delivery to customers,
we will continue to add to our revenue base in 2010.  Additionally, we
have a strong cash position and access to financing through our Secured Credit
Facility, if needed.  Sales orders for the nine months ended September
30, 2010 were higher than sales orders for the nine months ended September 30,
2009.  While net revenue attrition, as previously defined, for the
nine months ended September 30, 2010 was in line with net revenue attrition for
the nine months ended September 30, 2009, we cannot predict our net revenue
attrition for the balance of 2010.





In early
2010, we announced a number of growth initiatives, which included expansion of
services to several new markets in the U.S. and Europe.  This includes
connecting Miami to our long haul network, opening the Denver metro market and
providing certain metro services over leased fiber in Paris, Amsterdam and
Frankfurt.  We have also increased our investments in customer capital
(capital spent to fulfill customer service orders) for laterals to customer
locations (including both enterprise locations and data centers) and backbone
network infrastructure investments in our existing markets in order to extend
the reach of our networks and improve services to existing and prospective
customers and increase revenue opportunities.  We believe that we have
adequate liquidity to make these additional investments.





In the
fourth quarter of 2009, we reduced the valuation allowance with respect to
certain deferred tax assets.  These deferred tax assets are expected
to be used to reduce income tax payments in 2010 and future
years.  Provisions for income tax expense in 2010 will be reported
based upon pre-tax book income, plus permanent differences at our effective
state, federal and foreign income tax rates, as applicable.  These tax
provisions have had the effect, and will continue to have the effect, of
reducing net income and earnings per share in 2010 and in future
periods.




- 42
-




Revenue





Revenue
derived from leasing fiber optic telecommunications infrastructure and the
provision of telecommunications and co-location services is recognized as
services are provided.  Non-refundable payments received from
customers before the relevant criteria for revenue recognition are satisfied are
included in deferred revenue in the accompanying consolidated balance sheets and
are subsequently amortized into income over the fixed contract
term.





A
substantial portion of our revenue is derived from multi-year contracts for
services we provide.  We are often required to make an initial outlay
of capital to extend our network and purchase equipment for the provision of
services to our customers.  Under the terms of most contracts, the
customer is required to pay a termination fee or contractual damages (which
decline over the contract term) if the contract were terminated by the customer
without basis before its expiration to ensure that we recover our initial
capital investment, plus an acceptable return.  We also derive a
portion of our revenues from annual and month-to-month contracts.





Costs
of revenue





Costs of
revenue primarily include the following: (i) real estate expenses for all
operational sites; (ii) costs incurred to operate our networks, such as
licenses, right-of-way, permit fees and professional fees related to our
networks; (iii) third party telecommunications, fiber and conduit expenses;
(iv) repairs and maintenance costs incurred in connection with our
networks; and (v) employee-related costs relating to the operation of our
networks.





Selling,
General and Administrative Expenses (“SG&A”)





SG&A
primarily consist of (i) employee-related costs such as salaries and
benefits for employees not directly attributable to the operation of our
networks, in addition to stock-based compensation expenses and incentive bonus
expenses for all employees; (ii) real estate expenses for all
administrative sites; (iii) professional, consulting and audit fees; (iv)
certain taxes (other than income taxes), including property taxes and trust
fund-related taxes not passed through to customers; and (v) regulatory
costs, insurance, telecommunications costs, professional fees, and license and
maintenance fees for internal software and hardware.





Depreciation
and amortization





Depreciation
and amortization consists of the ratable measurement of the use of property and
equipment.  Depreciation and amortization for network assets commences
when such assets are placed in service and is provided on a straight-line basis
over the estimated useful lives of the assets, with the exception of leasehold
improvements, which are amortized over the lesser of the estimated useful lives
or the term of the lease.





Critical
Accounting Policies and Estimates





The
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the U.S. (“U.S.
GAAP”).  The preparation of these financial statements in conformity
with U.S. GAAP requires management to make judgments, estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, as
well as the reported amounts of revenue and expenses during the reporting
period.  Management continually evaluates its judgments, estimates and
assumptions based on historical experience and available
information.  The following is a discussion of the items within our
consolidated financial statements that involve significant judgments,
assumptions, uncertainties and estimates.  The estimates involved in
these areas are considered critical because they require high levels of
subjectivity and judgment to account for highly uncertain matters, and if actual
results or events differ materially from those contemplated by management in
making these estimates, the impact on our consolidated financial statements
could be material.  For a full description of our significant
accounting policies, see Note 2, “Basis of Presentation and Significant
Accounting Policies,” to the accompanying consolidated financial statements
included elsewhere in this Quarterly Report on Form 10-Q.




- 43
-




Fresh
Start Accounting




Our
emergence from bankruptcy resulted in a new reporting entity with no retained
earnings or accumulated losses, effective as of September 8,
2003.  Although the Effective Date of the Plan of Reorganization was
September 8, 2003, we accounted for the consummation of the Plan of
Reorganization as if it occurred on August 31, 2003 and implemented fresh
start accounting as of that date.  There were no significant
transactions during the period from August 31, 2003 to September 8,
2003.  Fresh start accounting requires us to allocate the
reorganization value of our assets and liabilities based upon their estimated
fair values, in accordance with Statement of Position 90-7, “Financial Reporting
by Entities in Reorganization under the Bankruptcy Code” (“SOP 90-7”) (now known
as FASB ASC 852-10).  We developed a set of financial projections,
which were utilized by an expert to assist us in estimating the fair value of
our assets and liabilities.  The expert utilized various valuation
methodologies, including (1) a comparison of the Company and our projected
performance to that of comparable companies; (2) a review and analysis of
several recent transactions of companies in similar industries to ours; and
(3) a calculation of the enterprise value based upon the future cash flows
of our projections.





Adopting
fresh start accounting resulted in material adjustments to the historical
carrying values of our assets and liabilities.  The reorganization
value was allocated to our assets and liabilities based upon their fair
values.  We engaged an independent appraiser to assist us in
determining the fair market value of our property and equipment.  The
determination of fair values of assets and liabilities was subject to
significant estimates and assumptions.  The unaudited fresh start
adjustments reflected at September 8, 2003 consisted of the
following: (i) reduction of property and equipment;
(ii) reduction of indebtedness; (iii) reduction of vendor payables;
(iv) reduction of the carrying value of deferred revenue; (v) increase
of deferred rent to fair market value; (vi) cancellation of MFN’s common
stock and additional paid-in capital, in accordance with the Plan of
Reorganization; (vii) issuance of new AboveNet, Inc. common stock and
additional paid-in capital; and (viii) elimination of the comprehensive
loss and accumulated deficit accounts.





Revenue
Recognition




We follow
SEC Staff Accounting Bulletin ("SAB") No. 101, “Revenue Recognition in Financial
Statements,” (now known as FASB ASC 605-10), as amended by SEC SAB No. 104,
“Revenue Recognition,” (also now known as FASB ASC 605-10).





Revenue
derived from leasing fiber optic telecommunications infrastructure and the
provision of telecommunications and co-location services is recognized as
services are provided.  Non-refundable payments received from
customers before the relevant criteria for revenue recognition are satisfied are
included in deferred revenue in the accompanying consolidated balance sheets and
are subsequently amortized into income over the fixed contract
term.





Prior to
October 1, 2009, we generally amortized revenue related to installation services
on a straight-line basis over the contracted customer relationship (two to
twenty years).  In the fourth quarter of 2009, we completed a study of
our historic customer relationship period.  As a result, commencing
October 1, 2009, we began amortizing revenue related to installation services on
a straight-line basis generally over the estimated customer relationship period
(generally ranging from three to twenty years).





Contract
termination revenue is recognized when a customer discontinues service prior to
the end of the contract period for which we had previously received
consideration and for which revenue recognition was
deferred.  Contract termination revenue is also recognized when
customers have made early termination payments to us to settle contractually
committed purchase amounts that the customer no longer expects to meet or when
we renegotiate or discontinue a contract with a customer and as a result are no
longer obligated to provide services for consideration previously received and
for which revenue recognition has been deferred.  Additionally, we
include receipts of bankruptcy claim settlements from former customers as
contract termination revenue when received.  Contract termination
revenue amounted to $0.7 million and $0.3 million in the three months ended
September 30, 2010 and 2009, respectively, and $2.3 million and $3.0 million in
the nine months ended September 30, 2010 and 2009, respectively.




- 44
-




Accounts
Receivable Reserves




Sales
Credit Reserves




During
each reporting period, we make estimates for potential future sales credits to
be issued in respect of current revenue, related to service interruptions and
customer disputes, which are recorded as a reduction in revenue.  We
analyze historical credit activity and changes in customer demand related to
current billing and service interruptions when evaluating our credit reserve
requirements.  We reserve for known service interruptions as
incurred.  We review customer disputes and reserve against those we
believe to be valid claims.  We also estimate a sales credit reserve
related to unknown billing errors and disputes based on such historical credit
activity.  The determination of the general sales credit and customer
dispute credit reserve requirements involves significant estimations and
assumptions.





Allowance
for Doubtful Accounts




During
each reporting period, we make estimates for potential losses resulting from the
inability of our customers to make required payments.  We analyze our
reserve requirements using several factors, including the length of time a
particular customer’s receivables are past due, changes in the customer’s
creditworthiness, the customer’s payment history, the length of the customer’s
relationship with us, the current economic climate and current industry
trends.  A specific reserve requirement review is performed on
customer accounts with larger balances.  A reserve analysis is also
performed on accounts not subject to specific review utilizing the factors
previously mentioned.  Changes in the financial viability of
significant customers, worsening of economic conditions and changes in our
ability to meet service level requirements may require changes to our estimate
of the recoverability of the receivables.  Revenue previously
unrecognized, which is recovered through litigation, negotiations, settlements
and judgments, is recognized as termination revenue in the period
collected.  The determination of both the specific and general
allowance for doubtful accounts reserve requirements involves significant
estimations and assumptions.





Property
and Equipment




Property
and equipment owned at the Effective Date are stated at their estimated fair
values as of the Effective Date based on our reorganization value, net of
accumulated depreciation and amortization incurred since the Effective
Date.  Purchases of property and equipment subsequent to the Effective
Date are stated at cost, net of depreciation and amortization.  Major
improvements are capitalized, while expenditures for repairs and maintenance are
expensed when incurred.  Costs incurred prior to a capital project’s
completion are reflected as construction in progress and are part of network
infrastructure assets, as described below and included in property and equipment
on the respective balance sheets.  At September 30, 2010 and December
31, 2009, we had $40.7 million and $26.9 million, respectively, of construction
in progress.  Certain internal direct labor costs of constructing or
installing property and equipment are capitalized.  Capitalized direct
labor is determined based upon a core group of project managers, field
engineers, network infrastructure engineers and equipment
engineers.  Capitalized direct labor is based upon time spent on
capitalized projects and consists of salary, plus related
benefits.  These individuals’ capitalized labor costs are directly
associated with the construction and installation of network infrastructure and
equipment and customer installations.  The salaries and related
benefits of non-engineers and supporting staff that are part of the operations
and engineering departments are not considered part of the pool subject to
capitalization.  Capitalized direct labor amounted to $2.0 million and
$2.8 million for the three months ended September 30, 2010 and 2009,
respectively, and $7.8 million and $8.4 million for the nine months ended
September 30, 2010 and 2009, respectively.  Depreciation and
amortization is provided on a straight-line basis over the estimated useful
lives of the assets, with the exception of leasehold improvements, which are
amortized over the lesser of the estimated useful lives or the term of the
lease.




- 45
-




Estimated
useful lives of our property and equipment are as follows:




Network
      infrastructure assets and storage huts (except for risers, which are 5
      years)
                  20
      yearsHVAC
      and power equipment
                  
                  12
      to 20 yearsSoftware
      and computer equipment
                  
                  3
      to 4 yearsTransmission
      and IP equipment
                  
                  5
      to 7 yearsFurniture,
      fixtures and equipment
                  
                  3
      to 10 yearsLeasehold
      improvements
                  Lesser
      of estimated useful life or the lease
term





When
property and equipment is retired or otherwise disposed of, the cost and
accumulated depreciation is removed from the accounts, and resulting gains or
losses are reflected in net income.




From time
to time, we are required to replace or re-route existing fiber due to structural
changes such as construction and highway expansions, which is defined as
“relocation.”  In such instances, we fully depreciate the remaining
carrying value of network infrastructure removed or rendered unusable and
capitalize the costs of the new fiber and associated construction placed into
service.  In certain circumstances, the local municipality or agency
is responsible for some or all of such amounts.  We record our share
of relocation costs in property and equipment and record the third party portion
of such costs as accounts receivable.  We capitalized relocation costs
amounting to $0.6 million and $0.9 million for the three months ended September
30, 2010 and 2009, respectively, and $1.0 million and $2.6 million for the nine
months ended September 30, 2010 and 2009, respectively.  We fully
depreciated the remaining carrying value of the network infrastructure rendered
unusable, which on an original cost basis, totaled $0.09 million and $0.14
million ($0.06 million and $0.10 million on a net book value basis) for the
three and nine months ended September 30, 2010, respectively, and, which on an
original cost basis, totaled $0.10 million and $0.30 million ($0.06 million and
$0.20 million on a net book value basis) for the three and nine months ended
September 30, 2009, respectively.  To the extent that relocation
requires only the movement of existing network infrastructure to another
location, the related costs are included in our results of
operations.


In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 34,
“Capitalization of Interest Cost,” (now known as FASB ASC 835-20), interest on
certain construction projects would be capitalized.  Such amounts were
considered immaterial, and accordingly, no such amounts were capitalized during
the three and nine months ended September 30, 2010 and 2009.





In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” (now known as FASB ASC 360-10-35), we periodically evaluate
the recoverability of our long-lived assets and evaluate such assets for
impairment whenever events or circumstances indicate that the carrying amount of
such assets (or group of assets) may not be recoverable.  Impairment
is determined to exist if the estimated future undiscounted cash flows are less
than the carrying value of such assets.  We consider various factors to
determine if an impairment test is necessary.  The factors include:
consideration of the overall economic climate, technological advances with
respect to equipment, our strategy and capital planning.  Since June
30, 2006, no event has occurred nor has the business environment changed to
trigger an impairment test for assets in revenue service and
operations.  We also consider the removal of assets from the network
as a triggering event for performing an impairment test.  Once an item
is removed from service, unless it is to be redeployed, it may have little or no
future cash flows related to it.  We performed annual physical counts
of such assets that are not in revenue service or operations (e.g., inventory,
primarily spare parts) at September 30, 2010 and 2009.  With the
assistance of a valuation report of the assets in inventory, prepared by an
independent third party on a basis consistent with SFAS No. 157, “Fair Value
Measurements,” (now known as FASB ASC 820-10), and pursuant to FASB ASC
360-10-35, we determined that the fair value of certain of these assets was less
than the carrying value and accordingly, recorded a provision for equipment
impairment of $0.4 million for the year ended December 31, 2009.  The
Company also recorded a provision for equipment impairment of $0.8 million in
the year ended December 31, 2009 to record the loss in value of certain
equipment, most of which was eventually sold to an unaffiliated third
party.  See Note 3, “Change in Estimate,” to the accompanying
consolidated financial statements included elsewhere in this Quarterly Report on
Form 10-Q.  For the nine months ended September 30, 2010, we provided
allowances for impairment of $0.4 million, of which $0.2 million was recorded in
the three months ended September 30, 2010.  For the nine months ended
September 30, 2009, we provided allowances for impairment of $0.5 million, none
of which was recorded in the three months ended September 30, 2009.




- 46
-




Asset
Retirement Obligations




In
accordance with SFAS No. 143, “Accounting for Asset Retirement
Obligations,” (now known as FASB ASC 410-20), we recognize the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred if a reasonable estimate of fair value can be made.  We have
asset retirement obligations related to the de-commissioning and removal of
equipment, restoration of leased facilities and the removal of certain fiber and
conduit systems.  Considerable management judgment is required in
estimating these obligations.  Important assumptions include estimates
of asset retirement costs, the timing of future asset retirement activities and
the likelihood of contractual asset retirement provisions being
enforced.  Changes in these assumptions based on future information
could result in adjustments to these estimated liabilities.





Asset
retirement obligations are generally recorded as “other long-term liabilities,”
are capitalized as part of the carrying amount of the related long-lived assets
included in property and equipment, net, and are depreciated over the life of
the associated asset.  Asset retirement obligations aggregated $7.7
million and $7.3 million at September 30, 2010 and December 31, 2009,
respectively, of which $4.2 million and $4.0 million, respectively, were
included in “Accrued expenses,” and $3.5 million and $3.3 million, respectively,
were included in “Other long-term liabilities” at such
dates.  Accretion expense, which is included in “Interest expense,”
amounted to $0.07 million and $0.10 million for the three months ended
September 30, 2010 and 2009, respectively, and $0.21 million, and $0.20 million
for the nine months ended September 30, 2010 and 2009,
respectively.





Derivative
Financial Instruments




We
utilize derivative financial instruments known as interest rate swaps
(“derivatives”) to mitigate our exposure to interest rate risk.  We
purchased the first interest rate swap on August 4, 2008 to hedge the interest
rate on the $24.0 million (original principal) portion of the Term Loan and we
purchased a second interest rate swap on November 14, 2008 to hedge the interest
rate on the additional $12.0 million (original principal) portion of the Term
Loan provided by SunTrust Bank.  See Note 4, “Note Payable,” to the
accompanying consolidated financial statements included elsewhere in this
Quarterly Report on Form 10-Q.  We accounted for the derivatives under
SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,”
(now known as FASB ASC 815).  FASB ASC 815 requires that all
derivatives be recognized in the financial statements and measured at fair value
regardless of the purpose or intent for holding them.  By policy, we
have not historically entered into derivatives for trading purposes or for
speculation.  Based on criteria defined in FASB ASC 815, the interest
rate swaps were considered cash flow hedges and were 100%
effective.  Accordingly, changes in the fair value of derivatives are,
and will be, recorded each period in accumulated other comprehensive
loss.  Changes in the fair value of the derivatives reported in
accumulated other comprehensive loss will be reclassified into earnings in the
period in which earnings are impacted by the variability of the cash flows of
the hedged item.  The ineffective portion of all hedges, if any, is
recognized in current period earnings.  The unrealized net loss
recorded in accumulated other comprehensive loss at September 30, 2010 and
December 31, 2009 was $0.8 million and $1.2 million, respectively, for the
interest rate swaps.  The mark-to-market value of the cash flow hedges
will be recorded in current assets, current liabilities, other non-current
assets or other long-term liabilities, as applicable, and the offsetting gains
or losses in accumulated other comprehensive loss.





On
January 1, 2009, we adopted SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement No. 133,”
(now known as FASB ASC 815-10).  FASB ASC 815-10 changes the
disclosure requirements for derivatives and hedging
activities.  Entities are required to provide enhanced disclosures
about (i) how and why an entity uses derivatives; (ii) how derivatives and
related hedged items are accounted for under FASB ASC 815; and (iii) how
derivatives and related hedged items affect an entity’s financial position and
cash flows.





We
minimize our credit risk relating to counterparties of our derivatives by
transacting with multiple, high-quality counterparties, thereby limiting
exposure to individual counterparties, and by monitoring the financial condition
of our counterparties.





All
derivatives were recorded in our consolidated balance sheets at fair
value.  Accounting for the gains and losses resulting from changes in
the fair value of derivatives depends on the use of the derivative and whether
it qualifies for hedge accounting in accordance with FASB ASC 815.  At
September 30, 2010, our consolidated balance sheet included net interest rate
swap derivative liabilities of $0.8 million, of which $0.6 million is included
in “Accrued expenses,” and $0.2 million is included in “Other long-term
liabilities,” and at December 31, 2009, our consolidated balance sheet included
net interest rate swap derivative liabilities of $1.2 million, which is included
in “Other long-term liabilities.”




- 47
-








Derivatives
recorded at fair value in our consolidated balance sheets as of September 30,
2010 and December 31, 2009 consisted of the following:





Derivative
      Liabilities
              (In
      millions)Derivatives
      designated as hedging instruments
            
            September
      30, 2010
            
            
            December
      31, 2009Interest
      rate swap agreements expiring August 4, 2011 (*)
            
            $
            0.6
            
            
            $
            0.9Interest
      rate swap agreements expiring November 1, 2011 (*)
            
            $
            0.2
            
            
            $
            0.3Total
      derivatives designated as hedging instruments
            
            $
            0.8
            
            
            $
            1.2





(*)
            The
      derivative liabilities are two interest rate swap agreements with original
      three year terms.  The interest rate swap agreement expiring
      August 1, 2011 is included in “Accrued expenses,” and the interest rate
      swap agreement expiring November 1, 2011 is included in “Other long-term
      liabilities,” in the Company’s consolidated balance sheet at September 30,
      2010.





Interest
Rate Swap Agreements




The
notional amounts provide an indication of the extent of our involvement in such
agreements but do not represent our exposure to market risk.  The
following table shows the notional amount outstanding, maturity date, and the
weighted average receive and pay rates of the interest rate swap agreements as
of September 30, 2010.





Notional
      Amount
            
            
            
            Weighted
      Average Rate(In
      millions)
            
            Maturity
      Date
            
            Pay
            
            Receive$19.7
            
            August
      2011
            
            3.65%
            
            0.77%9.8
            
            November
      2011
            
            2.635%
            
            0.42%$29.5




Interest
expense under these agreements, and the respective debt instruments that they
hedge, are recorded at the net effective interest rate of the hedged
transaction.





The
notional amounts of the swap arrangements have since been reduced by amounts
corresponding to reductions in the outstanding principal balances.





Fair
Value of Financial Instruments




We
adopted SFAS No. 157, “Fair Value Measurements,” (“SFAS No. 157”) (now known as
FASB ASC 820-10), for our financial assets and liabilities effective
January 1, 2008.  This pronouncement defines fair value, establishes a
framework for measuring fair value, and requires expanded disclosures about fair
value measurements.  FASB ASC 820-10 emphasizes that fair value is a
market-based measurement, not an entity-specific measurement, and defines fair
value as the price that would be received to sell an asset or transfer a
liability in an orderly transaction between market participants at the
measurement date.  FASB ASC 820-10 discusses valuation techniques,
such as the market approach (comparable market prices), the income approach
(present value of future income or cash flow) and the cost approach (cost to
replace the service capacity of an asset or replacement cost), which are each
based upon observable and unobservable inputs.  Observable inputs
reflect market data obtained from independent sources, while unobservable inputs
reflect our market assumptions.  FASB ASC 820-10 utilizes a fair value
hierarchy that prioritizes inputs to fair value measurement techniques into
three broad levels:




Level
      1:
            Observable
      inputs such as quoted prices for identical assets or liabilities in active
      markets.Level
      2:
            Observable
      inputs other than quoted prices that are directly or indirectly observable
      for the asset or liability, including quoted prices for similar assets or
      liabilities in active markets; quoted prices for similar or identical
      assets or liabilities in markets that are not active; and model-derived
      valuations whose inputs are observable or whose significant value drivers
      are observable.Level
      3:
            Unobservable
      inputs that reflect the reporting entity’s own
  assumptions.






- 48
-




Our
investment in overnight money market institutional funds, which amounted to
$180.9 million and $154.1 million at September 30, 2010 and December 31, 2009,
respectively, is included in cash and cash equivalents on the accompanying
balance sheets and is classified as a Level 1 asset.





We are
party to two interest rate swaps, which are utilized to modify our interest rate
risk.  We recorded the mark-to-market value of the interest rate swap
contracts of $0.8 million (of which $0.6 million is included in “Accrued
expenses” and $0.2 million is included in “Other long-term liabilities”) in our
consolidated balance sheet at September 30, 2010, and $1.2 million (which is
included in “Other long-term liabilities”) in our consolidated balance sheet at
December 31, 2009.  We used third parties to value each of the
interest rate swap agreements at September 30, 2010 and December 31, 2009, as
well as our own market analysis to determine fair value.  The fair
value of the interest rate swap contracts are classified as Level 2
liabilities.





Our
consolidated balance sheets include the following financial instruments:
short-term cash investments, trade accounts receivable, trade accounts payable
and note payable.  We believe the carrying amounts in the financial
statements approximate the fair value of these financial instruments due to the
relatively short period of time between the origination of the instruments and
their expected realization or the interest rates which approximate current
market rates.





Concentration
of Credit Risk




Financial
instruments, which potentially subject us to concentration of credit risk,
consist principally of temporary cash investments and accounts
receivable.  We do not enter into financial instruments for trading or
speculative purposes.  Our cash and cash equivalents are invested in
investment-grade, short-term investment instruments with high quality financial
institutions.  Our trade receivables, which are unsecured, are
geographically dispersed, and no single customer accounts for greater than 10%
of consolidated revenue or accounts receivable, net.  We perform
ongoing credit evaluations of our customers’ financial condition.  The
allowance for non-collection of accounts receivable is based upon the expected
collectability of all accounts receivable.  We place our cash and cash
equivalents primarily in commercial bank accounts in the U.S.  Account
balances generally exceed federally insured limits.





Foreign
Currency Translation and Transactions




Our
functional currency is the U.S. dollar.  For those subsidiaries not
using the U.S. dollar as their functional currency, assets and liabilities are
translated at exchange rates in effect at the applicable balance sheet date and
income and expense transactions are translated at average exchange rates during
the period.  Resulting translation adjustments are recorded directly
to a separate component of shareholders’ equity and are reflected in the
accompanying consolidated statements of comprehensive income.  Our
foreign exchange transaction gains (losses) are generally included in “other
income (expense), net” in the consolidated statements of
operations.





Income
Taxes




We
account for income taxes in accordance with SFAS No. 109, “Accounting for Income
Taxes,” (now known as FASB ASC 740).  Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between financial statement carrying amounts of existing assets and
liabilities and their respective tax basis, net operating losses and tax credit
carryforwards, and tax contingencies.  Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled.





We are
subject to audits by various taxing authorities, and these audits may result in
proposed assessments where the ultimate resolution results in us owing
additional taxes.  We are required to establish reserves under FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (now known
as FASB ASC 740-10), when we believe there is uncertainty with respect to
certain positions and we may not succeed in realizing the tax
benefit.  We believe that our tax return positions are appropriate and
supportable under relevant tax law.  We have evaluated our tax
positions for items of uncertainty in accordance with FASB ASC 740-10 and have
determined that our tax positions are highly certain within the meaning of FASB
ASC 740-10.  We believe the estimates and assumptions used to support
our evaluation of tax benefit realization are
reasonable.  Accordingly, no adjustments have been made to the
consolidated financial statements for the three and nine months ended September
30, 2010 and 2009.




- 49
-





Deferred
Taxes




Our
current and deferred income taxes, and associated valuation allowances, are
impacted by events and transactions arising in the normal course of business as
well as by both special and non-recurring items.  Assessment of the
appropriate amount and classification of income taxes is dependent on several
factors, including estimates of the timing and realization of deferred income
tax on income and deductions.  Actual realization of deferred tax
assets and liabilities may materially differ from these estimates as a result of
changes in tax laws as well as unanticipated future transactions impacting
related income tax balances.





The
assessment of a valuation allowance on deferred tax assets is based on the
likelihood that a portion of our deferred tax assets will be realized in future
periods.  The weight of all available evidence is considered in
determining realizability of our deferred tax assets.  Deferred tax
liabilities are first applied to the deferred tax assets reducing the need for a
valuation allowance.  Future utilization of the remaining net deferred
tax assets would require the ability to forecast future
earnings.  Based on past performance and management’s estimation of
future income, we do not believe that sufficient evidence exists to release the
entire valuation allowance as of December 31, 2009.




As part
of our evaluation of deferred tax assets in the fourth quarter of 2009, we
recognized a tax benefit of $183.0 million at December 31, 2009 relating to
the reduction of certain valuation allowances previously established in the U.S.
and the U.K.  We believe it is more likely than not that we will
utilize these deferred tax assets to reduce or eliminate tax payments in future
periods.  This reduction in valuation allowances had the effect of
increasing net income by $183.0 million for the year ended December 31,
2009.  Our evaluation encompassed (i) a review of our recent
history of profitability in the U.S. and the U.K. for the past three years; and
(ii) a review of internal financial forecasts demonstrating our expected
capacity to utilize deferred tax assets.  We review our deferred tax
assets and liabilities on a quarterly basis as part of our FASB ASC 740
review.  Significant and continuous judgment of management is required
in determining the provision for income tax, deferred tax assets and
liabilities, and related valuation allowances established against the deferred
tax assets.  It is possible that the valuation allowances could be
further adjusted, as necessary, in the near term.


Stock-Based
Compensation




On
September 8, 2003, we adopted the fair value provisions of SFAS
No. 148, “Accounting for Stock-Based Compensation Transition and
Disclosure,” (“SFAS No. 148”), (now known as FASB ASC
718-10).  SFAS No. 148 amended SFAS No. 123, “Accounting for
Stock-Based Compensation,” (“SFAS No. 123”), (also now known as FASB ASC
718-10), to provide alternative methods of transition to SFAS No. 123’s
fair value method of accounting for stock-based employee
compensation.  See Note 7, “Stock-Based Compensation,” to the
accompanying consolidated financial statements included elsewhere in this
Quarterly Report on Form 10-Q.





Under the
fair value provisions of SFAS No. 123, the fair value of each stock-based
compensation award is estimated at the date of grant, using the Black-Scholes
option pricing model for stock option awards.  We did not have a
historical basis for determining the volatility and expected life assumptions in
the model due to our limited market trading history; therefore, the assumptions
used for these amounts are an average of those used by a select group of related
industry companies.  Most stock-based awards have graded vesting (i.e.
portions of the award vest at different dates during the vesting
period).  We recognize the related stock-based compensation expense of
such awards on a straight-line basis over the vesting period for each tranche in
an award.  Upon consummation of our Plan of Reorganization, all then
outstanding stock options were cancelled.





Effective
January 1, 2006, we adopted SFAS No. 123(R), “Share-Based Payment,”
(“SFAS No. 123(R)”), (now known as FASB ASC 718), using the modified
prospective method.  SFAS No. 123(R) requires all share-based
awards granted to employees to be recognized as compensation expense over the
vesting period, based on fair value of the award.  The fair value
method under SFAS No. 123(R) is similar to the fair value method under SFAS
No. 123 with respect to measurement and recognition of stock-based
compensation expense except that SFAS No. 123(R) requires an estimate of
future forfeitures, whereas SFAS No. 123 permitted companies to estimate
forfeitures or recognize the impact of forfeitures as they
occurred.  As we had recognized the impact of forfeitures as they
occurred under SFAS No. 123, the adoption of SFAS No. 123(R) resulted
in a change in our accounting treatment, but it did not have a material impact
on our consolidated financial statements.





For a
description of our stock-based compensation programs, see Note 7, “Stock-Based
Compensation,” to the accompanying consolidated financial statements included
elsewhere in this Quarterly Report on Form 10-Q.





There
were no options to purchase shares of common stock granted during the three and
nine months ended September 30, 2010 and 2009.




- 50
-





Results
of Operations for the Nine Months Ended September 30, 2010 Compared to the Nine
Months Ended September 30, 2009





Consolidated
Results (dollars in millions for the table set forth below):




Nine
      Months Ended September 30,
            
            
            
            $
      Increase/
            
            
            
            %
      Increase/2010
            
            
            
            2009
            
            
            
            (Decrease)
            
            
            
            (Decrease)Revenue
            
            $
            301.6
            
            
            $
            265.8
            
            
            $
            35.8
            
            
            
            13.5
            %Costs
      of revenue (excluding depreciation and amortization, shown separately
      below)
            
            
            102.9
            
            
            
            95.6
            
            
            
            7.3
            
            
            
            7.6
            %Selling,
      general and administrative expenses
            
            
            69.7
            
            
            
            61.1
            
            
            
            8.6
            
            
            
            14.1
            %Depreciation
      and amortization
            
            
            46.5
            
            
            
            37.7
            
            
            
            8.8
            
            
            
            23.3
            %Operating
      income
            
            
            82.5
            
            
            
            71.4
            
            
            
            11.1
            
            
            
            15.5
            %Other
      income (expense):Interest
      income
            
            
            0.1
            
            
            
            0.3
            
            
            
            (0.2
            )
            
            
            (66.7
            )
      %Interest
      expense
            
            
            (3.7
            )
            
            
            (3.6
            )
            
            
            0.1
            
            
            
            2.8
            %Other
      income, net
            
            
            0.6
            
            
            
            1.9
            
            
            
            (1.3
            )
            
            
            (68.4
            )
      %Income
      before income taxes
            
            
            79.5
            
            
            
            70.0
            
            
            
            9.5
            
            
            
            13.6
            %Provision
      for (benefit from) income taxes
            
            
            32.4
            
            
            
            (4.7
            )
            
            
            37.1
            
            
            NMNet
      income
            
            $
            47.1
            
            
            $
            74.7
            
            
            $
            (27.6
            )
            
            
            (36.9
            )%




NM—not
meaningful





We use
the term “consolidated” below to describe the total results of our two
geographic segments, the U.S. and the U.K. and others.  Throughout this
document, unless otherwise noted, amounts discussed are consolidated
amounts.





Net
Income.  Our net income for the nine months ended September 30,
2010 was $47.1 million, compared to $74.7 million for the nine months ended
September 30, 2009, a decrease of $27.6 million.  The primary reasons
for the decrease in net income were the change from a net benefit from income
taxes of $4.7 million to a provision for income taxes of $32.4 million totaling
a change of $37.1 million, an increase in costs of revenue of $7.3 million, an
increase in selling, general and administrative expenses of $8.6 million, an
increase in depreciation and amortization of $8.8 million and a decrease in
other income, net, of $1.3 million, which were partially offset by an increase
in revenue of $35.8 million.  These changes are discussed more fully
below.





Revenue.  Consolidated
revenue was $301.6 million for the nine months ended September 30, 2010,
compared to $265.8 million for the nine months ended September 30, 2009, an
increase of $35.8 million, or 13.5%.  Revenue from our U.S. operations
increased by $32.0 million, or 13.2%, from $242.3 million for the nine months
ended September 30, 2009 to $274.3 million for the nine months ended September
30, 2010.  The principal reason for this increase was the continued
growth in each of our metro, fiber infrastructure and WAN
services.  This continued growth in revenue for each of these services
is attributable principally to revenue from service installations exceeding
reductions in revenue from contract terminations and any contractual price
reductions.  U.S. revenue from metro services increased by $14.7
million, or 21.2%, from $69.4 million for the nine months ended September 30,
2009 to $84.1 million for the nine months ended September 30, 2010, U.S. revenue
from fiber infrastructure services increased by $8.3 million, or 7.0%, from
$118.1 million for the nine months ended September 30, 2009 to $126.4 million
for the nine months ended September 30, 2010 and U.S. revenue from WAN services
increased by $9.2 million, or 18.6%, from $49.4 million for the nine months
ended September 30, 2009 to $58.6 million for the nine months ended September
30, 2010.  These increases were partially offset by a decrease of $0.2
million, or 3.7%, in other revenue, which includes domestic contract termination
revenue, from $5.4 million for the nine months ended September 30, 2009 to $5.2
million for the nine months ended September 30, 2010.  Revenue from
our foreign operations, primarily in the U.K., increased by $3.8 million, or
16.2%, from $23.5 million for the nine months ended September 30, 2009 to $27.3
million for the nine months ended September 30, 2010.  The primary
reason for this increase was due to an increase in revenue at the local currency
level due to an increase in provisioning of services.  Also
contributing to this increase was $0.2 million of contract termination revenue
earned during the nine months ended September 30, 2010.  There was no
contract termination revenue earned in the U.K. during the nine months ended
September 30, 2009.  The translation rate of the British pound to the
U.S. dollar in each period was substantially the same.




- 51
-




Costs of
revenue.  Consolidated costs of revenue for the nine months
ended September 30, 2010 was $102.9 million, compared to $95.6 million for the
nine months ended September 30, 2009, an increase of $7.3 million, or
7.6%.  Consolidated costs of revenue as a percentage of revenue was
34.1% for the nine months ended September 30, 2010, compared to 36.0% for the
nine months ended September 30, 2009, resulting in consolidated gross profit
margin of 65.9% and 64.0% for the nine months ended September 30, 2010 and 2009,
respectively.  The costs of revenue for our U.S. operations was $93.6
million and $87.2 million for the nine months ended September 30, 2010 and 2009,
respectively, an increase of $6.4 million, or 7.3%.  The increase in
domestic costs of revenue for the nine months ended September 30, 2010 compared
to the nine months ended September 30, 2009 was attributable principally to (i)
an increase of $3.8 million in co-location expenses, to support our IP network
services and increase our presence in third party data centers; (ii) an increase
of $1.3 million for expenses associated with third party network costs; (iii) an
increase of $1.2 million in payroll-related expenses; (iv) an increase of $1.2
million in installation costs; and (v) an increase of $0.4 million in amounts
rebilled to customers for equipment sales (for which there was a corresponding
increase in related revenue).  These increases were partially offset
by (i) a decrease of $0.8 million for repairs and maintenance charges for our
cable and transmission equipment; (ii) the reversal of $0.4 million during the
three months ended June 30, 2010 due to previously accrued right-of-way expenses
as a result of favorable negotiations with the relevant
jurisdiction.  Additionally, the nine month periods ended September
30, 2010 and 2009 include a provision for equipment impairment relating to
inventory of $0.4 million and $0.9 million, respectively.  The costs
of revenue for our foreign operations was $9.3 million for the nine months ended
September 30, 2010, compared to $8.4 million for the nine months ended September
30, 2009, an increase of $0.9 million, or 10.7%.  This increase was
due primarily to increases in third party network costs, co-location expenses
and leased fiber costs, which were needed to support the increases in our
current and future operations totaling $1.9 million, partially offset by a
one-time benefit of a reduction in certain business tax rates on fiber by the
Valuation Office Agency in the U.K., which was effective retroactively back to
2005, reducing amounts paid or accrued by $1.1 million.  As previously
described, the translation rate of the British pound to the U.S. dollar in each
period was substantially the same.




Selling, General
and Administrative Expenses (“SG&A”).  Consolidated
SG&A for the nine months ended September 30, 2010 was $69.7 million,
compared to $61.1 million for the nine months ended September 30, 2009, an
increase of $8.6 million, or 14.1%.  SG&A as a percentage of
revenue was 23.1% for the nine months ended September 30, 2010, compared to
23.0% for the nine months ended September 30, 2009.  In the U.S.,
SG&A was $61.6 million for the nine months ended September 30, 2010,
compared to $53.9 million for the nine months ended September 30, 2009, an
increase of $7.7 million, or 14.3%.  SG&A for our U.S. operations
for the nine months ended September 30, 2010 compared to the nine months ended
September 30, 2009 increased primarily due to (i) an increase of $5.2 million in
domestic payroll and payroll-related expenses from $29.8 million for the nine
months ended September 30, 2009 to $35.0 million for the nine months ended
September 30, 2010, which is attributable to an increase in annual merit
increases for domestic employees effectuated on March 1, 2010, an increase in
sales commissions due to an increase in year over year sales and a sales
incentive program in effect in the first quarter of 2010; (ii) an increase of
$0.7 million in occupancy-related expenses; (iii) an increase of $0.6 million
for property taxes; (iv) an increase of $0.5 million in professional fees; and
(v) an increase of $2.4 million in other operating expenses, primarily due to
increases in computer software and maintenance of $0.7 million, commissions paid
to third party sales agents and related marketing expenses of $0.9 million and
training and seminar expenses of $0.2 million.  These increases were
partially offset by a reduction of $1.8 million in domestic non-cash stock-based
compensation expense from $7.6 million for the nine months ended September 30,
2009 to $5.8 million for the nine months ended September 30,
2010.  SG&A from our foreign operations was $8.1 million for the
nine months ended September 30, 2010, compared to $7.2 million for the nine
months ended September 30, 2009, an increase of $0.9 million, or
12.5%.  Increases in professional fees and payroll related expenses
were the primary reasons for this change.





Depreciation and
amortization.  Consolidated depreciation and amortization was
$46.5 million for the nine months ended September 30, 2010, compared to
$37.7 million for the nine months ended September 30, 2009, an increase of
$8.8 million, or 23.3%.  Consolidated depreciation and amortization as
a percentage of revenue was 15.4% for the nine months ended September 30, 2010,
compared to 14.2% for the nine months ended September 30,
2009.  The increase in consolidated depreciation and amortization was
primarily attributable to (i) additions of property and equipment in the three
months ended December 31, 2009 and the nine months ended September 30, 2010, and
the full period effect of depreciation on property and equipment acquired during
the nine months ended September 30, 2009 and (ii) the change (reduction) in
estimated useful lives of certain property and equipment effectuated on October
1, 2009 and January 1, 2010.





Interest
income.  Interest income, substantially all of which was earned
in the U.S., decreased from $0.3 million for the nine months ended September 30,
2009 to $0.1 million for the nine months ended September 30,
2010.  The decrease of $0.2 million was primarily due to the
decline in short-term interest rates during the nine months ended September 30,
2010 compared to the nine months ended September 30, 2009, partially offset by
an increase in average balances available for investment.




- 52
-




Interest
expense.
Interest expense, substantially all of which was incurred in the U.S., includes
interest expense on borrowed amounts under the Secured Credit Facility,
availability fees on the unused portion of the Secured Credit Facility, the
amortization of debt acquisition costs (including upfront fees) related to the
Secured Credit Facility, interest expense related to a capital lease obligation,
interest accrued on certain tax liabilities, interest on the
outstanding balance of the deferred fair value rent liabilities established
at fresh start and interest accretion relating to asset retirement
obligations.  Interest expense was $3.7 million for the nine months
ended September 30, 2010, compared to $3.6 million for the nine months
ended September 30, 2009, an increase of $0.1 million, or 2.8%.





Other income,
net.Other
income, net is composed primarily of income or expense from non-recurring
transactions and is not comparative from a trend
perspective.  Consolidated other income, net was $0.6 million for the
nine months ended September 30, 2010, compared to $1.9 million for the nine
months ended September 30, 2009, a reduction of $1.3 million.  In the
U.S., other income, net was $0.7 million for the nine months ended September 30,
2010, compared to $0.6 million for the nine months ended September 30, 2009, an
increase of $0.1 million.  For our foreign operations, other (expense)
income, net was a net expense of $0.1 million for the nine months ended
September 30, 2010, compared to other income, net of $1.3 million for the nine
months ended September 30, 2009, a change (decrease) of $1.4
million.  For the nine months ended September 30, 2010, consolidated
other income, net was comprised of gains arising from the settlement or reversal
of certain tax liabilities of $0.4 million, a gain from the settlement of an
insurance claim of $0.2 million and other gains of $0.2 million, partially
offset by a net loss on foreign currency of $0.1 million and net loss on the
sale or disposition of property and equipment of $0.1 million.  For
the nine months ended September 30, 2009, consolidated other income, net was
comprised of a gain on foreign currency of $2.1 million, gains arising from the
reversal of certain tax liabilities of $0.7 million and other gains of 0.2
million, offset by a net loss on the sale or disposition of property and
equipment of $1.1 million.





Provision for
(benefit from) income taxes.We recorded a provision
for income taxes of $32.4 million for the nine months ended September 30, 2010,
compared to a benefit from income taxes of $4.7 million for the nine months
ended September 30, 2009.  The provision for income taxes for the nine
months ended September 30, 2010 was calculated at our effective tax rate based
upon our pre-tax book income (adjusted for permanent differences in both the
U.S. and the U.K.), resulting in a tax provision of $31.6 million, plus a
provision for certain capital-based state taxes of $0.8 million.  For
the nine months ended September 30, 2009, because of the anticipated loss for
federal income tax purposes for 2009, we recorded a carryback benefit to 2007
and 2008 and released a portion of the valuation allowance previously
established against deferred tax assets to the extent of a provision for income
taxes otherwise required.




- 53
-




Results
of Operations for the Three Months Ended September 30, 2010 Compared to the
Three Months Ended September 30, 2009





Consolidated
Results (dollars in millions for the table set forth below):




Three
      Months Ended September 30,
            
            
            
            $
      Increase/
            
            
            
            %
      Increase/2010
            
            
            
            2009
            
            
            
            (Decrease)
            
            
            
            (Decrease)Revenue
            
            $
            103.7
            
            
            $
            92.4
            
            
            $
            11.3
            
            
            
            12.2
            %Costs
      of revenue (excluding depreciation and amortization, shown separately
      below)
            
            
            35.7
            
            
            
            33.9
            
            
            
            1.8
            
            
            
            5.3
            %Selling,
      general and administrative expenses
            
            
            23.1
            
            
            
            20.3
            
            
            
            2.8
            
            
            
            13.8
            %Depreciation
      and amortization
            
            
            15.8
            
            
            
            13.5
            
            
            
            2.3
            
            
            
            17.0
            %Operating
      income
            
            
            29.1
            
            
            
            24.7
            
            
            
            4.4
            
            
            
            17.8
            %Other
      income (expense):Interest
      income
            
            
            0.1
            
            
            
            —
            
            
            
            0.1
            
            
            NMInterest
      expense
            
            
            (1.3
            )
            
            
            (1.3
            )
            
            
            —
            
            
            
            —Other
      income (expense), net
            
            
            1.0
            
            
            
            (0.5
            )
            
            
            1.5
            
            
            NMIncome
      before income taxes
            
            
            28.9
            
            
            
            22.9
            
            
            
            6.0
            
            
            
            26.2
            %Provision
      for income taxes
            
            
            11.7
            
            
            
            0.2
            
            
            
            11.5
            
            
            NMNet
      income
            
            $
            17.2
            
            
            $
            22.7
            
            
            $
            (5.5
            )
            
            
            (24.2
            )
      %




NM—not
meaningful





We use
the term “consolidated” below to describe the total results of our two
geographic segments, the U.S. and the U.K. and others.  Throughout this
document, unless otherwise noted, amounts discussed are consolidated
amounts.





Net
Income.  Our net income for the three months ended September
30, 2010 was $17.2 million, compared to $22.7 million for the three months ended
September 30, 2009, a decrease of $5.5 million.  The primary reasons
for the decrease in net income were the year over year increases in provision
for income taxes of $11.5 million, costs of revenue of $1.8 million, selling,
general and administrative expenses of $2.8 million and depreciation and
amortization of $2.3 million, which were partially offset by an increase in
revenue of $11.3 million and a change in other income, net of $1.5
million.  These changes are discussed more fully below.





Revenue.  Consolidated
revenue was $103.7 million for the three months ended September 30, 2010,
compared to $92.4 million for the three months ended September 30, 2009, an
increase of $11.3 million, or 12.2%.  Revenue from our U.S. operations
increased by $10.7 million, or 12.8%, from $83.6 million for the three months
ended September 30, 2009 to $94.3 million for the three months ended September
30, 2010.  The principal reason for this increase was the continued
growth in each of our metro, fiber infrastructure and WAN
services.  This continued growth in revenue for each of these services
is attributable principally to revenue from service installations exceeding
reductions in revenue from contract terminations and any contractual price
decreases.  U.S. revenue from metro services increased by $4.4
million, or 17.7%, from $24.8 million for the three months ended September 30,
2009 to $29.2 million for the three months ended September 30, 2010, U.S.
revenue from fiber infrastructure services increased by $2.7 million, or 6.7%,
from $40.5 million for the three months ended September 30, 2009 to $43.2
million for the three months ended September 30, 2010 and U.S. revenue from WAN
services increased by $3.5 million, or 20.5%, from $17.1 million for the three
months ended September 30, 2009 to $20.6 million for the three months ended
September 30, 2010.  Other revenue, which includes domestic contract
termination revenue, increased slightly from $1.2 million for the three months
ended September 30, 2009 to $1.3 million for the three months ended September
30, 2010.  Revenue from our foreign operations, primarily in the U.K.,
increased by $0.6 million, or 6.8%, from $8.8 million for the three months ended
September 30, 2009 to $9.4 million for the three months ended September 30,
2010.  The primary reason for this increase was due to an increase in
revenue at the local currency level resulting from higher levels in provisioning
of services, which was partially offset by a 5.6% decrease in the translation
rate due to the strengthening of the U.S. dollar against the British pound in
the three months ended September 30, 2010 compared to the three months ended
September 30, 2009.  There was no contract termination revenue earned
in the U.K. during the three months ended September 30, 2010 and
2009.




- 54
-





Costs of
revenue.  Consolidated costs of revenue for the three months
ended September 30, 2010 was $35.7 million, compared to $33.9 million for the
three months ended September 30, 2009, an increase of $1.8 million, or
5.3%.  Consolidated costs of revenue as a percentage of revenue was
34.4% for the three months ended September 30, 2010, compared to 36.7% for the
three months ended September 30, 2009, resulting in consolidated gross profit
margin of 65.6% and 63.3% for the three months ended September 30, 2010 and
2009, respectively.  The costs of revenue for our U.S. operations was
$32.6 million and $30.7 million for the three months ended September 30, 2010
and 2009, respectively, an increase of $1.9 million, or 6.2%.  The
increase in domestic costs of revenue for the three months ended September 30,
2010 compared to the three months ended September 30, 2009 was attributable
principally to (i) an increase of $1.1 million in co-location expenses, to
support our IP network services and increase our presence in third party data
centers; (ii) an increase of $0.8 million in payroll related expenses; and (iii)
an increase of $0.4 million for expenses associated with third party network
costs.  These increases were partially offset by a reduction of $0.3
million for amounts rebilled to customers for equipment sales (for which there
was a corresponding decrease in revenue).  Additionally, the three
month periods ended September 30, 2010 and 2009 includes provisions for
equipment impairment relating to inventory of $0.2 million and $0.4 million,
respectively.  The costs of revenue for our foreign operations was
$3.1 million for the three months ended September 30, 2010, compared to $3.2
million for the three months ended September 30, 2009, a decrease of $0.1
million, or 3.1%.  This decrease was due to a third quarter change in
certain business tax rates on fiber by the Valuation Office Agency in the U.K.,
which created a third quarter benefit of $0.3 million in the three months ended
September 30, 2010, compared to a $0.3 million expense in the three months ended
September 30, 2009, partially offset by increases in third party network costs
and co-location expenses totaling $0.4 million.




Selling, General
and Administrative Expenses (“SG&A”).  Consolidated
SG&A for the three months ended September 30, 2010 was $23.1 million,
compared to $20.3 million for the three months ended September 30, 2009, an
increase of $2.8 million, or 13.8%.  SG&A as a percentage of
revenue was 22.3% for the three months ended September 30, 2010, compared to
22.0% for the three months ended September 30, 2009.  In the U.S.,
SG&A was $20.2 million for the three months ended September 30, 2010,
compared to $18.0 million for the three months ended September 30, 2009, an
increase of $2.2 million, or 12.2%.  SG&A for our U.S. operations
for the three months ended September 30, 2010 compared to the three months ended
September 30, 2009 increased primarily due to (i) an increase of $1.4 million in
domestic payroll and payroll-related expenses from $9.9 million for the three
months ended September 30, 2009 to $11.3 million for the three months ended
September 30, 2010, which is attributable to annual merit increases for domestic
employees effectuated on March 1, 2010, an increase in sales commissions due to
an increase in year over year sales; (ii) an increase of $0.4 million in
occupancy related charges; (iii) an increase of $0.3 million in professional
fees; and (iv) an increase of $0.5 million due to increases in commissions paid
to third party sales agents and related marketing expenses of $0.5
million.  These increases were partially offset by a reduction of $0.3
million in domestic non-cash stock-based compensation expense from $2.4 million
for the three months ended September 30, 2009 to $2.1 million for the three
months ended September 30, 2010 and a reduction of $0.2 million for property
taxes.  SG&A from our foreign operations was $2.9 million for the
three months ended September 30, 2010, compared to $2.3 million for the three
months ended September 30, 2009, an increase of $0.6 million, or
26.1%.  Increases in professional fees and payroll related expenses
were the primary reasons for this change.





Depreciation and
amortization.  Consolidated depreciation and amortization was
$15.8 million for the three months ended September 30, 2010, compared to
$13.5 million for the three months ended September 30, 2009, an increase of
$2.3 million, or 17.0%. Consolidated depreciation and amortization as a
percentage of revenue was 15.2% for the three months ended September 30, 2010,
compared to 14.6% for the three months ended September 30,
2009.  The increase in consolidated depreciation and amortization was
primarily attributable to (i) additions of property and equipment in the three
months ended December 31, 2009 and the nine months ended September 30, 2010, and
the full period effect of depreciation on property and equipment acquired during
the nine months ended September 30, 2009 and (ii) the change (reduction) in
estimated useful lives of certain property and equipment effectuated on October
1, 2009 and January 1, 2010.





Interest
income.  Interest income, substantially all of which was earned
in the U.S., was $0.1 million for the three months ended September 30, 2010,
compared to a negligible amount for the three months ended September 30,
2009.  This increase primarily relates to an increase in average
balances available for investment during the three months ended September 30,
2010.





Interest
expense.
Interest expense, substantially all of which was incurred in the U.S., includes
interest expense on borrowed amounts under the Secured Credit Facility,
availability fees on the unused portion of the Secured Credit Facility, the
amortization of debt acquisition costs (including upfront fees) related to the
Secured Credit Facility, interest expense related to a capital lease obligation,
interest accrued on certain tax liabilities, interest on the
outstanding balance of the deferred fair value rent liabilities established
at fresh start and interest accretion relating to asset retirement
obligations.  Interest expense was $1.3 million for each of the three
months ended September 30, 2010 and 2009.




- 55
-





Other income
(expense), net.Other income (expense),
net is composed primarily of income or expense from non-recurring transactions
and is not comparative from a trend perspective.  Consolidated other
income (expense), net was other income, net of $1.0 million for the three months
ended September 30, 2010, compared to a net expense of $0.5 million for the
three months ended September 30, 2009, a change (decrease) of $1.5
million.  In the U.S., we had a negligible amount of other income, net
for the three months ended September 30, 2010, compared to other income, net of
$0.2 million for the three months ended September 30, 2009, reflecting a change
(decrease) of $0.2 million.  For our foreign operations, other income
(expense), net was other income, net of $1.0 million for the three months ended
September 30, 2010, compared to a net expense of $0.7 million for the three
months ended September 30, 2009, a change of $1.7 million.  For the
three months ended September 30, 2010, consolidated other income, net was
comprised of a net gain on foreign currency of $1.1 million, partially offset by
a net loss on the sale or disposition of property and equipment of $0.1
million.  For the three months ended September 30, 2009, consolidated
other expense, net was comprised of a loss on foreign currency of $0.5 million,
a loss on the sale or disposition of property and equipment of $0.2 million
offset by other gains of $0.2 million.





Provision for
(benefit from) income taxes.We recorded a provision
for income taxes of $11.7 million for the three months ended September 30, 2010,
compared to a provision for income taxes of $0.2 million for the three months
ended September 30, 2009.  The provision for income taxes for the
three months ended September 30, 2010 was calculated at our effective tax rate
based upon our pre-tax book income (adjusted for permanent differences in both
the U.S. and the U.K.), resulting in a tax provision of $11.2 million, plus a
provision for certain capital-based state taxes of $0.5 million.  The
provision for income taxes during the three months ended September 30, 2009 was
provided for certain capital-based state taxes.  For the three months
ended September 30, 2009, because of the anticipated loss for federal income tax
purposes for 2009, we released a portion of the valuation allowance previously
established against deferred tax assets to the extent of a provision for income
taxes otherwise required.





Liquidity
and Capital Resources




We had
working capital of $123.7 million at September 30, 2010, compared to working
capital of $88.6 million at December 31, 2009, an increase of $35.1
million.  This increase was primarily attributable to an increase in
unrestricted cash of $29.5 million from $165.3 million at December 31, 2009 to
$194.8 million at September 30, 2010, an increase in prepaid costs and other
current assets of $5.4 million, an increase in accrued expenses of $5.1 million,
a decrease in accounts payable of $4.8 million, a decrease in deferred revenue -
current portion of $2.0 million and a decrease in accounts receivable of $1.4
million.  The increase in unrestricted cash at September 30, 2010 was
primarily attributable to cash provided by operating activities of $117.3
million and cash generated by the exercise of stock purchase warrants and
options to purchase shares of common stock totaling $5.6 million, partially
offset by the use of cash to purchase property and equipment of $88.0 million
and for the scheduled debt service payments totaling $5.6 million.





Net cash
provided by operating activities was $117.3 million during the nine months ended
September 30, 2010, compared to $105.0 million during the nine months ended
September 30, 2009, an increase of $12.3 million.  Net cash provided
by operating activities during the nine months ended September 30, 2010
represents net income, plus the add back to net income of non-cash items
deducted in the determination of net income, principally depreciation and
amortization of $46.5 million, the change in deferred tax assets of $31.6
million and stock-based compensation expense of $6.5 million, plus the changes
in working capital components.  Net cash provided by operating activities
during the nine months ended September 30, 2009 resulted primarily from the add
back of non-cash items deducted in the determination of net income, principally
depreciation and amortization of $37.7 million and stock-based compensation
expense of $8.3 million.  The year over year increase in net cash
provided by operating activities is primarily due to the increase in net income
adjusted for non-cash activities (depreciation and amortization, change in
deferred tax assets and non-cash stock-based compensation expense) offset by the
difference in the changes in working capital components, the most significant
one of which was deferred revenue, a significant source of cash from operating
activities in the 2009 period.  In 2009, cash received for
installation payments, which are amortized over the estimated customer
relationship period, exceeded amortization of deferred revenue.  In
2010, because the average customer orders were smaller than in prior years,
emphasis on installation payments decreased, which resulted in amortization of
deferred revenue exceeding cash collections of installation
payments.





Net cash
used in investing activities was $87.7 million during the nine months ended
September 30, 2010, compared to $80.0 million during the nine months ended
September 30, 2009, an increase of $7.7 million.  Net cash used in
investing activities during the nine months ended September 30, 2010 was
attributable to the purchases of property and equipment of $88.0 million, offset
by the proceeds generated from sales of property and equipment of $0.3
million.  Net cash used in investing activities during the nine months
ended September 30, 2009 was attributable to the purchases of property and
equipment of $80.0 million.




- 56
-





Net cash
used in financing activities was $0.2 million during the nine months ended
September 30, 2010, which is comprised of the principal payment under the
Secured Credit Facility of $5.6 million and the purchase of treasury stock of
$0.3 million, offset by the proceeds from the exercise of warrants of $5.0
million, the proceeds from the exercise of options to purchase shares of common
stock of $0.6 million and the release of restricted cash and cash equivalents of
$0.1 million.  Net cash generated by financing activities was $9.8
million during the nine months ended September 30, 2009, which is comprised
of the proceeds from the exercise of options to purchase shares of common stock
of $7.7 million and the proceeds from the exercise of warrants of $4.8 million,
partially offset by the principal payment under the Secured Credit Facility of
$2.2 million, the purchase of treasury stock of $0.3 million and the principal
payment on our capital lease obligation of $0.2 million.





On
February 29, 2008, we (excluding certain foreign subsidiaries) entered into the
Secured Credit Facility comprised of: (i) an $18.0 million Revolver; (ii) a
$24.0 million Term Loan: and (iii) an $18.0 million Delayed Draw Term
Loan.  The initial lenders under the Secured Credit Facility were
Societe Generale and CIT Lending Services Corporation.  The Secured
Credit Facility matures on the fifth anniversary of the closing date (February
28, 2013).  The Secured Credit Facility is secured by substantially
all of our domestic assets.  The Secured Credit Facility prohibits us
from paying dividends (other than in our own shares or other equity securities)
and from making certain other payments, including payments to acquire our equity
securities other than under specified circumstances, which include the
repurchase of our equity securities from employees and directors in an aggregate
amount not to exceed $15.0 million.  On September 26, 2008, we
executed a joinder agreement to the Secured Credit Facility that added SunTrust
Bank as an additional lender and increased the amount of the Secured Credit
Facility to $90.0 million effective October 1, 2008.  The availability
under the Revolver increased to $27.0 million, the Term Loan increased to $36.0
million and the available Delayed Draw Term Loan increased to $27.0
million.  Additionally, the Delayed Draw Term Loan option available
under the Secured Credit Facility, which was originally scheduled to expire on
November 25, 2008, was extended to June 30, 2009 and subsequently extended to
December 31, 2009.  On December 31, 2009, we borrowed $24.57 million
under the Delayed Draw Term Loan.  We are party to two interest rate
swaps, which are utilized to modify our interest rate risk under the $24.0
million (original principal) Term Loan and the $12.0 million (original
principal) Term Loan.  We have chosen 30 day LIBOR as the interest
rate during the term of the interest rate swaps (30 day LIBOR was 0.25938% at
September 30, 2010).





During
the nine months ended September 30, 2010, we generated cash from operating
activities that was sufficient to fund our operating expenses, debt service and
expenditures for property and equipment.  We expect that our cash from
operations will continue to exceed our operating expenses and plan to continue
to use, as needed, our net cash from operations, cash reserves and the Revolver
to fund our future capital projects.





We, from
time to time, commit capital for, among other things, (i) customer capital (to
connect customers to the network); (ii) expansion and improvement of
infrastructure; and (iii) equipment.  We also commit capital for
investments in selected markets and have announced our intention to open up
Denver as a market and expand into Paris, Amsterdam and Frankfurt in
Europe.  It is possible, based upon these investment
plans,thatour capital expenditures in 2010 may
exceed our net cash generated from operating activities for the
year.  We believe, however, we have sufficient liquidity to fund such
investment plans.


Additionally,
in the future we may consider making acquisitions of other companies or product
lines to support our growth.  We may finance any such acquisition of
other companies or product lines from existing cash balances, through borrowings
from banks or other institutional lenders, and/or the public or private
offerings of debt and/or equity securities.  We cannot provide
assurances that any such funds will be available to us on favorable terms, or at
all.




- 57
-





Segment
Results (dollars in
millions for the tables set forth below)





Our
results (excluding intercompany activity) are segmented according to groupings
based on geography.





United
States:




Three
      Months Ended September 30,
            
            
            
            $
      Increase /
            
            
            
            %
      Increase /2010
            
            
            
            2009
            
            
            
            (Decrease)
            
            
            
            (Decrease)Revenue
            
            $
            94.3
            
            
            $
            83.6
            
            
            $
            10.7
            
            
            
            12.8
            %Costs
      of revenue (excluding depreciation and amortization, shown separately
      below)
            
            
            32.6
            
            
            
            30.7
            
            
            
            1.9
            
            
            
            6.2
            %Selling,
      general and administrative expenses
            
            
            20.2
            
            
            
            18.0
            
            
            
            2.2
            
            
            
            12.2
            %Depreciation
      and amortization
            
            
            14.1
            
            
            
            11.7
            
            
            
            2.4
            
            
            
            20.5
            %Operating
      income
            
            
            27.4
            
            
            
            23.2
            
            
            
            4.2
            
            
            
            18.1
            %Other
      income (expense):Interest
      income
            
            
            0.1
            
            
            
            —
            
            
            
            0.1
            
            NMInterest
      expense
            
            
            (1.3
            )
            
            
            (1.3
            )
            
            
            —
            
            
            
            —Other
      income, net
            
            
            —
            
            
            
            0.2
            
            
            
            (0.2
            )
            NMIncome
      before income taxes
            
            
            26.2
            
            
            
            22.1
            
            
            
            4.1
            
            
            
            18.6
            %Provision
      for income taxes
            
            
            11.0
            
            
            
            0.2
            
            
            
            10.8
            
            NMNet
      income
            
            $
            15.2
            
            
            $
            21.9
            
            
            $
            (6.7
            )
            
            
            (30.6
            )%





United
Kingdom and others:




Three
      Months Ended September 30,
                    
                    
                    
                    $
      Increase /
                    
                    
                    
                    %
      Increase /2010
                    
                    
                    
                    2009
                    
                    
                    
                    (Decrease)
                    
                    
                    
                    (Decrease)Revenue
                    
                    $
                    9.4
                    
                    
                    $
                    8.8
                    
                    
                    $
                    0.6
                    
                    
                    
                    6.8
                    %Costs
      of revenue (excluding depreciation and amortization, shown separately
      below)
                    
                    
                    3.1
                    
                    
                    
                    3.2
                    
                    
                    
                    (0.1
                    )
                    
                    
                    (3.1
                    )%Selling,
      general and administrative expenses
                    
                    
                    2.9
                    
                    
                    
                    2.3
                    
                    
                    
                    0.6
                    
                    
                    
                    26.1
                    %Depreciation
      and amortization
                    
                    
                    1.7
                    
                    
                    
                    1.8
                    
                    
                    
                    (0.1
                    )
                    
                    
                    (5.6
                    )%Operating
      income
                    
                    
                    1.7
                    
                    
                    
                    1.5
                    
                    
                    
                    0.2
                    
                    
                    
                    13.3
                    %Other
      income (expense):Other
      income (expense), net
                    
                    
                    1.0
                    
                    
                    
                    (0.7
                    )
                    
                    
                    (1.7
                    )
                    
                    NMIncome
      before income taxes
                    
                    
                    2.7
                    
                    
                    
                    0.8
                    
                    
                    
                    1.9
                    
                    
                    
                    237.5
                    %Provision
      for income taxes
                    
                    
                    0.7
                    
                    
                    
                    —
                    
                    
                    
                    0.7
                    
                    
                    NMNet
      income
                    
                    $
                    2.0
                    
                    
                    $
                    0.8
                    
                    
                    $
                    1.2
                    
                    
                    
                    150.0
                    %




NM—not
meaningful





The
segment results for the three months ended September 30, 2010 and 2009 (above)
reflect the elimination of any intercompany sales or charges.




- 58
-




United
States:




Nine
      Months Ended September 30,
            
            
            
            $
      Increase /
            
            
            
            %
      Increase /2010
            
            
            
            2009
            
            
            
            (Decrease)
            
            
            
            (Decrease)Revenue
            
            $
            274.3
            
            
            $
            242.3
            
            
            $
            32.0
            
            
            
            13.2
            %Costs
      of revenue (excluding depreciation and amortization, shown separately
      below)
            
            
            93.6
            
            
            
            87.2
            
            
            
            6.4
            
            
            
            7.3
            %Selling,
      general and administrative expenses
            
            
            61.6
            
            
            
            53.9
            
            
            
            7.7
            
            
            
            14.3
            %Depreciation
      and amortization
            
            
            41.3
            
            
            
            33.0
            
            
            
            8.3
            
            
            
            25.2
            %Operating
      income
            
            
            77.8
            
            
            
            68.2
            
            
            
            9.6
            
            
            
            14.1
            %Other
      income (expense):Interest
      income
            
            
            0.1
            
            
            
            0.3
            
            
            
            (0.2
            )
            
            
            (66.7
            )%Interest
      expense
            
            
            (3.7
            )
            
            
            (3.6
            )
            
            
            0.1
            
            
            
            2.8
            %Other
      income, net
            
            
            0.7
            
            
            
            0.6
            
            
            
            0.1
            
            
            
            16.7
            %Income
      before income taxes
            
            
            74.9
            
            
            
            65.5
            
            
            
            9.4
            
            
            
            14.4
            %Provision
      for (benefit from) income taxes
            
            
            30.8
            
            
            
            (4.7
            )
            
            
            35.5
            
            
            NMNet
      income
            
            $
            44.1
            
            
            $
            70.2
            
            
            $
            (26.1
            )
            
            
            (37.2
            )%





United
Kingdom and others:




Nine
      Months Ended September 30,
            
            
            $
      Increase /
            
            
            %
      Increase /2010
            
            
            2009
            
            
            (Decrease)
            
            
            (Decrease)Revenue
            
            $
            27.3
            
            
            $
            23.5
            
            
            $
            3.8
            
            
            
            16.2
            %Costs
      of revenue (excluding depreciation and amortization, shown separately
      below)
            
            
            9.3
            
            
            
            8.4
            
            
            
            0.9
            
            
            
            10.7
            %Selling,
      general and administrative expenses
            
            
            8.1
            
            
            
            7.2
            
            
            
            0.9
            
            
            
            12.5
            %Depreciation
      and amortization
            
            
            5.2
            
            
            
            4.7
            
            
            
            0.5
            
            
            
            10.6
            %Operating
      income
            
            
            4.7
            
            
            
            3.2
            
            
            
            1.5
            
            
            
            46.9
            %Other
      (expense) income:Other
      (expense) income, net
            
            
            (0.1
            )
            
            
            1.3
            
            
            
            (1.4
            )
            
            NMIncome
      before income taxes
            
            
            4.6
            
            
            
            4.5
            
            
            
            0.1
            
            
            
            2.2
            %Provision
      for income taxes
            
            
            1.6
            
            
            
            —
            
            
            
            1.6
            
            
            NMNet
      income
            
            $
            3.0
            
            
            $
            4.5
            
            
            $
            (1.5
            )
            
            
            (33.3
            )
      %




NM—not
meaningful







The
segment results for the nine months ended September 30, 2010 and 2009 (above)
reflect the elimination of any intercompany sales or charges.




- 59
-




Credit
Risk




Financial
instruments which potentially subject us to concentration of credit risk consist
principally of temporary cash investments and accounts receivable.  We
do not enter into financial instruments for trading or speculative purposes and
do not own auction rate notes.  We place our cash and cash equivalents
in short-term investment instruments with high quality financial institutions
(primarily commercial banks) in the U.S. and the U.K.  Domestic
account balances generally exceed federally insured limits.  Our trade
receivables, which are unsecured, are geographically dispersed throughout the
U.S. and the U.K. and include both large and small corporate entities spanning
numerous industries.  We perform ongoing credit evaluations of our
customers’ financial condition.





Off-balance
sheet arrangements





We do not
have any off-balance sheet arrangements other than our operating
leases.  We do not participate in transactions that generate
relationships with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special purpose entities
(“SPEs”), which would have been established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited
purposes.





Inflation





We
believe that our business is impacted by inflation to the same degree as the
general economy.





Certain
Factors That May Affect Future Results





Information
contained or incorporated by reference in this Quarterly Report on Form 10-Q, in
other SEC filings by the Company, in press releases and in presentations by the
Company or its management that are not historical by nature constitute
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995 which can be identified by the use of
forward-looking terminology such as “believes,” “expects,” “plans,” “intends,”
“estimates,” “projects,” “could,” “may,” “will,” “should,” or “anticipates” or
the negatives thereof, other variations thereon or comparable terminology, or by
discussions of strategy.  No assurance can be given that future results
expressed or implied by the forward-looking statements will be
achieved.  Such statements are based on management’s current
expectations and beliefs and are subject to a number of risks and uncertainties
that could cause actual results to differ materially from those expressed or
implied by the forward-looking statements.  These risks and
uncertainties include, but are not limited to, those relating to the Company’s
financial and operating prospects, current economic trends and recessionary
pressures, future opportunities, ability to retain existing customers and
attract new ones, the Company’s exposure to the financial services industry, the
Company’s acquisition strategy and ability to integrate acquired companies and
assets, outlook of customers, reception of new products and technologies, and
strength of competition and pricing.  Other factors and risks that may
affect the Company’s business and future financial results are detailed in the
Company’s SEC filings, including, but not limited to, those described under
“Risk Factors” and “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2009 and in this Quarterly Report on Form
10-Q.  The Company’s business could be materially adversely affected
and the trading price of the Company’s common stock could decline if any such
risks and uncertainties develop into actual events.  The Company
cautions you not to place undue reliance on these forward-looking statements,
which speak only as of their respective dates.  The Company undertakes
no obligation to publicly update or revise forward-looking statements to reflect
events or circumstances after the date of this Form 10-Q or to reflect the
occurrence of unanticipated events.




- 60
-




ITEM
3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





In the
normal course of business we are exposed to market risk arising from changes in
foreign currency exchange rates that could impact our cash flows and
earnings.  During the nine months ended September 30, 2010, our
foreign activities accounted for 9.1% of consolidated revenue.  The
translation rate for the British pound compared to the U.S. dollar was
substantially flat for the nine months ended September 30, 2010 compared to the
nine months ended September 30, 2009.  Due to the strengthening of the
U.S. dollar against the British pound, the translation rate for the three months
ended September 30, 2010 decreased 5.6% compared to the translation rate used
for the three months ended September 30, 2009.  We monitor foreign
markets and our commitments in such markets to manage currency and other
risks.  To date, based upon our level of foreign operations, we have
not entered into any hedging arrangement designed to limit exposure to foreign
currencies.  If we increase our level of foreign activities, or if at
current levels we determine that such arrangements would be appropriate, we will
consider such arrangements to minimize risk.





Under the
terms of the Secured Credit Facility, our borrowings bear interest based upon
short-term LIBOR rates or our administrative agent’s (Societe Generale) base
rate, at our discretion, plus the applicable margins, as defined.  If
the operative rate increases, our cost of borrowing would also increase, if not
hedged, thereby increasing the costs of our investment strategy.  We
have chosen 30 day LIBOR as the interest rate.  On August 4, 2008, we
entered into a swap arrangement under which we fixed our borrowing costs with
respect to $24.0 million borrowed under the Term Loan for three years at 3.65%
per annum, plus the applicable margin of 3.00%.  On October 1, 2008, we
borrowed an additional $12.0 million under the expanded Term Loan.  On
November 14, 2008, we entered into a swap arrangement under which we fixed our
borrowing costs with respect to the $12.0 million for three years at 2.635% per
annum, plus the applicable margin of 3.00%.  The swaps had the effect of
increasing our current interest expense with respect to the Term Loans compared
to the then current LIBOR rate and reducing our risk of increases in future
interest expenses from increasing LIBOR rates during the terms of the
swaps.  Also, in December 2009, we borrowed $24.57 million available
under the Delayed Draw Term Loan.  The interest rate was 30 day LIBOR
(0.23094% at December 29, 2009) plus the applicable margin of
3.00%.  The interest rate at September 30, 2010 was 3.25938% (30 day
LIBOR of 0.25938% at September 30, 2010, plus the applicable margin of
3.00%).  We have not entered into a swap arrangement to fix our
borrowing costs under the Delayed Draw Term Loan and accordingly, we are subject
to interest fluctuations on the outstanding balance under the Delayed Draw Term
Loan ($22.95 million at September 30, 2010).  Additionally, after the
expiration of each interest rate swap in August 2011 and November 2011, unless
they are renewed, the Term Loan will also bear interest at 30 day LIBOR, plus
the applicable margin of 3.00%.





As of
September 30, 2010, we had $51.7 million outstanding under the Secured Credit
Facility.  Additionally, we had a $1.3 million capital lease
obligation outstanding, which carried a fixed rate of interest of 8.0%, and as a
result, we were not exposed to related interest rate risk on this capital
lease.





Our
interest income is most sensitive to fluctuations in the general level of U.S.
interest rates, which affect the interest we earn on our cash and cash
equivalents.  Our investment policy and strategy are focused on the
preservation of capital and supporting our liquidity requirements and requires
investments to be investment grade, primarily rated AAA or better with the
objective of minimizing the potential risk of principal loss.  Highly
liquid investments with initial maturities of three months or less at the date
of purchase are classified as cash equivalents.  Investments in both
fixed rate and floating rate interest earning securities carry a degree of
interest rate risk.  Fixed rate securities may have their fair market
value adversely impacted due to a rise in interest rates, while floating rate
securities may produce less income than predicted if interest rates
fall.  We may suffer losses in principal if we are forced to sell
securities that have declined in market value due to changes in interest
rates.  Our investments in cash equivalents are primarily floating
rate investments.




- 61
-




ITEM
4.  CONTROLS AND PROCEDURES




Evaluation of Disclosure Controls and
Procedures





As of
September 30, 2010, the Company carried out an assessment, under the supervision
of and with the participation of the Company’s Chief Executive Officer and the
Chief Financial Officer, of the effectiveness of the design and operation of the
Company’s disclosure controls and procedures (as defined in the Exchange Act
Rules 13a-15(e) and 15d-15(e)).  The Chief Executive Officer and
the Chief Financial Officer concluded that the Company’s disclosure controls and
procedures were effective as of September 30, 2010 to ensure that all
information required to be disclosed in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in SEC rules and forms and is accumulated and
communicated to the Company’s management, including the Company’s Chief
Executive Officer and the Chief Financial Officer, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.





Remediation





During
2009, management remediated the material weaknesses in our entity level
controls, financial close and financial statement reporting processes, income
taxes, property and equipment and inventory processes.  The Company
completed and filed all past due federal and state income tax returns in the
fourth quarter of 2008.  The Company reconciled its physical inventory
counts to the financial records at September 30, 2008 and began updating the
perpetual inventory records on a monthly basis through December 31,
2009.  During the years ended December 31, 2009 and 2008, the Company
continued to develop processes to manage property and equipment, including
inventory, through a property and equipment sub-ledger and it is in the process
of converting those records to a more integrated sub-ledger
system.  Management also completed re-engineering efforts and is
re-aligning departments to create more efficiency and lines of responsibility,
which will improve the timely recording of project cost allocations and accrued
obligations relating to property and equipment, including
inventory.  The Company continues to evaluate methods to
integrate processes and systems for better information flow.





Changes
in Internal Control Over Financial Reporting





There has
been no change in internal control over financial reporting that occurred during
the last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.




- 62
-




PART
II.  OTHER INFORMATION





ITEM
1.  LEGAL PROCEEDINGS





The
information presented in Note 9, “Litigation,” to the consolidated financial
statements included elsewhere in this Quarterly Report on Form 10-Q is hereby
incorporated by reference.





ITEM 1A.  RISK
FACTORS





In
addition to the other information set forth in this Quarterly Report on Form
10-Q, you should carefully consider the factors discussed under ”Risk Factors”
in the Company’s Annual Report on Form 10-K for the year ended December 31,
2009, which could materially affect the Company’s business, financial condition
and future results.  The risks described in the Company’s Annual Report on
Form 10-K are not the only risks facing the Company.  Additional risks and
uncertainties, including those not currently known to the Company or that the
Company currently deems to be immaterial could also materially adversely affect
the Company’s business, financial condition and operating
results.  Other than as discussed below, there have been no material
changes in our risk factors from those disclosed in our Annual Report on Form
10-K for the year ended December 31, 2009.





Demand
for our services from certain customers in the financial services industry may
be negatively affected by regulatory changes.




We have a
large number of customers in the financial services industry.  Certain
of our financial services customers utilize our networks for high-frequency
trading.  To the extent that regulatory changes restrict this
activity, the needs of these customers for our services may be reduced or
eliminated.




Our
success depends on our ability to compete effectively in our
industry.
  The
telecommunications industry is extremely competitive, particularly with respect
to price and service.  Our failure to compete effectively with our
competitors could have a material adverse effect on our business, financial
condition and results of operations.  A significant increase in
industry capacity or reduction in overall demand would adversely affect our
ability to maintain or increase prices.  Further, we anticipate that
prices for certain telecommunications services such as IP bandwidth will
continue to decline due to a number of factors including (a) price competition
as various network providers attempt to gain market share to cover the fixed
costs of their network investments and/or install new networks that might
compete with our networks; and (b) technological advances that permit
substantial increases in the transmission capacity of many of our competitors’
networks.
  In the
telecommunications industry, we compete against ILECs, which have historically
provided local telephone services and currently occupy significant market
positions in their local telecommunications markets.  In addition to
these carriers, several other competitors, such as facilities-based
communications service providers including CLECs, cable television companies,
electric utilities and large end-users with private networks offer services
similar to those offered by us.  Many of our competitors have greater
financial, managerial, sales and marketing and research and development
resources than we do.  Recently, certain competitors in our largest
market have consolidated or undergone a change in control.  Increased
activity by these competitors could result in downward pricing pressure or loss
of customers, which could adversely affect our business, financial condition and
results of operations.


Future
sales, or the perception of future sales, of a substantial amount of our shares
of common stock could have a negative impact on the market price of our common
stock.


We
recently filed with the Securities and Exchange Commission a Form S-3 shelf
registration statement on behalf of certain funds advised by Franklin Mutual
Advisers, LLC that beneficially own an aggregate of 4,871,810 shares
of our common stock.  These shares, which may be offered and sold from
time to time, represent 19.0% of our outstanding shares based on the number of
shares of our common stock outstanding as of September 30, 2010.  Sales by
these stockholders of a substantial number of shares, or the perception that these sales might
occur, could have a negative impact on the market price of our common
stock.




- 63
-




ITEM 6.  EXHIBITS





Exhibit No.
            
            Description
      of Exhibit10.1
            
            AboveNet,
      Inc. Amended and Restated 2010 Employee Stock Purchase
    Plan.31.1
            
            Certification
      of Chief Executive Officer of the Registrant, pursuant to Rule 13a-14(a)
      of the Securities Exchange Act of 1934.31.2
            
            Certification
      of Chief Financial Officer of the Registrant, pursuant to Rule 13a-14(a)
      of the Securities Exchange Act of 1934.32.1
            
            Certification
      of Chief Executive Officer of the Registrant, pursuant to 18 U.S.C.
      Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002.32.2
            
            Certification
      of Chief Financial Officer of the Registrant, pursuant to 18 U.S.C.
      Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002.







- 64
-




SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.










ABOVENET,
      INC.Date:  November
      8, 2010
            By:
            /s/
      William G. LaPerchWilliam
      G. LaPerch
              President,
      Chief Executive Officer and Director
              (Principal
      Executive Officer)








Date:  November
      8, 2010
            By:
            /s/
      Joseph P. CiavarellaJoseph
      P. Ciavarella
              Senior
      Vice President and Chief Financial Officer
              (Principal
      Financial and Accounting Officer)






- 65
-




EXHIBIT
INDEX





Exhibit No.
            
            Description
      of Exhibit10.1
            
            AboveNet,
      Inc. Amended and Restated 2010 Employee Stock Purchase
    Plan.31.1
            
            Certification
      of Chief Executive Officer of the Registrant, pursuant to Rule 13a-14(a)
      of the Securities Exchange Act of 1934.31.2
            
            Certification
      of Chief Financial Officer of the Registrant, pursuant to Rule 13a-14(a)
      of the Securities Exchange Act of 1934.32.1
            
            Certification
      of Chief Executive Officer of the Registrant, pursuant to 18 U.S.C.
      Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002.32.2
            
            Certification
      of Chief Financial Officer of the Registrant, pursuant to 18 U.S.C.
      Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002.