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 June 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 August 2, 2010, was 25,170,404.








Table of
Contents





ABOVENET,
INC.





INDEX




PagePart
      I.
                        
                        FINANCIAL
      INFORMATIONItem
      1.
                        
                        Financial
      StatementsConsolidated
      Balance SheetsAs
      of June 30, 2010 (Unaudited) and December 31, 2009
                        
                        1Consolidated
      Statements of Operations (Unaudited)Three
      and Six month periods ended June 30, 2010 and 2009
                        
                        2Consolidated
      Statement of Shareholders’ Equity (Unaudited)Six
      month period ended June 30, 2010
                        
                        3Consolidated
      Statements of Cash Flows (Unaudited)Six
      month periods ended June 30, 2010 and 2009
                        
                        4Consolidated
      Statements of Comprehensive Income (Unaudited)Three
      and Six month periods ended June 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





PART
I.  FINANCIAL INFORMATION





ITEM
1.  FINANCIAL STATEMENTS





ABOVENET,
INC. AND SUBSIDIARIES





CONSOLIDATED
BALANCE SHEETS


(in
millions, except share and per share information)





June 30,
                    2010
                  
                  
                  December 31, 2009(Unaudited)ASSETS:Current
      assets:Cash
      and cash equivalents
                  
                  $
                  173.0
                  
                  
                  $
                  165.3Restricted
      cash and cash equivalents
                  
                  
                  3.7
                  
                  
                  
                  3.7Accounts
      receivable, net of allowances of $1.6 and $2.0 at June 30, 2010 and
      December 31, 2009, respectively
                  
                  
                  19.6
                  
                  
                  
                  20.1Prepaid
      costs and other current assets
                  
                  
                  18.8
                  
                  
                  
                  13.5Total
      current assets
                  
                  
                  215.1
                  
                  
                  
                  202.6Property
      and equipment, net of accumulated depreciation and amortization of $263.9
      and $236.5 at June 30, 2010 and December 31, 2009,
      respectively
                  
                  
                  491.5
                  
                  
                  
                  469.1Deferred
      tax assets
                  
                  
                  162.4
                  
                  
                  
                  183.0Other
      assets
                  
                  
                  9.6
                  
                  
                  
                  7.3Total
      assets
                  
                  $
                  878.6
                  
                  
                  $
                  862.0LIABILITIES:Current
      liabilities:Accounts
      payable
                  
                  $
                  6.1
                  
                  
                  $
                  10.7Accrued
      expenses
                  
                  
                  64.6
                  
                  
                  
                  68.4Deferred
      revenue - current portion
                  
                  
                  24.1
                  
                  
                  
                  27.3Note
      payable - current portion
                  
                  
                  7.6
                  
                  
                  
                  7.6Total
      current liabilities
                  
                  
                  102.4
                  
                  
                  
                  114.0Note
      payable
                  
                  
                  46.0
                  
                  
                  
                  49.7Deferred
      revenue
                  
                  
                  90.3
                  
                  
                  
                  93.8Other
      long-term liabilities
                  
                  
                  10.5
                  
                  
                  
                  10.3Total
      liabilities
                  
                  
                  249.2
                  
                  
                  
                  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, 25,754,019 issued
      and 25,165,638 outstanding at June 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
                  
                  
                  318.0
                  
                  
                  
                  308.2Treasury
      stock at cost, 588,381  and 521,228 shares at June 30, 2010 and
      December 31, 2009, respectively
                  
                  
                  (20.9
                  )
                  
                  
                  (16.7
                  )Accumulated
      other comprehensive loss
                  
                  
                  (9.3
                  )
                  
                  
                  (9.0
                  )Retained
      earnings
                  
                  
                  341.3
                  
                  
                  
                  311.4Total
      shareholders’ equity
                  
                  
                  629.4
                  
                  
                  
                  594.2Total
      liabilities and shareholders’ equity
                  
                  $
                  878.6
                  
                  
                  $
                  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 June 30,
                
                
                Six Months Ended June 30,2010
                
                
                2009
                
                
                2010
                
                
                2009Revenue
                
                $
                100.7
                
                
                $
                88.0
                
                
                $
                197.9
                
                
                $
                173.4Costs
      of revenue (excluding depreciation and amortization, shown separately
      below)
                
                
                34.1
                
                
                
                32.3
                
                
                
                67.2
                
                
                
                61.7Selling,
      general and administrative expenses
                
                
                23.0
                
                
                
                20.1
                
                
                
                46.6
                
                
                
                40.8Depreciation
      and amortization
                
                
                15.2
                
                
                
                12.3
                
                
                
                30.7
                
                
                
                24.2Operating
      income
                
                
                28.4
                
                
                
                23.3
                
                
                
                53.4
                
                
                
                46.7Other
      income (expense):Interest
      income
                
                
                —
                
                
                
                0.1
                
                
                
                —
                
                
                
                0.3Interest
      expense
                
                
                (1.2
                )
                
                
                (1.1
                )
                
                
                (2.4
                )
                
                
                (2.3
                )Other
      income (expense), net
                
                
                0.2
                
                
                
                2.5
                
                
                
                (0.4
                )
                
                
                2.4Income
      before income taxes
                
                
                27.4
                
                
                
                24.8
                
                
                
                50.6
                
                
                
                47.1Provision
      for (benefit from) income taxes
                
                
                11.1
                
                
                
                0.2
                
                
                
                20.7
                
                
                
                (4.9
                )Net
      income
                
                $
                16.3
                
                
                $
                24.6
                
                
                $
                29.9
                
                
                $
                52.0Income
      per share, basic:Basic
      income per share
                
                $
                0.64
                
                
                $
                1.07
                
                
                $
                1.19
                
                
                $
                2.26Weighted
      average number of common shares
                
                
                25,145,224
                
                
                
                23,026,298
                
                
                
                25,045,423
                
                
                
                22,974,578Income
      per share, diluted:Diluted
      income per share
                
                $
                0.62
                
                
                $
                0.97
                
                
                $
                1.14
                
                
                $
                2.08Weighted
      average number of common shares
                
                
                26,194,883
                
                
                
                25,227,006
                
                
                
                26,205,457
                
                
                
                24,968,436





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
                              
                              
                              437,634
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              5.2
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              5.2Issuance
      of common stock from vested restricted stock
                              
                              
                              14,000
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —Issuance
      of common stock from exercise of options to purchase shares of common
      stock
                              
                              
                              30,597
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              0.4
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              0.4Purchase
      of treasury stock
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              5,459
                              
                              
                              
                              (0.3
                              )
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              (0.3
                              )Deemed
      purchase of treasury stock in cashless exercises of stock
      warrants
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              61,694
                              
                              
                              
                              (3.9
                              )
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              (3.9
                              )Foreign
      currency translation adjustments
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              (0.5
                              )
                              
                              
                              —
                              
                              
                              
                              (0.5
                              )Change
      in fair value of interest rate swap contracts
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              0.2
                              
                              
                              
                              —
                              
                              
                              
                              0.2Amortization
      of stock-based compensation expense for restricted stock
    units
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              4.2
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              4.2Net
      income
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              29.9
                              
                              
                              
                              29.9Balance
      at June 30, 2010
                              
                              
                              25,754,019
                              
                              
                              $
                              0.3
                              
                              
                              
                              588,381
                              
                              
                              $
                              (20.9
                              )
                              
                              $
                              318.0
                              
                              
                              $
                              (9.3
                              )
                              
                              $
                              341.3
                              
                              
                              $
                              629.4





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)





Six Months Ended June 30,2010
                
                
                2009Cash
      flows provided by operating activities:Net
      income
                
                $
                29.9
                
                
                $
                52.0Adjustments
      to reconcile net income to net cash provided by
operations:Depreciation
      and amortization
                
                
                30.7
                
                
                
                24.2Provision
      for equipment impairment
                
                
                0.2
                
                
                
                0.5Provision
      for bad debts
                
                
                0.3
                
                
                
                0.2Non-cash
      stock-based compensation expense
                
                
                4.2
                
                
                
                5.8Loss
      on sale or disposition of property and equipment, net
                
                
                —
                
                
                
                0.9Change
      in deferred tax assets
                
                
                20.5
                
                
                
                —Changes
      in operating working capital:Accounts
      receivable
                
                
                (0.1
                )
                
                
                (0.6
                )Prepaid
      costs and other current assets
                
                
                (5.2
                )
                
                
                (1.2
                )Accounts
      payable
                
                
                (4.5
                )
                
                
                (5.0
                )Accrued
      expenses
                
                
                (0.3
                )
                
                
                (10.6
                )Other
      assets
                
                
                (2.4
                )
                
                
                (1.1
                )Deferred
      revenue and other long-term liabilities
                
                
                (5.6
                )
                
                
                9.4Net
      cash provided by operating activities
                
                
                67.7
                
                
                
                74.5Cash
      flows used in investing activities:Proceeds
      from sales of property and equipment
                
                
                0.2
                
                
                
                —Purchases
      of property and equipment
                
                
                (57.5
                )
                
                
                (53.5
                )Net
      cash used in investing activities
                
                
                (57.3
                )
                
                
                (53.5
                )Cash
      flows (used in) provided by financing activities:Proceeds
      from exercise of warrants
                
                
                1.4
                
                
                
                0.1Proceeds
      from exercise of options to purchase shares of common
stock
                
                
                0.4
                
                
                
                2.8Change
      in restricted cash and cash equivalents
                
                
                —
                
                
                
                (0.2
                )Principal
      payment - note payable
                
                
                (3.7
                )
                
                
                (1.1
                )Principal
      payment - capital lease obligation
                
                
                —
                
                
                
                (0.2
                )Purchase
      of treasury stock
                
                
                (0.3
                )
                
                
                (0.3
                )Net
      cash (used in) provided by financing activities
                
                
                (2.2
                )
                
                
                1.1Effect
      of exchange rates on cash
                
                
                (0.5
                )
                
                
                0.8Net
      increase in cash and cash equivalents
                
                
                7.7
                
                
                
                22.9Cash
      and cash equivalents, beginning of period
                
                
                165.3
                
                
                
                87.1Cash
      and cash equivalents, end of period
                
                $
                173.0
                
                
                $
                110.0Supplemental
      cash flow information:Cash
      paid for interest
                
                $
                1.5
                
                
                $
                1.3Cash
      paid for income taxes
                
                $
                0.3
                
                
                $
                2.8Supplemental
      non-cash financing activities:Issuance
      of shares of common stock in cashless exercise of stock purchase
      warrants
                
                $
                3.9
                
                
                $
                —Non-cash
      purchase of shares into treasury in cashless exercise of stock purchase
      warrants
                
                $
                3.9
                
                
                $
                —





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 June 30,
                      
                      
                      Six Months Ended June 30,2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009Net
      income
                      
                      $
                      16.3
                      
                      
                      $
                      24.6
                      
                      
                      $
                      29.9
                      
                      
                      $
                      52.0Foreign
      currency translation adjustments
                      
                      
                      (0.3
                      )
                      
                      
                      —
                      
                      
                      
                      (0.5
                      )
                      
                      
                      0.5Change
      in fair value of interest rate swap contracts
                      
                      
                      0.2
                      
                      
                      
                      0.2
                      
                      
                      
                      0.2
                      
                      
                      
                      0.2Comprehensive
      income
                      
                      $
                      16.2
                      
                      
                      $
                      24.8
                      
                      
                      $
                      29.6
                      
                      
                      $
                      52.7





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 all
periods presented, 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
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 six months ended June 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 $0.6 and $0.8 in the three months ended June 30, 2010 and 2009,
respectively, and $1.6 and $2.7 in the six months ended June 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 six months ended June 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 a part of network
infrastructure assets, as described below and included in property and equipment
on the respective balance sheets.  At June 30, 2010 and December 31, 2009,
the Company had $34.9 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 field engineers and IP engineers
and reflects their capitalized salary, plus related benefits, and is based upon
an allocation of their time between capitalized and non-capitalized
projects.  These individuals’ salaries are considered to be costs directly
associated with the construction of certain infrastructure and customer
installations.  The salaries and related benefits of non-engineers and
supporting staff that are part of the engineering departments are not considered
part of the pool subject to capitalization.  Capitalized direct labor
amounted to $2.8 and $2.9 for the three months ended June 30, 2010 and
2009, respectively, and $5.8 and $5.6 for the six months ended June 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 new fiber and associated construction costs of the
relocation placed into service, which is reduced by any reimbursements received
for such costs.  The Company capitalized relocation costs amounting to $0.2
and $1.0 for the three months ended June 30, 2010 and 2009, respectively, and
$0.4 and $1.7 for the six months ended June 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 $0.03 and $0.05 ($0.03 and $0.04 on a net book value basis) for
the three and six months ended June 30, 2010, respectively, and, which on an
original cost basis, totaled $0.10 and $0.20 ($0.07 and $0.14 on a net book
value basis) for the three and six months ended June 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 six months ended June 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, 2009 and 2008. 
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 such assets was less than the carrying value and
thus 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.”  The Company provided
allowances for impairment of $0.2 and $0.5 in the six months ended June 30, 2010
and 2009, respectively, which were recorded in the three months ended June 30,
2010 and 2009, respectively.





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 $7.4 and
$7.2 at June 30, 2010 and December 31, 2009, respectively, of which $3.9 and
$3.8 were included in “Accrued expenses,” and $3.5 and $3.4 were included in
“Other long-term liabilities” at such dates.  Accretion expense, which is
included in “Interest expense,” amounted to $0.07 and $0.02 for the
three months ended June 30, 2010 and 2009, respectively, and $0.14 and
$0.10 for the six months ended June 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.





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 six months ended June
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 six months ended June 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. 123R, “Share-Based
Payment,” (“SFAS No. 123R”), (now known as FASB ASC 718), using the
modified prospective method.  SFAS No. 123R 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. 123R 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. 123R 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. 123R 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
six months ended June 30, 2010 and 2009.





Restricted
Stock Units





Compensation
cost for restricted stock unit awards is measured based upon the quoted closing
market price for the Company’s stock on the date of grant.  The
compensation cost is recognized on a straight-line basis over the vesting
period.  See Note 7, “Stock-Based Compensation.”





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
(expiring September 8, 2010).  The stock warrants are treated as
equity upon their exercise based upon the terms of the warrant and cash
received.  18,208 and 13,222 seven year stock warrants to purchase shares
of common stock were exercised during the three months ended June 30, 2010 and
2009, respectively.  437,634 and 13,622 stock warrants to purchase shares
of common stock were exercised during the six months ended June 30, 2010 and
2009, respectively.


13


ABOVENET,
INC. AND SUBSIDIARIES





NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(in
millions, except share and per share information)





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, is
greater than the warrant exercise price, the Company is required to give each
warrant holder notice that at the warrant expiration date, the warrants would be
deemed to have been exercised pursuant to the net exercise provisions of the
respective Warrant Agreements (the “Net Exercise”), unless the warrant holder
elects, 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.





During
the six months ended June 30, 2010, seven year warrants to purchase 323,084
shares of common stock were exercised pursuant to the Net Exercise provisions
described above, of which 261,390 shares were issued and 61,694 shares were
deemed repurchased.  There were no Net Exercises during the three and six
months ended June 30, 2009 or during the three months ended June 30, 2010. 
Additionally, seven year warrants to purchase 18,208 and 114,550 shares of
common stock were exercised during the three and six months ended June 30, 2010,
respectively.  At June 30, 2010, seven year warrants to purchase 420,896
shares of common stock were outstanding.





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 June 30, 2010 and December 31, 2009 was
$1.0 and $1.2, respectively, for the interest rate swaps.  The
mark-to-market value of the cash flow hedges will be recorded in 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 June
30, 2010 and December 31, 2009, the Company’s consolidated balance sheet
included net interest rate swap derivative liabilities of $1.0 and $1.2,
respectively.





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





Derivative LiabilitiesDerivatives designated as hedging instruments
                      
                      June 30, 2010
                      
                      
                      December 31, 2009Interest
      rate swap agreements (*)
                      
                      $
                      1.0
                      
                      
                      $
                      1.2Total
      derivatives designated as hedging instruments
                      
                      $
                      1.0
                      
                      
                      $
                      1.2





(*)
            The
      derivative liabilities are two interest rate swap agreements with original
      three year terms.  They are both considered to be long-term
      liabilities for financial statement
purposes.





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 June 30, 2010.




Weighted Average RateNotional Amount
                                          
                                          Maturity Date
                                          
                                          Pay
                                          
                                          
                                          Receive$
                                          20.4
                                          
                                          August
      2011
                                          
                                          3.65%
                                          
                                          
                                          0.83%10.2
                                          
                                          November
      2011
                                          
                                          2.635%
                                          
                                          
                                          0.44%$
                                          30.6





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 $158.9 and $154.1 at June 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 $1.0 and $1.2 in other
long-term liabilities in the consolidated balance sheet at June 30, 2010 and
December 31, 2009, respectively.  The Company used third parties to value
each of the interest rate swap agreements at June 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 $0.4 for each of the three months ended June 30, 2010 and
2009 and contributed $0.9 for each of the six months ended June 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 six months ended June 30, 2010 to conform to the classifications
used for the three and six months ended June 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 FASB issued SFAS No. 141(R), “Business Combinations
(Revised),” (“SFAS No. 141(R)”), (now known as FASB ASC 805), to replace SFAS
No. 141, “Business Combinations.”  FASB ASC 805 requires the use of the
acquisition method of accounting, defines the acquirer, establishes the
acquisition date and broadens the scope to all transactions and other events in
which one entity obtains control over one or more other businesses.  This
statement is effective for business combinations or transactions entered into
for fiscal years beginning on or after December 15, 2008.  The adoption of
this statement did not have a material impact on the Company’s financial
position, results of operations or cash flows.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51,” (“SFAS No.
160”), (now known as FASB ASC 810-10-65).  FASB ASC 810-10-65 establishes
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the retained interest and gain or loss when a subsidiary is
deconsolidated.  This statement is effective for financial statements
issued for fiscal years beginning on or after December 15, 2008.  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
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 six
months ended June 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.





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.





19


ABOVENET,
INC. AND SUBSIDIARIES





NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(in
millions, except share and per share information)





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.





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.


20


ABOVENET,
INC. AND SUBSIDIARIES





NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(in
millions, except share and per share information)





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.





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 0.50% per annum or 0.75% per annum, depending on the utilization of the
Secured Credit Facility.  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 0.35375% at June 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.





In
addition, 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
imposed limits on annual capital expenditures in 2008, 2009 and 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 June 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 (0.35375% at June 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.





On March
4, 2010, the Company and the Lenders entered into an amendment to the Credit
Agreement to clarify the principal repayment schedule for the Delayed Draw Term
Loan.





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 June 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 six months ended June 30, 2010 and
2009 are as follows:




Three Months Ended June 30,
                  
                  
                  Six Months Ended June 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Federal
                  
                  $
                  9.1
                  
                  
                  $
                  —
                  
                  
                  $
                  17.1
                  
                  
                  $
                  (5.3
                  )State
                  
                  
                  1.4
                  
                  
                  
                  0.2
                  
                  
                  
                  2.7
                  
                  
                  
                  0.4Foreign
                  
                  
                  0.6
                  
                  
                  
                  —
                  
                  
                  
                  0.9
                  
                  
                  
                  —Total
      provision for (benefit from) income taxes
                  
                  $
                  11.1
                  
                  
                  $
                  0.2
                  
                  
                  $
                  20.7
                  
                  
                  $
                  (4.9
                  )





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.





For the
three months ended June 30, 2010 and 2009, the effective income tax rates
were 40.6% and 0.8%, respectively. For the six months ended June
30, 2010 and 2009, the effective income tax rates were 40.9% and
(10.4)%, respectively.





The
Company believes it is more likely than not that it will utilize these assets to
reduce or eliminate tax payments in future periods.  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; (ii) a review of
internal financial forecasts demonstrating its expected capacity to utilize
deferred tax assets; and (iii) a reassessment of tax benefits recognition
under FASB ASC 740.





NOTE
6:  INCOME PER COMMON SHARE





Basic net
income per common share is computed as net income or net loss 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 25,145,224 and 23,026,298 for the three months ended June 30, 2010 and
2009, respectively.  Total weighted average shares utilized in computing
diluted net income per common share were 26,194,883 and 25,227,006 for the three
months ended June 30, 2010 and 2009, respectively.  Dilutive securities
include options to purchase shares of common stock, restricted stock units and
stock warrants.  For the three months ended June 30, 2010, there were no
potentially dilutive securities excluded from the calculation of diluted income
per common share.  For the three months ended June 30, 2009, potentially
dilutive securities to acquire 13,400 shares of common stock were excluded from
the calculation of diluted income per common share as they were
anti-dilutive.  For the six months ended June 30, 2010 and 2009, total
weighted average shares utilized in computing basic net income per common share
were 25,045,423 and 22,974,578, respectively.  For the six months ended
June 30, 2010 and 2009, total weighted average shares utilized in computing
diluted net income per common share were 26,205,457 and 24,968,436,
respectively.  For the six months ended June 30, 2010, there were no
potentially dilutive securities excluded from the calculation of diluted income
per common share.  For the six months ended June 30, 2009, potentially
dilutive securities to acquire 52,650 shares of common stock were excluded from
the calculation of diluted income per share as they were
anti-dilutive.


23


ABOVENET,
INC. AND SUBSIDIARIES





NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(in
millions, except share and per share information)





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 June 30, 2010, 1,169,432 common shares had been
issued pursuant to vested restricted stock units (including shares repurchased
by the Company), 771,223 shares had been issued pursuant to options exercised to
purchase common shares, 155,179 common shares were reserved pursuant to
outstanding options to purchase shares of common stock and 34,078 common shares
were cancelled.  No shares are available for future grants under the 2003
Plan.





Under the
2008 Plan, as of June 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.





Stock
Options





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





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


24


ABOVENET,
INC. AND SUBSIDIARIES





NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(in
millions, except share and per share information)





Restricted
Stock Units





The
Company did not award any restricted stock units during the three and six months
ended June 30, 2010 and 2009.  The Company recognized non-cash stock-based
compensation expense related to restricted stock units granted in prior periods
of $2.1 and $2.9 for the three months ended June 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 June 30, 2010 and by $0.12
per basic common share and by $0.11 per diluted common share for the three
months ended June 30, 2009.  The Company recognized non-cash stock-based
compensation expense related to restricted stock units of $4.2 and $5.7 for the
six months ended June 30, 2010 and 2009, respectively, which had the effect of
decreasing net income by $0.10 per basic and diluted common share for the six
months ended June 30, 2010 and by $0.25 per basic common share and by $0.23 per
diluted common share for the six months ended June 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





A. 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 in all
periods presented, 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 to reflect the two-for-one stock
split.





B. 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 is 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)





C. 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)





D. 2010
Employee Stock Purchase Plan





On June
24, 2010, the Company’s stockholders approved the AboveNet, Inc. 2010 Employee
Stock Purchase Plan (the “Stock Purchase Plan”), which was adopted by the Board
of Directors on April 28, 2010.  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, and the like.





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).  As of July 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 offering period in 2010 will be from September 1 to November 15). 
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 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.


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 June 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.





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 June 30, 2010 and 2009, and $0.2 for each of the six months ended
June 30, 2010 and 2009.  No amounts were outstanding at each of June 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 activity 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 June 30,
                                          
                                          
                                          Six Months Ended June 30,2010
                                          
                                          
                                          2009
                                          
                                          
                                          2010
                                          
                                          
                                          2009RevenueUnited
      States
                                          
                                          $
                                          92.1
                                          
                                          
                                          $
                                          80.4
                                          
                                          
                                          $
                                          180.5
                                          
                                          
                                          $
                                          159.0United
      Kingdom
                                          
                                          
                                          10.0
                                          
                                          
                                          
                                          8.5
                                          
                                          
                                          
                                          20.1
                                          
                                          
                                          
                                          16.1Eliminations
                                          
                                          
                                          (1.3
                                          )
                                          
                                          
                                          (0.9
                                          )
                                          
                                          
                                          (2.6
                                          )
                                          
                                          
                                          (1.7
                                          )Consolidated
      Worldwide
                                          
                                          $
                                          100.8
                                          
                                          
                                          $
                                          88.0
                                          
                                          
                                          $
                                          198.0
                                          
                                          
                                          $
                                          173.4





As ofJune 30, 2010
                  
                  
                  December 31, 2009Long-lived
      assetsUnited
      States
                  
                  $
                  463.7
                  
                  
                  $
                  440.8United
      Kingdom
                  
                  
                  27.8
                  
                  
                  
                  28.3Other
                  
                  
                  —
                  
                  
                  
                  —Consolidated
      Worldwide
                  
                  $
                  491.5
                  
                  
                  $
                  469.1





NOTE
12: OTHER INCOME (EXPENSE), NET





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





Three Months Ended June 30,
                      
                      
                      Six Months Ended June 30,2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009Gain
      on settlement or reversal of liabilities
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      0.4
                      
                      
                      $
                      0.7Gain
      on settlement of insurance claim
                      
                      
                      0.2
                      
                      
                      
                      —
                      
                      
                      
                      0.2
                      
                      
                      
                      —(Loss)
      gain on foreign currency
                      
                      
                      (0.1
                      )
                      
                      
                      3.2
                      
                      
                      
                      (1.2
                      )
                      
                      
                      2.6Loss
      on disposition of property and equipment
                      
                      
                      (0.1
                      )
                      
                      
                      (0.7
                      )
                      
                      
                      —
                      
                      
                      
                      (0.9
                      )Other
                      
                      
                      0.2
                      
                      
                      
                      —
                      
                      
                      
                      0.2
                      
                      
                      
                      —Total
                      
                      $
                      0.2
                      
                      
                      $
                      2.5
                      
                      
                      $
                      (0.4
                      )
                      
                      $
                      2.4


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,
amongother things, (i)
customer capital (to connect customers to the network); (ii)expansion and improvement ofinfrastructure; and (iii)
equipment.  The Company also commits capital for investments inselectedmarkets 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 $150 and $160, of which $57.5 was spent during the six
months ended June 30, 2010.  The Company believes it has sufficient
liquidity to fund such 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 6,000 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. 
We recently 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 by the end of 2010 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.  We recently 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
the end of 2010.





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 6,000 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 5,700 network access points
that can be utilized to build laterals or connect to other networks, thereby
providing access to additional locations.





We also
recently announced plans 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 over 2,400 buildings in the U.S. and the U.K. through our
lateral cables, which cover approximately 1,100 route miles and approximately
140,000 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 recently connected Miami to the long haul network 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 the end of
2010.  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 recently established an IP presence in
Miami and plan to add additional IP locations in London, Paris and Amsterdam by
the end of 2010.





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.  The new groups
are: fiber infrastructure services, metro services and WAN
services.


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 with direct routing 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 also plan to add 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.  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 six months ended June 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 671 as of June 30, 2010, 587 of
which were employed in the U.S., 82 in the U.K., one in the Netherlands and one
in Japan.


41





2010
Highlights





Our
consolidated revenue increased by $24.5 million, or 14.1%, from $173.4 million
for the six months ended June 30, 2009 to $197.9 million for the six months
ended June 30, 2010, which included a $10.3 million increase in our domestic
metro services.  Additionally, in the U.S., our revenue from fiber
infrastructure and WAN services increased by $5.6 million and $5.7 million,
respectively, for the six months ended June 30, 2010 compared to the six months
ended June 30, 2009.  Other revenue (which includes contract termination
revenue) was $3.9 million for the six months ended June 30, 2010, compared to
$4.2 million for the six months ended June 30, 2009.  Revenue from our
foreign operations, primarily in the U.K., increased by $3.2 million for the six
months ended June 30, 2010 compared to the six months ended June 30,
2009.





For the
six months ended June 30, 2010, we generated operating income of $53.4
million and net income of $29.9 million, compared to operating income of
$46.7 million and net income of $52.0 million for the six months ended June 30,
2009.  At June 30, 2010, we had $173.0 million of unrestricted cash,
compared to $165.3 million of unrestricted cash at December 31, 2009, an
increase in liquidity of $7.7 million.  The increase in unrestricted
cash at June 30, 2010 was primarily attributable to cash provided by
operating activities of $67.7 million and cash generated by the exercise of
stock purchase warrants and options to purchase shares of common stock totaling
$1.8 million, partially offset by the use of cash to purchase property and
equipment of $57.5 million and for the scheduled debt service payments totaling
$3.7 million.  See below in this Item 2 under, “Liquidity and Capital
Resources,” for further discussion.





For the
six months ended June 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 six months ended June 30, 2010
were higher than sales orders for the six months ended June 30, 2009. 
While net revenue attrition, as previously defined, for the six months ended
June 30, 2010 was in line with net revenue attrition for the six months ended
June 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 and by the end of 2010, 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 such 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 $0.6
million and $0.8 million in the three months ended June 30, 2010 and 2009,
respectively, and $1.6 million and $2.7 million in the six months ended June 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 June 30, 2010 and December 31, 2009,
we had $34.9 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 field engineers and IP engineers
and reflects their capitalized salary, plus related benefits, and is based upon
an allocation of their time between capitalized and non-capitalized
projects.  These individuals’ salaries are considered to be costs directly
associated with the construction of certain infrastructure and customer
installations.  The salaries and related benefits of non-engineers and
supporting staff that are part of the engineering departments are not considered
part of the pool subject to capitalization.  Capitalized direct labor
amounted to $2.8 million and $2.9 million for the three months ended
June 30, 2010 and 2009, respectively, and $5.8 million and $5.6 million for
the six months ended June 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 new fiber and associated construction costs of the relocation
placed into service, which is reduced by any reimbursements received for such
costs.  We capitalized relocation costs amounting to $0.2 million and $1.0
million for the three months ended June 30, 2010 and 2009, respectively, and
$0.4 million and $1.7 million for the six months ended June 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 $0.03 million and $0.05 million ($0.03 million and $0.04 million on a
net book value basis) for the three and six months ended June 30, 2010,
respectively, and, which on an original cost basis, totaled $0.10 million and
$0.20 million ($0.07 million and $0.14 million on a net book value basis) for
the three and six months ended June 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 six months ended June 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, 2009 and 2008.  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 such assets was less than the carrying value and thus
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.  We provided allowances for impairment of
$0.2 million and $0.5 million in the six months ended June 30, 2010 and 2009,
respectively, which were recorded in the three months ended June 30, 2010 and
2009, respectively.


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 $7.4 million
and $7.2 million at June 30, 2010 and December 31, 2009, respectively, of which
$3.9 million and $3.8 million, respectively, were included in “Accrued
expenses,” and $3.5 million and $3.4 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 $0.02 million for
the three months ended June 30, 2010 and 2009, respectively, and $0.14
million, and $0.10 million for the six months ended June 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 June
30, 2010 and December 31, 2009 was $1.0 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 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 June
30, 2010 and December 31, 2009, our consolidated balance sheet included net
interest rate swap derivative liabilities of $1.0 million and $1.2 million,
respectively.


47





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





Derivative Liabilities
                        (In millions)Derivatives designated as hedging instruments
                      
                      June 30, 2010
                      
                      
                      December 31, 2009Interest
      rate swap agreements (*)
                      
                      $
                      1.0
                      
                      
                      $
                      1.2Total
      derivatives designated as hedging instruments
                      
                      $
                      1.0
                      
                      
                      $
                      1.2





(*)
            The
      derivative liabilities are two interest rate swap agreements with original
      three year terms.  They are both considered to be long-term
      liabilities for financial statement
purposes.





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 June
30, 2010.





Notional
      Amount
                                      
                                      
                                      
                                      Weighted Average Rate(In millions)
                                      
                                      Maturity Date
                                      
                                      Pay
                                      
                                      
                                      Receive$
                                      20.4
                                      
                                      August
      2011
                                      
                                      3.65%
                                      
                                      
                                      0.83%10.2
                                      
                                      November
      2011
                                      
                                      2.635%
                                      
                                      
                                      0.44%$
                                      30.6





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
$158.9 million and $154.1 million at June 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 $1.0 million and $1.2 million in other long-term liabilities in the
consolidated balance sheet at June 30, 2010 and December 31, 2009,
respectively.  We used third parties to value each of the interest
rate swap agreements at June 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 six months ended June 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 allowance 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; (ii) a
review of internal financial forecasts demonstrating our expected capacity to
utilize deferred tax assets; and (iii) a reassessment of tax benefits
recognition under FASB ASC 740.





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
six months ended June 30, 2010 and 2009.





50


Results
of Operations for the Six Months Ended June 30, 2010 Compared to the Six Months
Ended June 30, 2009





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





SixMonthsEndedJune30,
                    
                    
                    $ Increase/
                    
                    
                    % Increase/2010
                    
                    
                    2009
                    
                    
                    (Decrease)
                    
                    
                    (Decrease)Revenue
                    
                    $
                    197.9
                    
                    
                    $
                    173.4
                    
                    
                    $
                    24.5
                    
                    
                    
                    14.1
                    %Costs
      of revenue (excluding depreciation and amortization, shown separately
      below)
                    
                    
                    67.2
                    
                    
                    
                    61.7
                    
                    
                    
                    5.5
                    
                    
                    
                    8.9
                    %Selling,
      general and administrative expenses
                    
                    
                    46.6
                    
                    
                    
                    40.8
                    
                    
                    
                    5.8
                    
                    
                    
                    14.2
                    %Depreciation
      and amortization
                    
                    
                    30.7
                    
                    
                    
                    24.2
                    
                    
                    
                    6.5
                    
                    
                    
                    26.9
                    %Operating
      income
                    
                    
                    53.4
                    
                    
                    
                    46.7
                    
                    
                    
                    6.7
                    
                    
                    
                    14.3
                    %Other
      income (expense):Interest
      income
                    
                    
                    —
                    
                    
                    
                    0.3
                    
                    
                    
                    (0.3
                    )
                    
                    NMInterest
      expense
                    
                    
                    (2.4
                    )
                    
                    
                    (2.3
                    )
                    
                    
                    0.1
                    
                    
                    
                    4.3
                    %Other
      (expense) income, net
                    
                    
                    (0.4
                    )
                    
                    
                    2.4
                    
                    
                    
                    (2.8
                    )
                    
                    
                    (116.7
                    )%Income
      before income taxes
                    
                    
                    50.6
                    
                    
                    
                    47.1
                    
                    
                    
                    3.5
                    
                    
                    
                    7.4
                    %Provision
      for (benefit from) income taxes
                    
                    
                    20.7
                    
                    
                    
                    (4.9
                    )
                    
                    
                    25.6
                    
                    
                    NMNet
      income
                    
                    $
                    29.9
                    
                    
                    $
                    52.0
                    
                    
                    $
                    (22.1
                    )
                    
                    
                    (42.5
                    )%




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 six months ended June 30, 2010 was
$29.9 million, compared to $52.0 million for the six months ended June 30, 2009,
a decrease of $22.1 million.  The primary reasons for the decrease in net
income were the change from a net benefit from income taxes of $4.9 million to a
provision for income taxes of $20.7 million totaling a change of $25.6 million,
an increase in costs of revenue of $5.5 million, an increase in selling, general
and administrative expenses of $5.8 million, an increase in depreciation and
amortization of $6.5 million and a change (decrease) in other (expense) income,
net, of $2.8 million, which were partially offset by an increase in revenue of
$24.5 million.  These changes are discussed more fully below.





Revenue. 
Consolidated revenue was $197.9 million for the six months ended June 30, 2010,
compared to $173.4 million for the six months ended June 30, 2009, an increase
of $24.5 million, or 14.1%.  Revenue from our U.S. operations increased by
$21.3 million, or 13.4%, from $158.7 million for the six months ended June 30,
2009 to $180.0 million for the six months ended June 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 $10.3 million, or 23.1%, from $44.6 million for the six months
ended June 30, 2009 to $54.9 million for the six months ended June 30, 2010,
U.S. revenue from fiber infrastructure services increased by $5.6 million, or
7.2%, from $77.6 million for the six months ended June 30, 2009 to $83.2 million
for the six months ended June 30, 2010 and U.S. revenue from WAN services
increased by $5.7 million, or 17.6%, from $32.3 million for the six months ended
June 30, 2009 to $38.0 million for the six months ended June 30, 2010. 
These increases were partially offset by a decrease of $0.3 million, or 7.1%, in
other revenue, which includes domestic contract termination revenue, from $4.2
million for the six months ended June 30, 2009 to $3.9 million for the six
months ended June 30, 2010.  Revenue from our foreign operations, primarily
in the U.K., increased by $3.2 million, or 21.8%, from $14.7 million for the six
months ended June 30, 2009 to $17.9 million for the six months ended June 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 six months ended June 30, 2010 and a 2.2%
increase in the translation rate due to the strengthening of the British pound
to the U.S. dollar in the six months ended June 30, 2010 compared to the six
months ended June 30, 2009.  There was no contract termination revenue
earned in the U.K. during the six months ended June 30, 2009.


51




Costs of
revenue.  Consolidated costs of revenue for the six months ended
June 30, 2010 was $67.2 million, compared to $61.7 million for the six months
ended June 30, 2009, an increase of $5.5 million, or 8.9%.  Consolidated
costs of revenue as a percentage of revenue was 34.0% for the six months ended
June 30, 2010, compared to 35.6% for the six months ended June 30, 2009,
resulting in consolidated gross profit margin of 66.0% and 64.4% for the six
months ended June 30, 2010 and 2009, respectively.  The costs of revenue
for our U.S. operations was $61.0 million and $56.5 million for the six months
ended June 30, 2010 and 2009, respectively, an increase of $4.5 million, or
8.0%.  The increase in domestic costs of revenue for the six months ended
June 30, 2010 compared to the six months ended June 30, 2009 was attributable
principally to (i) an increase of $2.7 million in co-location expenses, to
support our IP network services and increase our presence in third party data
centers; (ii) an increase of $0.9 million for expenses associated with third
party network costs; (iii) an increase of $0.7 million in amounts rebilled to
customers for equipment sales (for which there was a corresponding increase in
related revenue); and (iv) an increase of $0.4 million in payroll-related
expenses.  These increases were partially offset by 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 negotiations with the relevant
jurisdiction).  Additionally, the six month periods ended June 30, 2010 and
2009 include a provision for equipment impairment relating to inventory of $0.2
million and $0.5 million, respectively, which was recorded in the three months
ended June 30, 2010 and 2009, respectively.  The costs of revenue for our
foreign operations was $6.2 million for the six months ended June 30, 2010,
compared to $5.2 million for the six months ended June 30, 2009, an increase of
$1.0 million, or 19.2%.  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 $1.5 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 $0.5 million.  In
addition, the results for the six months ended June 30, 2010 compared to the six
months ended June 30, 2009 reflect a 2.2% increase in the translation
rate.




Selling, General
and Administrative Expenses (“SG&A”).  Consolidated SG&A
for the six months ended June 30, 2010 was $46.6 million, compared to $40.8
million for the six months ended June 30, 2009, an increase of $5.8 million, or
14.2%.  SG&A as a percentage of revenue was 23.5% for each of the six
months ended June 30, 2010 and 2009.  In the U.S., SG&A was $41.4
million for the six months ended June 30, 2010, compared to $35.9 million for
the six months ended June 30, 2009, an increase of $5.5 million, or 15.3%. 
SG&A for our U.S. operations for the six months ended June 30, 2010 compared
to the six months ended June 30, 2009 increased primarily due to (i) an increase
of $3.8 million in domestic payroll and payroll-related expenses from $19.9
million for the six months ended June 30, 2009 to $23.7 million for the six
months ended June 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
$0.8 million for property taxes; (iii) an increase of $0.3 million in
occupancy-related expenses; (iv) an increase of $0.2 million in professional
fees; and (v) an increase of $1.6 million in other operating expenses, primarily
due to increases in computer software and maintenance of $0.6 million,
commissions paid to third party sales agents of $0.4 million and training and
seminar expenses of $0.2 million.  These increases were partially offset by
a reduction of $1.5 million in domestic non-cash stock-based compensation
expense from $5.2 million for the six months ended June 30, 2009 to $3.7 million
for the six months ended June 30, 2010.  SG&A from our foreign
operations was $5.2 million for the six months ended June 30, 2010, compared to
$4.9 million for the six months ended June 30, 2009, an increase of $0.3
million, or 6.1%.  Increases in professional fees and the year over year
increase in the translation rate were the primary reasons for this
increase.





Depreciation and
amortization.  Consolidated depreciation and amortization was $30.7
million for the six months ended June 30, 2010, compared to
$24.2 million for the six months ended June 30, 2009, an increase of $6.5
million, or 26.9%.  Consolidated depreciation and amortization as a
percentage of revenue was 15.5% for the six months ended June 30, 2010, compared
to 14.0% for the six months ended June 30, 2009.  The increase in
consolidated depreciation and amortization was primarily attributable to (i)
additions of property and equipment for the six months ended June 30, 2010 and
the full period effect of depreciation on property and equipment acquired during
2009 and (ii) the change (reduction) in estimated useful lives of certain
property and equipment effectuated on October 1, 2009 and January 1, 2010, partially offset by the reduction of
depreciation with respect to certain assets, which became fully depreciated
between the two periods.





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





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 $2.4 million for the six months ended
June 30, 2010, compared to $2.3 million for the six months ended June 30,
2009, an increase of $0.1 million, or 4.3%.


52





Other (expense)
income, net.Other (expense) income,
net is composed primarily of income or expense from non-recurring transactions
and is not comparative from a trend perspective.  Consolidated other
(expense) income, net was a net expense of $0.4 million for the six months ended
June 30, 2010, compared to other income, net of $2.4 million for the six months
ended June 30, 2009, a change (decrease) of $2.8 million.  In the U.S.,
other income, net was $0.7 million for the six months ended June 30, 2010,
compared to other income, net of $0.4 million for the six months ended June 30,
2009, an increase of $0.3 million.  For our foreign operations, other
(expense) income, net was a net expense of $1.1 million for the six months ended
June 30, 2010, compared to other income, net of $2.0 million for the six months
ended June 30, 2009, a change (decrease) of $3.1 million.  For the six
months ended June 30, 2010, consolidated other expense, net was comprised of a
net loss on foreign currency of $1.2 million, offset by 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.  For the six months ended June 30, 2009, consolidated other
income, net was comprised of a gain on foreign currency of $2.6 million and
gains arising from the reversal of certain tax liabilities of $0.7 million,
offset by a net loss on the sale or disposition of property and equipment of
$0.9 million.




Provision for
(benefit from) income taxes.We recorded a provision
for income taxes of $20.7 million for the six months ended June 30, 2010,
compared to a benefit from income taxes of $4.9 million for the six months ended
June 30, 2009.  The provision for income taxes for the six months
ended June 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 $20.5 million, plus a provision for
certain capital-based state taxes of $0.2 million.  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 in the six months
ended June 30, 2009.




53





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




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




ThreeMonthsEndedJune30,
                    
                    
                    $ Increase/
                    
                    
                    % Increase/2010
                    
                    
                    2009
                    
                    
                    (Decrease)
                    
                    
                    (Decrease)Revenue
                    
                    $
                    100.7
                    
                    
                    $
                    88.0
                    
                    
                    $
                    12.7
                    
                    
                    
                    14.4
                    %Costs
      of revenue (excluding depreciation and amortization, shown separately
      below)
                    
                    
                    34.1
                    
                    
                    
                    32.3
                    
                    
                    
                    1.8
                    
                    
                    
                    5.6
                    %Selling,
      general and administrative expenses
                    
                    
                    23.0
                    
                    
                    
                    20.1
                    
                    
                    
                    2.9
                    
                    
                    
                    14.4
                    %Depreciation
      and amortization
                    
                    
                    15.2
                    
                    
                    
                    12.3
                    
                    
                    
                    2.9
                    
                    
                    
                    23.6
                    %Operating
      income
                    
                    
                    28.4
                    
                    
                    
                    23.3
                    
                    
                    
                    5.1
                    
                    
                    
                    21.9
                    %Other
      income (expense):Interest
      income
                    
                    
                    —
                    
                    
                    
                    0.1
                    
                    
                    
                    (0.1
                    )
                    
                    NMInterest
      expense
                    
                    
                    (1.2
                    )
                    
                    
                    (1.1
                    )
                    
                    
                    0.1
                    
                    
                    
                    9.1
                    %Other
      income, net
                    
                    
                    0.2
                    
                    
                    
                    2.5
                    
                    
                    
                    (2.3
                    )
                    
                    NMIncome
      before income taxes
                    
                    
                    27.4
                    
                    
                    
                    24.8
                    
                    
                    
                    2.6
                    
                    
                    
                    10.5
                    %Provision
      for income taxes
                    
                    
                    11.1
                    
                    
                    
                    0.2
                    
                    
                    
                    10.9
                    
                    
                    NMNet
      income
                    
                    $
                    16.3
                    
                    
                    $
                    24.6
                    
                    
                    $
                    (8.3
                    )
                    
                    
                    (33.7
                    )%




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 June 30, 2010 was
$16.3 million, compared to $24.6 million for the three months ended June 30,
2009, a decrease of $8.3 million.  The primary reasons for the decrease in
net income were the year over year increases in provision for income taxes of
$10.9 million, costs of revenue of $1.8 million, selling, general and
administrative expenses of $2.9 million and depreciation and amortization of
$2.9 million and a change (decrease) in other income, net, of $2.3 million,
which were partially offset by an increase in revenue of $12.7 million. 
These changes are discussed more fully below.





Revenue. 
Consolidated revenue was $100.7 million for the three months ended June 30,
2010, compared to $88.0 million for the three months ended June 30, 2009, an
increase of $12.7 million, or 14.4%.  Revenue from our U.S. operations
increased by $11.7 million, or 14.6%, from $80.2 million for the three months
ended June 30, 2009 to $91.9 million for the three months ended June 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 $4.7 million, or 20.3%, from $23.2 million for the three
months ended June 30, 2009 to $27.9 million for the three months ended June 30,
2010, U.S. revenue from fiber infrastructure services increased by $2.7 million,
or 6.9%, from $39.3 million for the three months ended June 30, 2009 to $42.0
million for the three months ended June 30, 2010 and U.S. revenue from WAN
services increased by $3.3 million, or 20.2%, from $16.3 million for the three
months ended June 30, 2009 to $19.6 million for the three months ended June 30,
2010.  Other revenue, which includes domestic contract termination revenue,
increased from $1.4 million for the three months ended June 30, 2009 to $2.4
million for the three months ended June 30, 2010, primarily due to a $1.2
million increase in equipment sales.  Revenue from our foreign operations,
primarily in the U.K., increased by $1.0 million, or 12.8%, from $7.8 million
for the three months ended June 30, 2009 to $8.8 million for the three months
ended June 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 and $0.2 million of contract termination revenue earned
during the three months ended June 30, 2010, which was partially offset by a
3.6% decrease in the translation rate due to the strengthening of the U.S.
dollar to the British pound in the three months ended June 30, 2010 compared to
the three months ended June 30, 2009.  There was no contract termination
revenue earned in the U.K. during the three months ended June 30,
2009.


54




Costs of
revenue.  Consolidated costs of revenue for the three months ended
June 30, 2010 was $34.1 million, compared to $32.3 million for the three months
ended June 30, 2009, an increase of $1.8 million, or 5.6%.  Consolidated
costs of revenue as a percentage of revenue was 33.9% for the three months ended
June 30, 2010, compared to 36.7% for the three months ended June 30, 2009,
resulting in consolidated gross profit margin of 66.1% and 63.3% for the three
months ended June 30, 2010 and 2009, respectively.  The costs of revenue
for our U.S. operations was $31.1 million and $29.3 million for the three months
ended June 30, 2010 and 2009, respectively, an increase of $1.8 million, or
6.1%.  The increase in domestic costs of revenue for the three months ended
June 30, 2010 compared to the three months ended June 30, 2009 was attributable
principally to (i) an increase of $1.6 million in co-location expenses, to
support our IP network services and increase our presence in third party data
centers; and (ii) an increase of $0.5 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 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 negotiations with the relevant
jurisdiction).  Additionally, the three month periods ended June 30, 2010
and 2009 each include a provision for equipment impairment relating to inventory
of $0.2 million and $0.5 million, respectively.  The costs of revenue for
our foreign operations was $3.0 million for each of the three months ended June
30, 2010 and 2009.  There were increases in third party network costs and
co-location expenses totaling $0.5 million, 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 $0.5 million.




Selling, General
and Administrative Expenses (“SG&A”).  Consolidated SG&A
for the three months ended June 30, 2010 was $23.0 million, compared to $20.1
million for the three months ended June 30, 2009, an increase of $2.9 million,
or 14.4%.  SG&A as a percentage of revenue was 22.8% for each of the
three months ended June 30, 2010 and 2009.  In the U.S., SG&A was $20.3
million for the three months ended June 30, 2010, compared to $17.5 million for
the three months ended June 30, 2009, an increase of $2.8 million, or
16.0%.  SG&A for our U.S. operations for the three months ended June
30, 2010 compared to the three months ended June 30, 2009 increased primarily
due to (i) an increase of $1.6 million in domestic payroll and payroll-related
expenses from $9.9 million for the three months ended June 30, 2009 to $11.5
million for the three months ended June 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 property taxes; (iii) an increase of $0.4 million
in professional fees; and (iv) a net increase of $0.9 million in other operating
expenses, primarily due to increases in computer software and maintenance of
$0.2 million, commissions paid to third party sales agents of $0.2 million and
training and seminar expenses of $0.2 million.  These increases were
partially offset by the reduction of $0.8 million in domestic non-cash
stock-based compensation expense from $2.6 million for the three months ended
June 30, 2009 to $1.8 million for the three months ended June 30, 2010. 
SG&A from our foreign operations was $2.7 million for the three months ended
June 30, 2010, compared to $2.6 million for the three months ended June 30,
2009, an increase of $0.1 million, or 3.8%.  The year over year increase in
the translation rate was the principal reason for this change.





Depreciation and
amortization.  Consolidated depreciation and amortization was $15.2
million for the three months ended June 30, 2010, compared to
$12.3 million for the three months ended June 30, 2009, an increase of $2.9
million, or 23.6%.  Consolidated depreciation and amortization as a
percentage of revenue was 15.1% for the three months ended June 30, 2010,
compared to 14.0% for the three months ended June 30, 2009.  The
increase in consolidated depreciation and amortization was primarily
attributable to (i) additions of property and equipment for the six months ended
June 30, 2010 and the full period effect of depreciation on property and
equipment acquired during 2009 and (ii) the change (reduction) in estimated
useful lives of certain property and equipment effectuated on October 1, 2009
and January 1, 2010, partially offset by the reduction of
depreciation with respect to certain assets, which became fully depreciated
between the two periods.





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





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 $1.2 million for the three months ended
June 30, 2010, compared to $1.1 million for the three months ended June 30,
2009, an increase of $0.1 million, or 9.1%.





55


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 $0.2 million for the three months ended June 30, 2010,
compared to other income, net of $2.5 million for the three months ended June
30, 2009, a change (decrease) of $2.3 million.  In the U.S., other income
(expense), net was other income, net of $0.2 million for the three months ended
June 30, 2010, compared to a net expense of $0.2 million for the three months
ended June 30, 2009, a change (increase) of $0.4 million.  For our foreign
operations, other income, net was $2.7 million for the three months ended June
30, 2009, reflecting a decrease of $2.7 million for the three months ended June
30, 2010 compared to the three months ended June 30, 2009.  For the three
months ended June 30, 2010, consolidated other income, net was comprised of a
gain from the settlement of an insurance claim of $0.2 million and other gains
of $0.2 million, offset by a net loss on foreign currency of $0.1 million and a
net loss on the sale or disposition of property and equipment of $0.1
million.  For the three months ended June 30, 2009, consolidated other
income, net was comprised of a net gain on foreign currency of $3.2 million
offset by a net loss on the sale or disposition of property and equipment of
$0.7 million.




Provision for
(benefit from) income taxes.We recorded a provision
for income taxes of $11.1 million for the three months ended June 30, 2010,
compared to a provision for income taxes of $0.2 million for the three months
ended June 30, 2009.  The provision for income taxes for the three
months ended June 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 $11.0 million, plus a provision for
certain capital-based state taxes of $0.1 million.  The provision for
income taxes during the three months ended June 30, 2009 was provided for
certain capital-based state taxes.  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 in the three months
ended June 30, 2009.




Liquidity
and Capital Resources




We had
working capital of $112.7 million at June 30, 2010, compared to working capital
of $88.6 million at December 31, 2009, an increase of $24.1 million.  This
increase was primarily attributable to an increase in unrestricted cash of $7.7
million from $165.3 million at December 31, 2009 to $173.0 million at June 30,
2010, an increase in prepaid costs and other current assets of $5.3 million, a
decrease in accounts payable of $4.6 million, a decrease in accrued expenses of
$3.8 million (primarily due to accrued bonus) and a decrease in deferred revenue
- current portion of $3.2 million.  The increase in unrestricted cash at
June 30, 2010 was primarily attributable to cash provided by operating
activities of $67.7 million and cash generated by the exercise of stock purchase
warrants and options to purchase shares of common stock totaling $1.8 million,
partially offset by the use of cash to purchase property and equipment of $57.5
million and for the scheduled debt service payments totaling $3.7
million.





Net cash
provided by operating activities was $67.7 million during the six months ended
June 30, 2010, compared to $74.5 million during the six months ended June 30,
2009, a decrease of $6.8 million.  Net cash provided by operating
activities during the six months ended June 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 $30.7 million, the
change in deferred tax assets of $20.5 million and stock-based compensation
expense of $4.2 million, plus the changes in working capital components.
 Net cash provided by operating activities during the six months ended June
30, 2009 resulted primarily from the add back of non-cash items deducted in the
determination of net income, principally depreciation and amortization of $24.2
million and stock-based compensation expense of $5.8 million.  The year
over year decrease in net cash provided by operating activities is primarily due
to the decrease in net income adjusted for non-cash activities and 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.





Net cash
used in investing activities was $57.3 million during the six months ended June
30, 2010, compared to $53.5 million during the six months ended June 30, 2009,
an increase of $3.8 million.  Net cash used in investing activities during
the six months ended June 30, 2010 was attributable to the purchases of property
and equipment of $57.5 million, offset by the proceeds generated from sales of
property and equipment of $0.2 million.  Net cash used in investing
activities during the six months ended June 30, 2009 was attributable to the
purchases of property and equipment of $53.5 million.




56





Net cash
used in financing activities was $2.2 million during the six months ended June
30, 2010, which is comprised of the principal payment under the Secured Credit
Facility of $3.7 million and the purchase of treasury stock of $0.3 million,
offset by the proceeds from the exercise of warrants of $1.4 million and the
proceeds from the exercise of options to purchase shares of common stock of $0.4
million.  Net cash generated by financing activities was $1.1 million
during the six months ended June 30, 2009, which is comprised of the
proceeds from the exercise of options to purchase shares of common stock of $2.8
million and the proceeds from the exercise of warrants of $0.1 million, offset
by the principal payment under the Secured Credit Facility of $1.1 million, the
purchase of treasury stock of $0.3 million, the principal payment on our capital
lease obligation of $0.2 million and the increase in restricted cash and cash
equivalents 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. 35375% at June 30, 2010).




During
the six months ended June 30, 2010, we generated cash from
operating
activitiesthat 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,commitcapital for, amongother things, (i) customer capital (to
connect customers to the network); (ii)expansion and improvement ofinfrastructure; and (iii)
equipment.We
also commitcapital for
investments inselectedmarkets andhave announced
ourintention to open up
Denver as a market and expand into Paris, Amsterdam and Frankfurt in
Europe.Based
upon our investment plans, our capital expenditures for 2010 are expected to be
between $150 million and $160 million, of which $57.5 million was spent during
the six months ended June 30, 2010.  Based upon these investment
plans, our capital expenditures in the last half of 2010 may exceed our net cash
generated from operating activities.  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:





ThreeMonthsEndedJune30,
                      
                      
                      $ Increase /
                      
                      
                      % Increase /2010
                      
                      
                      2009
                      
                      
                      (Decrease)
                      
                      
                      (Decrease)Revenue
                      
                      $
                      91.9
                      
                      
                      $
                      80.2
                      
                      
                      $
                      11.7
                      
                      
                      
                      14.6
                      %Costs
      of revenue (excluding depreciation and amortization, shown separately
      below)
                      
                      
                      31.1
                      
                      
                      
                      29.3
                      
                      
                      
                      1.8
                      
                      
                      
                      6.1
                      %Selling,
      general and administrative expenses
                      
                      
                      20.3
                      
                      
                      
                      17.5
                      
                      
                      
                      2.8
                      
                      
                      
                      16.0
                      %Depreciation
      and amortization
                      
                      
                      13.6
                      
                      
                      
                      10.8
                      
                      
                      
                      2.8
                      
                      
                      
                      25.9
                      %Operating
      income
                      
                      
                      26.9
                      
                      
                      
                      22.6
                      
                      
                      
                      4.3
                      
                      
                      
                      19.0
                      %Other
      income (expense):Interest
      income
                      
                      
                      —
                      
                      
                      
                      0.1
                      
                      
                      
                      (0.1
                      )
                      
                      NMInterest
      expense
                      
                      
                      (1.2
                      )
                      
                      
                      (1.1
                      )
                      
                      
                      0.1
                      
                      
                      
                      9.1
                      %Other
      income (expense), net
                      
                      
                      0.2
                      
                      
                      
                      (0.2
                      )
                      
                      
                      0.4
                      
                      
                      NMIncome
      before income taxes
                      
                      
                      25.9
                      
                      
                      
                      21.4
                      
                      
                      
                      4.5
                      
                      
                      
                      21.0
                      %Provision
      for income taxes
                      
                      
                      10.5
                      
                      
                      
                      0.2
                      
                      
                      
                      10.3
                      
                      
                      NMNet
      income
                      
                      $
                      15.4
                      
                      
                      $
                      21.2
                      
                      
                      $
                      (5.8
                      )
                      
                      
                      (27.4
                      )%





United
Kingdom and others:





ThreeMonthsEndedJune30,
                      
                      
                      $ Increase /
                      
                      
                      % Increase /2009
                      
                      
                      2008
                      
                      
                      (Decrease)
                      
                      
                      (Decrease)Revenue
                      
                      $
                      8.8
                      
                      
                      $
                      7.8
                      
                      
                      $
                      1.0
                      
                      
                      
                      12.8
                      %Costs
      of revenue (excluding depreciation and amortization, shown separately
      below)
                      
                      
                      3.0
                      
                      
                      
                      3.0
                      
                      
                      
                      —
                      
                      
                      
                      —Selling,
      general and administrative expenses
                      
                      
                      2.7
                      
                      
                      
                      2.6
                      
                      
                      
                      0.1
                      
                      
                      
                      3.8
                      %Depreciation
      and amortization
                      
                      
                      1.6
                      
                      
                      
                      1.5
                      
                      
                      
                      0.1
                      
                      
                      
                      6.7
                      %Operating
      income
                      
                      
                      1.5
                      
                      
                      
                      0.7
                      
                      
                      
                      0.8
                      
                      
                      
                      114.3
                      %Other
      income:Other
      income, net
                      
                      
                      —
                      
                      
                      
                      2.7
                      
                      
                      
                      (2.7
                      )
                      
                      NMIncome
      before income taxes
                      
                      
                      1.5
                      
                      
                      
                      3.4
                      
                      
                      
                      (1.9
                      )
                      
                      
                      (55.9
                      )%Provision
      for income taxes
                      
                      
                      0.6
                      
                      
                      
                      —
                      
                      
                      
                      0.6
                      
                      
                      NMNet
      income
                      
                      $
                      0.9
                      
                      
                      $
                      3.4
                      
                      
                      $
                      (2.5
                      )
                      
                      
                      (73.5
                      )%




NM—not
meaningful








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


58





United
States:





SixMonthsEndedJune30,
                      
                      
                      $ Increase /
                      
                      
                      % Increase /2010
                      
                      
                      2009
                      
                      
                      (Decrease)
                      
                      
                      (Decrease)Revenue
                      
                      $
                      180.0
                      
                      
                      $
                      158.7
                      
                      
                      $
                      21.3
                      
                      
                      
                      13.4
                      %Costs
      of revenue (excluding depreciation and amortization, shown separately
      below)
                      
                      
                      61.0
                      
                      
                      
                      56.5
                      
                      
                      
                      4.5
                      
                      
                      
                      8.0
                      %Selling,
      general and administrative expenses
                      
                      
                      41.4
                      
                      
                      
                      35.9
                      
                      
                      
                      5.5
                      
                      
                      
                      15.3
                      %Depreciation
      and amortization
                      
                      
                      27.2
                      
                      
                      
                      21.3
                      
                      
                      
                      5.9
                      
                      
                      
                      27.7
                      %Operating
      income
                      
                      
                      50.4
                      
                      
                      
                      45.0
                      
                      
                      
                      5.4
                      
                      
                      
                      12.0
                      %Other
      income (expense):Interest
      income
                      
                      
                      —
                      
                      
                      
                      0.3
                      
                      
                      
                      (0.3
                      )
                      
                      NMInterest
      expense
                      
                      
                      (2.4
                      )
                      
                      
                      (2.3
                      )
                      
                      
                      0.1
                      
                      
                      
                      4.3
                      %Other
      income, net
                      
                      
                      0.7
                      
                      
                      
                      0.4
                      
                      
                      
                      0.3
                      
                      
                      
                      75.0
                      %Income
      before income taxes
                      
                      
                      48.7
                      
                      
                      
                      43.4
                      
                      
                      
                      5.3
                      
                      
                      
                      12.2
                      %Provision
      for (benefit from) income taxes
                      
                      
                      19.8
                      
                      
                      
                      (4.9
                      )
                      
                      
                      24.7
                      
                      
                      NMNet
      income
                      
                      $
                      28.9
                      
                      
                      $
                      48.3
                      
                      
                      $
                      (19.4
                      )
                      
                      
                      (40.2
                      )%





United
Kingdom and others:





SixMonthsEndedJune30,
                      
                      
                      $ Increase /
                      
                      
                      % Increase /2010
                      
                      
                      2009
                      
                      
                      (Decrease)
                      
                      
                      (Decrease)Revenue
                      
                      $
                      17.9
                      
                      
                      $
                      14.7
                      
                      
                      $
                      3.2
                      
                      
                      
                      21.8
                      %Costs
      of revenue (excluding depreciation and amortization, shown separately
      below)
                      
                      
                      6.2
                      
                      
                      
                      5.2
                      
                      
                      
                      1.0
                      
                      
                      
                      19.2
                      %Selling,
      general and administrative expenses
                      
                      
                      5.2
                      
                      
                      
                      4.9
                      
                      
                      
                      0.3
                      
                      
                      
                      6.1
                      %Depreciation
      and amortization
                      
                      
                      3.5
                      
                      
                      
                      2.9
                      
                      
                      
                      0.6
                      
                      
                      
                      20.7
                      %Operating
      income
                      
                      
                      3.0
                      
                      
                      
                      1.7
                      
                      
                      
                      1.3
                      
                      
                      
                      76.5
                      %Other
      (expense) income:Other
      (expense) income, net
                      
                      
                      (1.1
                      )
                      
                      
                      2.0
                      
                      
                      
                      (3.1
                      )
                      
                      NMIncome
      before income taxes
                      
                      
                      1.9
                      
                      
                      
                      3.7
                      
                      
                      
                      (1.8
                      )
                      
                      
                      (48.6
                      )%Provision
      for income taxes
                      
                      
                      0.9
                      
                      
                      
                      —
                      
                      
                      
                      0.9
                      
                      
                      NMNet
      income
                      
                      $
                      1.0
                      
                      
                      $
                      3.7
                      
                      
                      $
                      (2.7
                      )
                      
                      
                      (73.0
                      )%




NM—not
meaningful








The
segment results for the six months ended June 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 six months ended June 30, 2010, our foreign
activities accounted for 9.0% of consolidated revenue.  Due to the
strengthening of the British pound compared to the U.S. dollar, the translation
rate for the six months ended June 30, 2010 increased 2.2% compared to the
translation rate used for the six months ended June 30, 2009.  Due to the
weakening of the British pound against the U.S. dollar, the translation rate for
the three months ended June 30, 2010 decreased 3.6% compared to the translation
rate used for the three months ended June 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 June 30, 2010 was 3.35375% (30 day LIBOR of 0.35375% at June 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. 
Thus, we remain subject to interest fluctuations on the outstanding balance
under the Delayed Draw Term Loan ($22.95 million at June 30, 2010), which is
currently not hedged.  After the expiration of each interest rate swap, the
corresponding Term Loan will bear interest at 30 day LIBOR, plus the applicable
margin of 3.00%.





As of
June 30, 2010, we had $53.6 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
June 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 June 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.


63





ITEM 6.  EXHIBITS





Exhibit No.
                
                Description
      of Exhibit3.1
      (a)
                
                Restated
      Certificate of Incorporation of AboveNet, Inc. filed with the Secretary of
      State of the State of Delaware on August 3, 2010.3.1
      (b)
                
                Certificate
      of Amendment to the Amended and Restated Certificate of Incorporation of
      AboveNet, Inc. filed with the Secretary of State of the State of Delaware
      on June 24, 2010.10.1
                
                AboveNet,
      Inc. 2010 Employee Stock Purchase Plan (incorporated by reference to the
      AboveNet, Inc. Proxy Statement filed with the Securities and Exchange
      Commission on May 14, 2010).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:  August
      9, 2010
            By:
            /s/ William G. LaPerchWilliam
      G. LaPerch
              President,
      Chief Executive Officer and Director
              (Principal
      Executive Officer)




Date:  August
      9, 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 Exhibit3.1
      (a)
                  
                  Restated
      Certificate of Incorporation of AboveNet, Inc. filed with the Secretary of
      State of the State of Delaware on August 3, 2010.3.1
      (b)
                  
                  Certificate
      of Amendment to the Amended and Restated Certificate of Incorporation of
      AboveNet, Inc. filed with the Secretary of State of the State of Delaware
      on June 24, 2010.10.1
                  
                  AboveNet,
      Inc. 2010 Employee Stock Purchase Plan (incorporated by reference to the
      AboveNet, Inc. Proxy Statement filed with the Securities and Exchange
      Commission on May 14, 2010).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.