UNITED
STATES
 SECURITIES ANDEXCHANGE
COMMISSION
 WASHINGTON,
D.C. 20549
 
 FORM 10-K
 
 x
                ANNUAL REPORT PURSUANT TO SECTION
      13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
    1934
 
 For the fiscal year ended December 31,
2009
 
 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)
 
 Securities registered pursuant to
Section 12(b) of the Act:None.
 
 Securities registered pursuant to
Section 12(g) of the Act:
 Common Stock, par value $0.01 per
share
 Title of Class
 
 Indicate by check mark
if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.  Yes ̈Nox
 
 Indicate by check mark
if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.  Yes ̈Nox
 
 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.  YesxNo ̈
 
 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
if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§ 229.405 of this chapter) is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ̈
 
 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. (Check one):
 
 Large accelerated
      filer ̈
              Accelerated
      filerx
              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
Act).  Yes ̈Nox
 
 The aggregate market value of the common
stock of the registrant held by non-affiliates of the registrant as of June 30,
2009was approximately
$388.9million.
 
 The number of shares of the registrant’s
common stock, par value $0.01 per share,outstanding as of March 1,
2010, was
25,050,849.
 
 DOCUMENTS
INCORPORATED BY REFERENCE:NOT APPLICABLE
  
  Table of Contents
 
 ABOVENET, INC.
 
 For The Year Ended December 31,
2009
 
 INDEX
  PagePART
      I.ITEM
      1.
                          BUSINESS
                          
                          1ITEM
      1A.
                          RISK
      FACTORS
                          
                          16ITEM
      1B.
                          UNRESOLVED
      STAFF COMMENTS
                          
                          22ITEM
      2.
                          PROPERTIES
                          
                          23ITEM
      3.
                          LEGAL
      PROCEEDINGS
                          
                          23ITEM
      4.
                          RESERVED
                          
                          24PART
      II.ITEM
      5.
                          MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
      ISSUERPURCHASES OF EQUITY SECURITIES
                          
                          25ITEM
      6.
                          SELECTED
      FINANCIAL DATA
                          
                          30ITEM
      7.
                          MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                          
                          32ITEM 7A.
                          QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                          
                          55ITEM
      8.
                          FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
                          
                          56ITEM
      9.
                          CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
                          
                          99ITEM
      9A.
                          CONTROLS
      AND PROCEDURES
                          
                          99ITEM
      9B.
                          OTHER
      INFORMATION
                          
                          101PART
      III.ITEM
      10.
                          DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
                          
                          102ITEM
      11.
                          EXECUTIVE
      COMPENSATION
                          
                          109ITEM
      12.
                          SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
      RELATEDSTOCKHOLDER
      MATTERS
                          
                          127ITEM
      13.
                          CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
                          
                          131ITEM
      14.
                          PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
                          
                          132PART
      IV.ITEM
      15.
                          EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES
                          
                          133SIGNATURES
                          
                          135EXHIBIT
      INDEX
                          
                          136
  i
  PART I
  ITEM 1.  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 most competitive local exchange carriers (“CLECs”),
we do not provide voice services, services to residential customers or a wide
range of lower-bandwidth services.  We have included a Glossary of Terms
beginning on page 13 to explain the many technical terms that are commonly used
in our industry to assist you to better understand our business.  We
recommend that you refer to this Glossary as you review the description of our
business.
 
 Metro
networks.We are
a facilities-based provider that operates fiber-optic networks in 15 major
markets in the U.S. and one in 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 1.9 million fiber miles across
over 5,500 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.
 
 Long haul
network.  Through
construction, acquisition and leasing activities, we have created a nationwide
fiber-optic communications network spanning over 11,000 cable route miles that
connects each of our 15 U.S. metro networks.  We run advanced dense
wavelength-division multiplexing (“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 are also members of the
Japan-US Cable Network (JUS) and Trans-Atlantic undersea telecommunications
consortia (“TAT-14”) that provide connectivity between the U.S. and Japan and
the U.S. and Europe, respectively.  We refer to this network as our long
haul network.
 
 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.
 
 Corporate History
  We were formed as National Fiber
Network, Inc. on April 8, 1993 and our name was changed to Metromedia Fiber
Network, Inc. (also referred to as “MFN”) on August 12,
1997.  Initially, we focused on providing dark fiber to carrier
customers in the U.S. and later, as we expanded, in Europe.  In
September 1999, we acquired AboveNet Communications, Inc., a data center
facility and Internet connectivity provider as well as PAIX.net, Inc., an
AboveNet Communications, Inc. subsidiary that operated Internet peering
exchanges.  In February 2001, we acquired SiteSmith, Inc., a provider
of managed web-hosting services.
 
 In 2003, we changed the name of our
parent company to AboveNet, Inc. and shifted our focus to taking advantage of
our extensive fiber-optic assets to sell high-bandwidth solutions,
primarily to enterprise customers.  As a result, we sold or disposed
of businesses and assets not deemed central to this focus, including our managed
web-hosting services business and data center business.
  1
  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.
  2
  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 1.9 million fiber miles and over 5,500 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
5,400 network access points that can be utilized to build laterals or connect to
other networks, thereby providing access to additional locations.
 
 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.
 
 ·
              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.
  3
  On-Net
Buildings
  Our metro
networks connect to over 2,200 buildings in the U.S. and the U.K. through our
lateral cables, which cover approximately 1,400 route miles and approximately
150,000 fiber miles (which are part of the 1.9 million fiber miles previously
described).  These connected buildings are referred to as on-net
buildings.
 
 ·
              Enterprise Buildings -Our network extends to over 1,700 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
  Weoperate a nationwide long haul network
interconnecting each of our metro networks that spans over 11,000 route
miles.  With the exception of the route between New York and
Washington, D.C., which we constructed and own, our 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 next generation 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.
 
 In addition to our U.S.-based
facilities, we are a member of the TAT-14 consortium, which 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 among our key IP presence
locations.  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
high-bandwidth capability among our metro networks and certain key markets in
Europe and Japan.
 
 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 15 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 London, Amsterdam, Tokyo, Paris and Frankfurt,
including the major exchanges in these markets such as LINX, AMS-IX, and
JPIX.
 
 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.
  4
  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.  See Item 7, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations - Contractual
Obligations.”
 
 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 on 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.  We recasted our revenue into these groupings, as
applicable, for 2007 for comparative purposes and trend analysis.
 
 Our
services are grouped into three categories, as described below: fiber
infrastructure, metro and WAN services.
 
 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 and the provisioning of network co-location
and in-building interconnection services, typically at our POP
locations.
 
 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.
  5
  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 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 15 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.
  6
  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 15 U.S. metro markets and London.  Our U.S. sales force is
comprised of over 70 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.
 
 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.
  7
  Segments
  We operate our business as one operating
segment and include segmented results based on geography.
 
 Below is
our revenue based on the location of our entity providing the
service.  Long-lived assets are based on the physical location of the
assets.  The following tables present revenue and long-lived asset
information for geographic areas (in millions):
 
 Years
      Ended December 31,2009
                    
                    
                    2008
                    
                    
                    2007RevenueUnited
      States
                    
                    $
                    328.0
                    
                    
                    $
                    288.5
                    
                    
                    $
                    227.8United
      Kingdom
                    
                    
                    35.8
                    
                    
                    
                    36.1
                    
                    
                    
                    29.4Other
                    
                    
                    0.1
                    
                    
                    
                    —
                    
                    
                    
                    —Eliminations
                    
                    
                    (3.8
                    )
                    
                    
                    (4.7
                    )
                    
                    
                    (3.6
                    )Consolidated
      Worldwide
                    
                    $
                    360.1
                    
                    
                    $
                    319.9
                    
                    
                    $
                    253.6
 
 December 31,2009
                        
                        
                        2008Long-lived
      assetsUnited
      States
                        
                        $
                        440.8
                        
                        
                        $
                        374.5United
      Kingdom
                        
                        
                        28.3
                        
                        
                        
                        23.8Other
                        
                        
                        —
                        
                        
                        
                        0.1Consolidated
      Worldwide
                        
                        $
                        469.1
                        
                        
                        $
                        398.4
 
 See Item 6, “Management’s Discussion and Analysis
of Financial Condition and Results of Operations – Segment Results,” and
Note 18, “Segment Reporting,” to the accompanying consolidated financial
statements included elsewhere in this Annual Report on Form 10-K. 
SeeItem 7,“Management’s Discussion and Analysis
of Financial Condition and Results of Operations,” for details relating to our
domestic revenues by service during the three years ended December 31, 2009 and
our revenue generated in the U.K. and other during the three years ended
December 31, 2009.
 
 Research and
Development
  We depend upon our equipment vendors for
technology developments in telecommunications equipment.  We test,
combine and implement these technology developments to provide the highest level
of services to our customers.
  Competition
  The telecom industry is intensely
competitive and has undergone significant consolidation over the past few
years.  Although there are multiple reasons for this consolidation,
among the most prominent is the need to rationalize capacity created as a result
of the telecommunications investment boom which occurred in the late
1990s.  With respect to our larger competitors, Verizon and AT&T
(formerly SBC) have accounted for most of the consolidation through their
purchases of MCI and AT&T, respectively.  In the mid-market, Level
3 was responsible for a significant portion of the consolidation by acquiring a
large number of facilities-based telecommunications providers.  At the
same time, regulatory rulings have reduced the obligations of the ILECs to
provide portions of their networks, referred to as unbundled network elements
(“UNEs”), at historical cost prices making it more difficult for
non-facilities-based operators to continue to provide services by utilizing UNEs
from the ILECs.
 
 We face competition from CLECs and other
facilities-based telecommunications providers including the ILECs who currently
have a large share of the local markets and are aggressively deploying their own
fiber.  Like us, a number of our competitors survived the downturn of the
early 2000s by going through a restructuring process that significantly improved
their financial condition and efficiency of their operations.  CLECs
generally offer a much broader array of services than we do and tend to compete
more directly with each other and the ILECs across a larger segment of
customers.
  8
  The Internet connectivity business is
intensely competitive and includes many providers such as AT&T, Verizon,
Level 3 and Cogent.  As a result of this competition, while Internet
traffic has continued to grow at a substantial rate over the past five years,
pricing has generally declined, which has negatively affected revenue
growth.
 
 Our fiber
infrastructure services face competition from numerous regional fiber providers
and in some cases from CLECs.
 
 In the London market, we compete with a
number of other telecommunications companies, including British Telecom, Cable
& Wireless, Colt Telecom and Global Crossing.
 
 Personnel
  Our workforce levels
have increased over the last three years as our business has
expanded.  As of December 31, 2009, 2008 and 2007 our work force was
deployed as follows:
 
 December
31,2009
                    
                    
                    2008
                    
                    
                    2007U.S.
                    
                    
                    567
                    
                    
                    
                    537
                    
                    
                    
                    482U.K.
                    
                    
                    77
                    
                    
                    
                    76
                    
                    
                    
                    65Japan
                    
                    
                    1
                    
                    
                    
                    1
                    
                    
                    
                    1Netherlands
                    
                    
                    1
                    
                    
                    
                    1
                    
                    
                    
                    1Total
                    
                    
                    646
                    
                    
                    
                    615
                    
                    
                    
                    549
 
 We consider our relations with our
workforce to be good.  None of our employees is represented by a
union.
 
 Regulation
  In the
U.S., the Federal Communications Commission, which we refer to as the FCC, and
various state regulatory bodies regulate some aspects of certain of our
services.  In some local jurisdictions, we must obtain approval to
operate or construct our networks.  In the U.K., we are subject to
regulation by the agencies having jurisdiction over the provision of
transmission services.  In addition, we are subject to numerous
federal, state and local taxes, fees or surcharges on our products and
services.
 
 Federal
  In the
U.S., federal telecommunications law directly shapes the market in which we
compete.  We offer two types of services that fall under the
jurisdiction of the FCC—the leasing of dark fiber and the provision of
telecommunications transmission services—that are subject to varying degrees of
regulation by the FCC pursuant to the provisions of the Communications Act of
1934, as amended by the Telecommunications Act of 1996, which we refer to as the
1996 Communications Act, and by FCC regulations implementing and interpreting
the 1996 Communications Act.
  Dark fiber
leasing.  The FCC considers dark fiber a “network element” and not a
“telecommunications service.”  As a result, we believe that our
provision of dark fiber is not subject to many of the legal requirements imposed
on the sale of telecommunications services.
  Telecommunicationsservices.For most
of our telecommunications services offerings, we are not required to provide
such services on a common carrier basis (i.e., the provision of services to all
customers on uniform terms and conditions).  Our revenue from
transmission services, whether or not provided as a common carrier, is subject
to FCC Universal Service Fund assessments to the extent that these services are
purchased by end users (i.e., not by wholesale providers or resellers).To the extent we provide
telecommunications services on a common carrier basis, beingregulated as a “telecommunications
carrier” gives us
certain legal benefits.  In particular, state and local governments
have the obligation to manage access to the public rights-of-way in a
competitively neutral nondiscriminatory manner to telecommunications
carriers.  In addition, we are entitled to access existing
telecommunications infrastructure by interconnecting our fiber-optic networks
with the ILECs’ central offices and other facilities.  Under the 1996
Communications Act, ILECs must, among other things: (1) allow interconnection
with other telecommunications carriersat any technically
feasible point and provide service equal in quality to that provided to others,
and (2) provide other telecommunications carriers withaccess to their poles,
ducts, conduits and other rights-of-wayon just, reasonable and
non-discriminatory terms.
  9
  In most
states, the FCC exercises jurisdiction over the rates that many power utilities
and telecommunications carriers charge to other companies to lease space on
their telephone poles or electrical towers or in their conduitsin order to install
fiber optic cable.  This jurisdiction derives from Section 224 of the
Federal Communications Act of 1978, later expanded in the 1996 Communications
Act.  The statute makes it possible for states to preempt the FCC’s
jurisdiction over rates for and access to poles and conduits where the state
certifies to the FCC that it regulates such rates and access.  The
purpose of the law is to make it easier for cable companies and competitive
telecommunications providers to build out their own networks.  We have
many pole attachment agreements with ILECs and power utilities – some of these
agreements reflect rates that were voluntarily negotiated, but many reflect
rates established pursuant to the FCC’s regulations, which implement provisions
of Section 224.In
recent years, some utilities have interpreted the regulations in a way that can
impose what we believe to be excessive costs on competitive carriers, including
us.  To the extent utilities are successful in maintaining these
interpretations of the rules they can increase our cost of doing
business.  In late 2007, the FCC initiated rulemaking proceedings to
examine the pole attachment rate formula, specifically, whether a single rate
should apply to all attachers and whether incumbent local exchange carriers
should be entitled to the same rate as other telecommunications service
providers, among other matters.That proceeding remains
pending.  A possible outcome of the proceeding is that our rates for
access to the poles and conduit of utilities and other carriers could
increase.
 
 Internet
access services, including IP connectivity services that we provide, are treated
as unregulated “information services” under Title I of the 1996 Communications
Act, and are not subject to regulatory fees.  The FCC has issued
orders confirming that other forms of IP bandwidth services, including Digital
Subscriber Line service, Cable Modem service and Broadband Over Powerline
service, are defined as “information services” and so are not subject to
regulatory fees.  However, the dramatic growth of Voice over Internet
Protocol (“VoIP”) services has caused intense focus on the regulatory status of
IP services.  The FCC recently required that providers of
interconnected VoIP service must provide access to emergency 911 services, must
comply with federal law enforcement and “wiretap” statutes, contribute to the
federaluniversal
service fund,and
must paycertain
regulatory fees.  Some of these FCC decisions are under appeal before
federal courts of appeals.  While these decisions have focused on
providers of interconnected VoIP service, which we do not provide, there is
nevertheless substantial uncertainty concerning the regulatory status of
IP-based services generally.  This general uncertainty raises the
concern that the FCC may extend other traditional telecommunications regulation
to VoIP and/or other IP-based services, including the IP connectivity services
that we offer.  If this occurs, it could lead to an increase in the
intercarrier compensation, universal service contributions and regulatory fees
required to be paid by us related to such services.
 
 Congress
has charged the FCC with the task of formulating a national broadband plan by
March 2010.  It is expected that the national broadband plan will
propose significant measures and reforms designed to accelerate and expand the
availability of broadband networks and services to end users across the
nation.  The national broadband plan could address issues that are
significant to us, including without limitation, regulation of last mile and
middle mile transmission facilities, regulation of IP-based services and IP
interconnection, funding of broadband facilities and services, and reform of
universal system funding and intercarrier compensation systems.
 
 State
  The 1996
Communications Act prohibits state and local governments from enforcing any law,
rule or legal requirement that prohibits, or has the effect of prohibiting, any
person from providing any interstate or intrastate telecommunications
service.  This provision of the 1996 Communications Act enables us to
provide telecommunications services in states that previously prohibited
competitive entry.
 
 Under the
1996 Communications Act, states retain jurisdiction, on a competitively neutral
basis, to adopt regulations necessary to preserve universal service, protect
public safety and welfare, manage public rights-of-way, ensure the continued
quality of intrastate communications services and safeguard the rights of
consumers.
 
 States
are responsible for mediating and arbitrating interconnection agreements between
ILECs and other carriers if voluntary agreements are not
reached.  Accordingly, state involvement in local telecommunications
services is substantial.
  10
  Each
state (and the District of Columbia) has its own statutory requirements for
regulating providers of intrastate telecommunications services if they are “common carriers” or “public
utilities.” As
with the federal regulatory scheme, we believe that our leasing of dark fiber
facilities does not render us a common carrier or public utility such that we
would be subject to this type of regulation in the provision of dark fiber in
most jurisdictions in which we currently have facilities.  Our
offering of transmission services (as distinct from leasing dark fiber
capacity), however, is subject to regulation in each of these jurisdictions to
the extent that these services are offered for intrastate use.  Under
current FCC policies, any dedicated transmission service or facility thatthe user certifiesis used more than 10% of
the time for the purpose of interstate or foreign communications is subject to
federal tariffs and rates, which fall under FCC jurisdiction to the exclusion of
state regulation.
 
 State
regulation of the telecommunications industry is changing rapidly, and the
regulatory environment varies substantially from state to state.  We
are currently authorized to provide intrastate telecommunications services in
Arizona, California, Colorado, Connecticut, Delaware, the District of Columbia,
Florida, Georgia, Illinois, Kansas, Louisiana, Maryland, Massachusetts,
Michigan, Minnesota, Missouri, Nevada, New Jersey, New Mexico, New York, North
Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina,
Texas, Utah, Virginia, Washington and West Virginia.  At present, we
do not anticipate that the regulatory requirements to which we will be subject
in the states in which we currently operate or intend to operate will have any
material adverse effect on our operations.  These regulations may
require, among other things, that we maintain certifications to operate and
utilize the public rights-of-way, that we obtain certain environmental approvals
before we construct new facilities, and that we provide notification of, or
obtain authorization for, specified corporate transactions, such as incurring
debt or encumbering our telecommunications assets.  We will incur
costs to comply with these and other regulatory requirements, such as the filing
of tariffs, submission of periodic financial and operational reports to
regulators, and payment of regulatory fees and assessments, including, in some
states, contributions to state universal service
programs.  Notwithstanding federal and state laws and regulations
requiring nondiscriminatory access to public rights-of-way, in some
jurisdictions certain of our competitors, especially ILECs, have certain
advantages by reason of having obtained approvals for operation under prior,
less regulatory intensive regimes.  For example, in California,
certain competitors of ours are subject to a less rigorous environmental review
procedure for proposed construction than we are, thereby enabling them
potentially to construct new facilities more quickly than us and at a lower
cost.  We have filed comments in connection with a California Public
Utility Commission rulemaking proceeding advocating for parity among carriers
related to the environmental review of certain construction
projects.  We cannot represent that this effort will be successful,
however, and we continue to be concerned that the disparate treatment of
telecommunications carriers by California regulators will continue in the
foreseeable future.  In some jurisdictions, our pricing flexibility
for intrastate services may be limited because of regulation, although our
direct competitors will be subject to similar restrictions.  However,
we cannot assure you that future regulatory, judicial, or legislative action
will not have a material adverse effect on us.
  Some
states may also impose a state universal service fund assessment on intrastate
telecommunications services to fund state universal service
projects.  The rate of assessment varies by state.  To the
extent the state assessment applies to our dark fiber revenue or transmission
services, we are required to pay into the state funds.
 
 Some
states have certified to the FCC that they regulate the leasing of poles and
conduits owned by incumbent utilities, including telecom, electric and gas
utilities.In many
of these states, the poleattachment and conduit
occupancy rates are calculatedin a similar manner to
that provided for by the FCC formulas implemented by the states, although in some cases state
regulators have adjusted the FCC formula in certain respects.  In
other states, although the state may have certified to the FCC that it regulates
such rates, the state has not yet adopted clear rules regarding such
matters.  Where there are state-adopted formulas, the rates generally
are more advantageous than what we believe we could negotiate on amarketbasis.  The
leasing of pole and conduit facilities in such states that have certified that
they regulate pole and conduit rates and access is determined by a commercially
negotiated contractas influenced by
whatever state regulation is in place.  Such regulations may change in
the future to our disadvantage and additional states may certify to the FCC that
they regulate pole and conduit access rates, terms and conditions, and such
states may impose regulations that are less advantageous than are the FCC’s
regulations.
 
 Local
  In
addition to federal and state laws, local governments exercise legal authority
that can affect our business.  For example, local governments, such as
the City of New York, typically manage access topublic rights-of-way
subject to the limitation that local governments may not prohibit persons from
providing telecommunications services, may only collect fair and reasonable
compensation fromtelecommunications
providers for access to public rights-of-way, and may not treat
telecommunications providers in a discriminatory manner.  Because of
the general need fortelecommunicationsprovidersto obtain approvalsfromlocalgovernmentstoaccessthepublicrights-of-way, local authorities can
affect the timing and costs associated with our use of public
rights-of-way.
  11
  Regulation
of the Internet
  Laws and
regulations that apply directly to the Internet are becoming more
prevalent.  The U.S. Congress frequently considers laws regarding
privacy and security relating to the collection and transmission of information
over the Internet.  Congress also addressed the need for regulation on
the protection of children, copyrights, trademarks, domain names, taxation and
the transmission of sexually explicit material over the Internet.  The
European Union adopted its own privacy regulations and other countries may do so
in the future.  Other nations have taken actions to restrict the free
flow of material deemed objectionable over the Internet.
 
 The scope
of laws and regulations applicable to the Internet is subject to conflicting
interpretations and developments.  The applicability to the Internet
of laws and regulations from various jurisdictions governing issues such as
property ownership, sales tax, libel and personal privacy is unsettled and may
take years to resolve.  For example, the 1996 Communications Act
prohibits the transmission of certain types of information and content over the
Internet but the scope of this prohibition is currently unsettled.  In
addition, although courts held unconstitutional substantial parts of the
Communication Decency Act, federal or state governments may enact, and courts
may uphold, similar legislation as well as laws covering issues such as
intellectual property rights over the Internet and the characteristics and
quality of Internet services and consumer protection laws.  In the
U.S., federal agencies, such as the FCC and the Federal Trade Commission,
occasionally have overlapping jurisdiction in matters regarding privacy,
consumer protection and fraud that are part of Internet-based services or
transactions.  In addition, several state regulators and lawmakers are
also exercising jurisdiction in these areas.  Foreign countries have
also enacted laws in these fields.
 
 The
current application of most of these laws does not directly affect us in a
material manner, although these laws do affect many of our Internet connectivity
customers.  The extent that Internet connectivity providers such as
ourselves are held directly or contributorily liable for violations of such laws
by their customers or others involved with Internet-based services or
transactions is an area of law that is only now becoming established, and it is
possible that we may face increased legal liability and costs of legal
compliance.
 
 Regulation
in the United Kingdom
  The
telecommunications regulatory regime in the U.K. is derived from directives and
other regulatory instruments of the European Union Council, Parliament and the
European Commission.  In particular, in March 2002, the European
Commission adopted a package of five key directives which set out a new
framework for the regulation of electronic communications networks and services
throughout the EU.  These directives were incorporated into U.K.
national law by the Communications Act 2003 and Privacy and Electronic
Communications (EC Directive) Regulations 2003.
 
 The
Communications Act 2003 introduced a number of changes to the previous
regulatory and licensing framework that previouslyexisted in the U.K., including the abolition of
the requirement for operators to hold individual licenses.  However,
in many ways, similar end-results are achieved under the new general
authorization regime by the obligation imposed upon electronic communication
providers to comply with some basic conditions, known as the General Conditions
of Entitlement.  A breach of any of these conditions could lead the
regulator, the Office of Communications (“OFCOM”), to impose fines and,
potentially, suspend or revoke the right to provide electronic communications
networks and services.
 
 The
Communications Act 2003 retained the broad structure of the ‘Code Powers,’ which
were introduced as an annex to the previous legislation.  Code Powers
provide enhanced legal powers for operators who wish to construct and maintain
networks on both public and private land.  AboveNet Communications UK
Limited, our U.K. operating subsidiary (“ACUK”), holds such Code Powers as a
result of automatic entitlement arising from its previous status as a license
holder.  Although Code Powers give operators the right to install
networks on public highways, each operator is required to certify to OFCOM each
year that it has sufficient and acceptable financial security in place to cover
the costs which could be incurred by local councils or road authorities if they
were required to remove these networks or restore the public roads following the
insolvency of that operator.  This security is commonly referred to as
“funds for liabilities.” OFCOM has indicated that it will generally require an
operator to provide board-level certification of third party security for this
purpose.
  12
  Followingconsultationsin 2006, the European
Commission published proposals inNovember2007toreformthe regulatory framework. An
agreement on the EU telecommunications reform was reached bytheEuropeanParliamentandCouncil of Ministers on
November 4, 2009. The amendments to the regulatory framework created by the
reform will need to be transposed into national laws of each of the 27 EU Member
States, including the U.K., by June 2011. The amendments involve the enactment
of three legislative measures: a Directive that amends the Framework Directive,
the Access Directive, and the Authorization Directive; a Directive that amends
the Universal Services Directive and the Privacy and Data Protection Directive;
and a regulation to establish the new Body of European Regulators for Electronic
Communications (“BEREC”), which will help ensure fair competition and more
consistency of regulation of the telecoms markets across the EU Member
States.It is not
possible, at this stage, to assess the impact of the reform on the U.K.
telecommunications regulatory regime.
 
 Our
subsidiary, ACUK, is entitled to provide electronic communications networks and
services throughout the U.K. and is therefore liable for property taxation
(“Business Rates”) on the amount of fiber in use and in our control during each
fiscal year. These Business Rates are levied on companies by the local
government authorities for the boroughs through which the fiber
passes.
 
 Glossary of Terms
  Cable route
miles– the length of fiber
cable installed in a network.  This does not necessarily correspond to
geographical footprint.  For example, if two cables are installed
along the same path, the length of both cables would count in assessing “cable
route miles.”
 
 Carrier hotel –a facility containing many
telecommunications service providers that are widely
interconnected.  The facility is generally industrial in nature with
high-capacity power service, backup batteries and generators, fuel storage,
riser cable systems, large cooling capability and advanced fire suppression
systems.
  Central
Office– a facility used to
house telecommunications equipment (e.g. switching equipment) that is used to
make connections between the local loops (local
distribution network) in the vicinity of the facility to regional or
long distance telecommunications facilities.  Central Offices are
typically operated by the ILEC.
 
 CLEC– this is an acronym for “competitive
local exchange carrier,” a carrier providing telecommunications services in
competition with the ILEC.
 
 Co-location– the placement of equipment in a
telecommunications POP, data center or central office.
 
 Data Center– afacility used to house
computer systems and associated components.  It generally includes
environmental controls (air conditioning, fire suppression, etc.),
redundant/backup power supplies, redundant data communications connections and
high security.
 
 Dark
Fiber– fiber that has not
yet been connected to telecommunications transmission equipment and therefore
not yet activated or “lit” for the transmission of voice, data or video
traffic.
 
 DWDM– this is an acronym for Dense
Wavelength-Division Multiplexing.  The term “dense” refers to the
number of channels being multiplexed – a DWDM system typically has the
capability to multiplex greater than 16 wavelengths.
 
 Ethernet– the standard local area network (LAN)
protocol.  Ethernet was originally specified to connect devices on a
company or home network as well as to a cable modem or DSL modem for Internet
access.  Due to its ubiquity in the LAN, Ethernet has become a popular
transmission protocol in the metro and long haul networks as
well.  Ethernet is defined by the IEEE in the 802.3
standard.
 
 Facilities-based
provider– a provider that
predominately utilizes its own facilities and transmission and termination
equipment (whether owned or leased) in the provision of telecommunications
services rather than the facilities of other telecommunications services
providers.
 
 Fiber miles– the route miles of a
network multiplied by the number of fibers within each cable on the
network.  For example, if a 10 mile network segment with one cable of
432 count fiber is installed, it would represent 10x1x432 or 4,320 fiber
miles.
  13
  Gbps– gigabits per second, a measure of
telecommunications transmission speed.  One gigabit equals
1 billion bits of information.
 
 IEEE– The Institute of Electrical
and Electronics Engineers or IEEE (pronounced as eye-triple-e) is an
international non-profit, professional organization for the advancement of
technology related to electricity.  It sets numerous standards in the
telecommunications industry.
 
 ILEC– incumbent local exchange carrier,
typically one of the historic regional Bell operating
companies.
 
 IP– Internet protocol, the transmission
protocol used in the transmission of data over the Internet.
 
 JUS– this is an acronym for the Japan-US
Cable Network, a trans-Pacific undersea telecommunications cable system running
between the U.S. and Japan.
 
 Lateral –an extension from the main
or core portion of a network to a customer’s premises or other connection
point.
 
 Mbps– megabits per second, a measure of
telecommunications transmission speed.One megabit equals
1 million bits of information.
 
 MPLS– this is an acronym forMultiProtocol Label Switching, which is a standards-based technology for
speeding up network traffic flow and making it easier to manage.  MPLS
involves setting up a specific path for a given source/destination pair,
identified by a label put in each packet, thus saving the time needed for a
router or switch to look up the address for the next node to which the packet is
to be sent.
 
 Multiplexing– an electronic or optical
process that combines a large number of lower speed transmissions into one
higher speed data stream.  Multiplexing can be accomplished via either
time-division (TDM) or wavelength-division (WDM) methods.
 
 Nm
(nanometer)– the unit
of measure used to quantify wavelength.  The term “nm range” is used
to quantify a portion of the optical spectrum in which a particular optical
transmission system operates.
 
 NZDSF– this is an acronym for non-zero
dispersion shifted fiber, a fiber type optimized for long distance transmission
in the 1550 nm range.
 
 Packet– a packet is a formatted block of
information carried by a communications network.  Traditional
point-to-point communications networks simply transmit data as a series of
bytes, characters or bits alone.
 
 OC– this is an acronym for optical
carrier level, a measure of the transmission rate of optical telecommunications
traffic.  For example: OC-1 = 51.85 Mbps.
 
 Optical– relating to the transmission of
telecommunications traffic through the use of light through
fiber.
 
 Peering– the interconnection between Internet
service providers pursuant to which they exchange traffic from their respective
customers.
 
 Peering exchange –a facility at which
multiple Internet service providers peer or exchange customer traffic to reach
other parts of the Internet.
 
 POP– this is an acronym for
point-of-presence, a facility at which certain telecommunications services,
ranging from co-location to transmission to fiber termination,
occur.
 
 TAT-14– this is an acronym for a
trans-Atlantic undersea telecommunications cable system running between the U.S.
and a number of points in Europe.
 
 Tier 1– a network generally operated by
an Internet service provider that connects to the entire Internet solely via
peering connections.
  14
  Although there is no formal definition
of the "Internet Tier hierarchy," the generally accepted definition among
networking professionals is:
 
 ·
              Tier 1 - A network that peers with
      every other network to reach the Internet.·
              Tier 2 - A network that peers with
      some networks, but still purchases IP transit (i.e., routing of traffic to
      all other places on the Internet) to reach at least some portion of the
      Internet.
 
 ·
              Tier 3 - A network that solely
      purchases transit from other networks to reach the
      Internet.
 
 TDM– this is an acronym for time division
multiplexing, an electronic process that combines a large number of lower
speed data streams into one high speed transmission through the use of fixed
time slots within the high-speed stream.
 
 Transport service – a telecommunication service moving
data from one place to another.
 
 UNE– this is an acronym for unbundled
network element, which is a regulatory term used to describe a segment of an
ILEC telecommunications network that must be offered on a stand-alone basis, and
is used in the provision of telecommunications services.
  VPLS - this is an acronym for
virtual private LAN service, a multipoint VPN service using MPLS or other
protocols.
 
 VPN– this is an acronym for virtual private
network, a private communications networkused by companies or
organizations to communicate confidentially over a shared (not a dedicated)
network.  VPN traffic can be carried over a shared networking
infrastructure on top of standard protocols, or over a service provider's
private network.
 
 WAN –this is an acronym for wide area
network, or a network crossing a large geographical area.
 
 Wavelength– a channel of light that carries
telecommunications traffic through the process of wavelength-division
multiplexing.
 
 WDM–in fiber-optic communications,
wavelength-division multiplexing or WDM is a technology that combines
(multiplexes) multiple optical signals onto a single optical fiber by using
different wavelengths (colors) of laser light to carry the different
signals.
 
 Special Note Regarding Forward-looking
Statements
  Information contained or incorporated by
reference in this Annual Report on Form 10-K, in other SEC filings by the
Company, in press releases, and in presentations by the Company or its
management, contains “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 covered by the forward-looking statements will be achieved,
and other factors could also cause actual results to vary materially from the
future results covered in such forward-looking statements.  Such
forward-looking statements 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 or future financial
results are detailed in the Company’s SEC filings, including, but not limited
to, those described under Part I, Item 1A, “Risk Factors” and Part II, Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”  In
addition, such forward-looking statements involve known and unknown risks,
uncertainties, and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from any future
results expressed or implied by such forward-looking
statements.  Also, 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-K or to reflect the occurrence of unanticipated
events.
  15
  Available
Information
  We file with the SEC our Annual Reports
on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and
Proxy Statements.  These reports, and any amendments to these reports,
are available at the SEC’s Public Reference Room at 100 F Street NE, Washington,
D.C. 20549.  Additionally, this information is available at the SEC’s
website (http://www.sec.gov).  All of our SEC filings are
available, free of charge, and as soon as practicable after they are filed with,
or furnished to, the SEC on our website athttp://www.above.netat the About / Investors
tabs.
 
 ITEM 1A.  RISK FACTORS
 
 You
should consider carefully the risks described below, together with the other
information contained in this report.  If any of the identified risks
actually occurs, or is adversely resolved, our consolidated financial statements
could be materially, adversely impacted in a particular fiscal quarter or year
and our business, financial condition and results of operations may suffer
materially.  As a result, the market price of our common stock could
decline and you could lose all or part of your investment in our common
stock.  The risks described below are not the only risks we
face.  Additional risks and uncertainties, including those not
currently known to us or that we currently deem to be immaterial also could
materially adversely affect our business, financial condition and results of
operations.
 
 Problems
in the economy could negatively affect our future operating
results.
 
 The
problems in the economy could adversely affect our operations, by among other
things,
 
 ·
              reducing
      and/or delaying the demand for our services;·
              increasing
      our customer churn, both with respect to customer terminations and with
      respect to reduced prices upon renewals of customer
      agreements;
 ·
              leading
      to reduced services from our vendors facing economic difficulties;
      and·
              increasing
      the bad debts in our customer
receivables.
 
 These and
other related factors could negatively affect our future operating results
depending upon the length and severity of the current economic
downturn.
 
 Prior
to the filing of our Annual Report on Form 10-K for the year ended December 31,
2008, we were not in compliance with our reporting obligations under the
Securities Exchange Act of 1934.
  We had
not made any timely periodic filings with the SEC required by the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), from 2002 through
September 30, 2008.  Since filing our Annual Report on Form 10-K for
the year ended December 31, 2008, we have made all periodic filings on a timely
basis.  The filing of this Annual Report on Form 10-K or future
periodic filings will not cure past violations.  As a result of our
past failure to make timely periodic filings with the SEC, we could be subject
to civil penalties and other administrative proceedings by the SEC.
 
 Our
revenue includes certain fees that are not predictable.
  Historically,
a portion of our revenue has included certain termination payments received by
the Company to settle contractual commitments, which are referred to as
termination revenue.  Additionally, we have received settlements of
our claims in various customer bankruptcy cases, which is also included in
termination revenue.  Termination revenue amounted to $3.9 million,
$15.4 million and $8.5 million in 2009, 2008 and 2007,
respectively.  This revenue is not predictable and may not be
sustainable.
  16
  In
prior years, we incurred significant net losses and we cannot assure you that we
will generate net income or that we will sustain positive operating cash flow in
the future.
  We
incurred net losses from our inception through December 31, 2005.  In
2006, we generated net income, principally from the sale of our remaining data
centers and in 2007, 2008 and 2009, we generated operating income and net
income.  The net income reported for 2007 included the non-cash gain of $10.3 million on the
reversal of foreign currency translation adjustments from the liquidation
of certain subsidiaries.  The net income reported for 2008 of
$42.3 million included termination fees of $15.4 million (as described in Note
2, “Basis of Presentation and Significant Accounting Policies – Revenue
Recognition,” to the consolidated financial statements included elsewhere in
this report).  The net income reported for 2009 of $281.6 million
included the recognition of non-cash tax benefits 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.
 
 In order
for us to continue to generate positive operating cash flow and net income, we
will need to continue to obtain new customers, increase our revenue from our
existing customers and manage our costs effectively.  In the event we
are unable to do so, or if we lose customers, we may not be able to continue to
generate operating cash flow or net income in the future.
 
 We
have significant exposure to the financial services industry.
  We have a
large number of customers in the financial services industry.  Certain
financial services companies, including some of our customers, have reported
significant losses.  These problems may affect these customers’
willingness to retain existing services and to place orders for new
services.  In addition, our operating results may also be adversely
affected if our customers file for bankruptcy or are acquired by institutions or
entities that are not interested in purchasing services from us.
 
 We
have incurred secured indebtedness.
  At March
1, 2010, we had $57.33 million outstanding under our secured credit facility
(the “Secured Credit Facility”), which consists of $32.76 million borrowed as
term loans (the “Term Loans”) and $24.57 million borrowed as a delayed draw term
loan (the “Delayed Draw Term Loan”).  Under the Secured Credit
Facility, we also have an additional $26 million of availability through our
revolving credit facility (the “Revolver”).  The Secured Credit
Facility is secured by substantially all of our domestic assets and is to be
used for general corporate purposes and for capital investment.
 
 The Term Loans in the aggregate provide
for monthly payments of interest and quarterly payments of principal of $1.08
million, which began June 30, 2009, increasing to $1.44 million commencing June
30, 2012 with the final principal payment of $18.7 million plus interest due on
February 28, 2013.  Interest is currently fixed on the Term
Loans through interest rate
swaps.With
respect to the initial $24 million in Term Loans, interest is currently fixed at
6.65% per annumuntil August2011 and with respect to the second $12
million in Term Loans, interest is currently fixed at rate of 5.635% per annum
untilNovember
2011.After the
expiration of each interest rates swap, the corresponding Term Loan will bear interest at30 day LIBOR plus the
applicable margin of 3.00%.  The borrowing under the Delayed Draw Term
Loan will bear interest at 30 day LIBOR (0.23094% atDecember 29, 2009) plus the applicable margin of
3.00%.  The Delayed Draw Term Loan provides for monthly payments of
interest and, beginning March 31, 2010, quarterly payments of principal of $0.81
million increasing to $1.08 million starting on June 30, 2012 with the final
principal payment of $14.04 million plus accrued interest due on February 28,
2013.
 
 We may
not be able to generate sufficient cash flows in the future to repay the loans
due under the Secured Credit Facility.  Additionally, we may not be
able to satisfy the requirements under the loan covenants in order to utilize
the Revolver or repayment may be accelerated.  See Part II, Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources” and Note 9, “Long-Term Debt,” to
the accompanying consolidated financial statements included elsewhere in this
report.
  17
  If
our operations do not produce sufficient cash to fund our operating expenses and
capital requirements, we may be required to raise additional capital through a
debt or equity financing.
  In 2007
and 2008, we utilized cash in excess of our cash from operating activities to
fund additional investments in property and equipment thus reducing
liquidity.  If our operating expenses or our investments in property
and equipment increase, we may need to rely on our existing cash balance
and funds available under our Secured Credit Facility to meet our cash
needs.  Our future capital requirements may increase if we acquire or
invest in additional businesses, assets, services or technologies, which may
require us to issue additional equity or debt.  We may also face
unforeseen capital requirements for new technology that we require to remain
competitive or to comply with new regulatory requirements, for unforeseen
maintenance of our network and facilities and for other unanticipated expenses
associated with running our business.  We cannot assure you that we
will have access to necessary capital, particularly in light of current market
conditions, nor can we assure you that any such financing will be available on
terms that are acceptable to us.  If we issue equity securities to
raise additional funds, our existing stockholders may be
diluted.  Additionally, our Secured Credit Facility imposes
limitations on the amount of additional indebtedness we may incur.
 
 We
may not be able to develop and maintain systems and controls to operate our
business effectively.
  We have
experienced severe difficulties developing and maintaining financial and other
systems necessary to operate our business properly and for a period of over six
years we could not file our periodic reports with the SEC.
 
 Our
history of rapid initial growth, expansion through acquisitions with attendant
integration issues, significant reorganization and restructuring activities and
associated significant staffing reductions, budgetary constraints and attendant
limitations on investment in internal systems had contributed to the risk of
internal control deficiencies.
  Under
Section 404 of the Sarbanes-Oxley Act, management is required to assess the
effectiveness of our internal control over financial reporting on a periodic
basis.  Pursuant to our assessment of internal control over financial
reporting as of December 31, 2009, as described in Item 9A, “Controls and
Procedures.” our management concluded that our internal control over financial
reporting was effective as of December 31, 2009.  Our management
concluded that our internal control over financial reporting was not effective
as of December 31, 2008 and as of December 31, 2007 as we had material
weaknesses in our internal control over financial reporting.  These
weaknesses meant that there was more than a remote likelihood that we would not
prevent or detect a material misstatement in our financial
statements.
 
 We
may not be able to successfully implement our business strategy because we
depend on factors beyond our control, which could adversely affect our results
of operations.
  Our
future largely depends on our ability to implement our business strategy to
create new business and revenue opportunities.  Our results of
operations will be adversely affected if we cannot fully implement our business
strategy.  Successful implementation depends on numerous factors
beyond our control, including economic, competitive, regulatory and other
conditions and uncertainties, the ability to obtain licenses, permits,
franchises and rights-of-way on reasonable terms and conditions and the ability
to hire and retain qualified management personnel.
  18
  Our
success depends on our ability to compete effectively in our
industry.
  The
telecommunications industry is extremely competitive, particularly with respect
to price and service.  Our failure to compete effectively with our
competitors could have a material adverse effect on our business, financial
condition and results of operations.  A significant increase in
industry capacity or reduction in overall demand would adversely affect our
ability to maintain or increase prices.  Further, we anticipate that
prices for certain telecommunications services such as IP bandwidth will
continue to decline due to a number of factors including (a) price competition
as various network providers attempt to gain market share to cover the fixed
costs of their network investments and/or install new networks that might
compete with our networks; and (b) technological advances that permit
substantial increases in the transmission capacity of many of our competitors’
networks.
 
 In the
telecommunications industry, we compete against ILECs, which have historically
provided local telephone services and currently occupy significant market
positions in their local telecommunications markets.  In addition to
these carriers, several other competitors, such as facilities-based
communications service providers including CLECs, cable television companies,
electric utilities and large end-users with private networks offer services
similar to those offered by us.  Many of our competitors have greater
financial, managerial, sales and marketing and research and development
resources than we do.
 
 Rapid
technological changes could affect the continued use of our
services.
  The
telecommunications industry is subject to rapid and significant changes in
technology that could materially affect the continued use of our
services.  Changes in technology could negatively affect the desire of
customers to purchase our existing services and may require us to make
significant investments in order to meet customer demands for services
incorporating new technologies.  We also cannot assure you that
technological changes in the communications industry and Internet-related
industry will not have a material adverse effect on our business, financial
condition and results of operations.
 
 We
are dependent on key personnel.
  Our
business is managed by certain key management and operating
personnel.  We believe that the success of our business strategy and
our ability to operate successfully depend on the continued employment of such
employees and the ability to attract qualified employees.  We face
significant competition from a wide range of companies in our recruiting
efforts, and we could experience difficulties in recruiting and retaining
qualified personnel in the future.
 
 Our
franchises, licenses, permits, rights-of-way, conduit leases and property leases
could be canceled or not renewed, which would impair our ability to provide our
services.
  We must
maintain rights-of-way, franchises and other permits from railroads, utilities,
state highway authorities, local governments, transit authorities and others to
operate our networks.  We cannot assure you that we will be successful
in maintaining these right-of-way agreements or obtaining future agreements on
acceptable terms.  Some of these agreements may be short-term or
revocable at will, and we cannot assure you that we will continue to have access
to existing rights-of-way after they have expired or terminated.  If a
material portion of these agreements were terminated or could not be renewed and
we were forced to abandon our networks, the termination could have a material
adverse effect on our business, financial condition and results of
operations.  In addition, in some cases landowners have asserted that
railroad companies, utilities and others to whom they granted easements to their
properties are not entitled as a result of these easements to grant
rights-of-way to telecommunications providers.  If these disputes are
resolved in the landowners' favor, we could be obligated to make payments to
these landowners for the lease of these rights-of-way or to indemnify the
right-of-way holder for its losses.
 
 In the
past, we have had franchises and rights-of-way expire prior to executing a
renewal and in the interim until such renewal was executed, operated without an
agreement, which is the case currently with respect to our franchise agreement
for our operations in the City of New York.  We expect that these
situations will continue to occur in the future.  These expirations
have not caused any material adverse effect on our operations in the past, and
we do not expect that they will in the future.  However, to the extent
that a municipality or other right-of-way holder attempts to terminate our
related operations upon the expiration of a franchise or right-of-way agreement,
it could materially adversely affect our business, financial condition and
results of operations.
  19
  As the
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 us that they have temporarily suspended any discussions regarding
renewals of telecommunications franchises in the City of New York.  As
a result, it is our understanding that DOITT has not renewed any recently
expired franchise agreement, including our franchise agreement which expired on
December 20, 2008.  Prior to the expiration of our franchise
agreement, we sought out and received written confirmation from DOITT that our
franchise agreement provides a basis for us to continue to operate in the City
of New York pending conclusion of renewal discussions.  We intend to
continue to operate under our expired franchise agreement pending any
renewal.  We believe that a number of other operators in the City of
New York are operating on a similar basis.  Based on our discussions
with DOITT and the written confirmation that we have received, we do 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 our operations
as the result of our expired franchise agreement could have a material adverse
effect on our business, financial condition and results of
operations.
 
 In order
to expand our network to new locations, we often need to obtain additional
rights-of-way, franchises and other permits.  Our failure to obtain
these rights in a prompt and cost effective manner may prevent us from expanding
our network which may be necessary to meet our contractual obligations to our
customers and could expose us to liabilities and have an adverse effect on our
business, financial condition and results of operations.
 
 If we
lose or are unable to renew key real property leases where we have located our
POPs, it could adversely affect our services and increase our costs as we would
be required to restructure our network and move our POPs.
 
 We
depend on third party service providers for important parts of our business
operations and the failure of those third parties to provide their services
could negatively affect our services.
  We rely
on third party service providers for important parts of our business, including
most of the fibers on which our long haul network operates and significant
portions of the conduits into which our fiber optic cables are installed in our
metro networks.  If these third party providers fail to perform the
services required under the terms of our contracts with them or fail to renew
agreements on reasonable terms and conditions, it could materially and adversely
affect the performance of our services, and we may experience difficulties
locating alternative service providers on favorable terms, if at
all.
 
 Changes
in our traffic patterns or industry practice could result in increasing peering
costs for our IP network.
  Peering
agreements with other Internet service providers allow us to access the Internet
and exchange traffic with these providers.  In most cases, we peer
with other Internet service providers on a payment-free basis, referred to as
settlement-free peering.  If other providers change the terms upon
which they allow settlement-free peering or if changes in our Internet traffic
patterns, including the ratio of our inbound to outbound traffic, cause us to
fall below the criteria that these providers use in allowing settlement-free
peering, the costs of operating our Internet backbone will likely
increase.  Any increases in costs could have an adverse effect on our
margins and our ability to compete in the Internet services market.
 
 Customer
agreements contain service level and delivery obligations that could subject us
to liability or the loss of revenue.
  Our
contracts with customers generally contain service guarantees and service
delivery date targets, which if not met by us, enable customers to claim credits
against their payments to us and, under certain conditions, terminate their
agreements.  If we are unable to meet our service level guarantees or
service delivery dates, it could adversely affect our revenue and cash
flow.
  20
  We
are required to maintain, repair, upgrade and replace our network and
facilities, and our failure to do so could harm our business.
  Our
business requires that we maintain, upgrade, repair and periodically replace our
facilities and networks.  This requires and will continue to require,
management time and the expenditure of capital on a regular basis.  In
the event that we fail to maintain, upgrade or replace essential portions of our
network or facilities, it could lead to a material degradation in the level of
services that we provide to our customers which would adversely affect our
business.  Our networks can be damaged in a number of ways, including
by other parties engaged in construction close to our network
facilities.  In the event of such damage, we will be required to incur
expenses to repair the network in order to maintain services to
customers.  We could be subject to significant network repair and
replacement expenses in the event a terrorist attack or natural disaster damages
our network.  Further, the operation of our network requires the
coordination and integration of sophisticated and highly specialized hardware
and software technologies.  Our failure to maintain or properly
operate this hardware and software can lead to degradations or interruptions in
service.  Our failure to provide a higher level of service can result
in claims from our customers for credits or damages and can damage our
reputation for service, thereby limiting future sales
opportunities.
 
 Requests
to relocate portions of our network can result in additional
expenses.
  We are
periodically required to relocate portions of our network by municipalities,
railroads, highway authorities and other entities that engage in construction or
other activities in areas close to our network.  These relocations can
be expensive and time consuming to management and can result in interruptions of
service to customers.  If we are required to engage in an increased
amount of relocation activities resulting from increased government spending on
infrastructure or other reasons, it could adversely affect our business,
financial condition and results of operations.
 
 Governmental
regulation may negatively affect our operations.
  Existing
and future government laws and regulations greatly influence how we operate our
business.  U.S. Federal and state laws directly shape the
telecommunications and Internet markets.  Consequently, regulatory
requirements and changes could adversely affect our operations and also
influence the markets for telecommunications and Internet
services.  We cannot predict the future regulatory framework of our
business.
 
 Local
governments also exercise legal authority that may have an adverse effect on our
business because of our need to obtain rights-of-way for our fiber
networks.  While local governments may not prohibit persons from
providing telecommunications services nor treat telecommunication service
providers in a discriminatory manner, they can affect the timing and costs
associated with our use of public rights-of-way.
 
 Government
regulation of the Internet may subject us to liability.
  Laws and
regulations that apply to the Internet are becoming more
prevalent.  The U.S. Congress has considered Internet laws regarding
privacy and security relating to the collection and transmission of information
over the Internet, entrusting the Federal Trade Commission with strong
enforcement power.  The U.S. Congress also has adopted laws that
regulate the protection of children, copyrights, trademarks, domain names,
taxation and the transmission of sexually explicit material over the
Internet.  The European Union adopted its own privacy regulations and
other countries may do so in the future.  Other nations have taken
actions to restrict the free flow of material deemed objectionable over the
Internet.
 
 The scope
of many of these laws and regulations is subject to conflicting interpretations
and significant uncertainty that may take years to resolve.  As a
result of this uncertainty, we may be exposed to direct liability for our
actions and to contributory liability for the actions of our
customers.
  21
  We
cannot predict our future tax liabilities.  If we become subject to
increased levels of taxation, our financial condition and results of operations
could be adversely affected.
  We
provide telecommunication and other services in multiple jurisdictions across
the United States and Europe and are therefore subject to multiple sets of
complex and varying tax laws and rules.  We cannot predict the amount
of future tax liabilities to which we may become subject.  Any
increase in the amount of taxation incurred as a result of our operations or due
to legislative or regulatory changes could result in a material adverse effect
on our sales, financial condition and results of operations.  While we
believe that our current provisions for taxes are reasonable and appropriate, we
cannot assure you that these items will be settled for the amounts accrued or
that we will not identify additional exposures in the future.
 
 Our
inability to produce audited financial statements prevented us from filing our
federal and state income taxes in a timely manner.




Because
we were unable to produce audited financial statements on a timely basis, we
delayed the filing of our federal and state income tax returns for 2003 to
2006.  In January 2008, we filed the 2003 to 2005 income tax returns
and in December 2008, we filed our income tax returns for the years ended
December 31, 2006 and 2007.  Our income tax returns for 2008 were
timely filed.  However, we are still subject to federal and state tax
audits.  We believe that we will not owe any material amount of income
taxes and related penalties and/or interest in these jurisdictions due to the
losses incurred by us.
 Our charter documents, our Amended and
Restated Stockholders’ Rights Plan and Delaware law may inhibit a takeover that
stockholders may consider favorable.
  Provisions in our restated certificate
of incorporation, our amended and restated by-laws, our Amended and Restated
Stockholders’ Rights Plan and Delaware law could delay or prevent a change of
control or change in management that would provide stockholders with a premium
to the market price of their common stock.  Our Amended and Restated
Stockholders’ Rights Plan has significant anti-takeover effects by causing
substantial dilution to a person or group that attempts to acquire us on terms
not approved by our Board of Directors.  In addition, the
authorization of undesignated preferred stock gives our Board of Directors the
ability to issue preferred stock with voting or other rights or preferences that
could impede the success of any attempt to acquire control of us.  If
a change of control or change in management is delayed or prevented, this
premium may not be realized or the market price of our common stock could
decline.
 
 ITEM 1B.  UNRESOLVED STAFF
COMMENTS
 
 None.
  22
  ITEM 2.  PROPERTIES
 
 Our
principal properties currently are fiber optic networks and their component
assets.  We own substantially all of the communications equipment
required for operating the network and our business.  Such assets are
located at leased locations in the areas that we serve.
 
 We lease
our principal executive offices in White Plains, New York and London, U.K., as
well as significant sales, administrative and other support
offices.  We lease properties to locate the POPs necessary to operate
our networks.  Our executive office located at 360 Hamilton Avenue,
White Plains, New York is approximately 33,000 square feet and leased under an
agreement that expires in May 2020.  Office and POP space is
leased in the markets where we maintain our network and generally ranges from
100 to 33,000 square feet under agreements that expire over the next 16 years
(as of December 31, 2009), with the majority of leases expiring over the next
five years.
  The
majority of our leases have renewal provisions at either fair market value or a
stated escalation above the last year of the current term.
 
 Our
existing properties are in good condition and are suitable for the conduct of
our business.
 
 We do not
own any real property.  As of December 31, 2009, we conducted our
business in the U.S. through 115 operating leases totaling approximately 490,000
rentable square feet.
 
 ITEM 3.  LEGAL
PROCEEDINGS
 
 Our
significant legal proceedings are as follows:
 
 We were a
party to a fiber lease agreement with SBC Telecom, Inc. (“SBC”), a subsidiary of
AT&T, entered into in May 2000.  We 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 of the Southern
District Court of New York (the “Bankruptcy Court”).  In November
2003, the Bankruptcy Court agreed with our interpretation of the agreement,
which decision SBC did not appeal.  Subsequently, SBC also alleged
that we were in breach of our obligations under such agreement and that
therefore we were unable to assume the agreement upon our emergence from
bankruptcy.  We disagreed with SBC’s position, however in December
2005, the Bankruptcy Court agreed with SBC.  In 2006, we appealed
certain aspects of the decision to the District Court for the Southern District
of New York but the District Court denied our appeal.  In March 2007,
we filed a notice of appeal to the Second Circuit Court of Appeals seeking
relief with respect to the Bankruptcy Court’s determination that we were in
default of the agreement with SBC.  During the term of the agreement,
SBC paid us at the higher rate per fiber mile to reflect the reduced volume of
services SBC believed it was obligated to take, in accordance with its
understanding of the fiber lease agreement.  However, for financial
statement purposes, we recorded revenue based on the lower amount per fiber mile
for the fiber miles accepted by SBC, which was $2.3 million for the year ended
December 31, 2008 and $2.0 million for the years ended December 31, 2007 and
2006, respectively.
  23
  In July
2008, we 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 being paid by SBC
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 was terminated and we 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 us as revenue, which aggregated
$3.5 million at July 10, 2008 ($3.2 million at December 31, 2007), was recorded
as settlement revenue in the three months ended September 30, 2008.
 
 Our 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 Global Voice Networks Limited (“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, we were 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.We
also had certain repair and maintenance obligations that we 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, we paid $3.0 million in damages pursuant to
the ruling in the liability trial.  Additionally, we reimbursed GVN
$1.8 million for legal fees and incurred our own legal fees of $2.4
million.  Further, we have incurred or are obligated for costs
totaling $2.7 million to build additional network.  In early August
2008, we reached a settlement agreement under which we paid GVN $0.6 million and
agreed to provide additional construction of duct at an estimated cost of $1.2
million 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 the chamber construction
obligations discussed above.  We recorded a loss on litigation of
$11.7 million at December 31, 2007, of which $0.8 million was paid in 2007 and
$10.9 million was included in accrued expenses on the consolidated balance sheet
at December 31, 2007, of which $8.5 million was paid in 2008, $0.7 million was
paid in 2009 and $0.6 million 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.
 
 In
October 2008, the Southeastern Pennsylvania Transportation Authority (“SEPTA”)
filed a claim in the Philadelphia County Court of Common Pleas against us for
trespass with regard to portions of our network allegedly residing on SEPTA
property in Pennsylvania.  SEPTA seeks unspecified damages for
trespass and/or a determination that our network must be removed from SEPTA’s
property.  We have 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 our plan of reorganization,
which became effective on September 8, 2003 (“Plan of Reorganization”) or
(“Plan”).  We believe that we have meritorious defenses to SEPTA’s
claims.
 
 From time to time, other legal matters
in which we may be named as a defendant arise in the normal course of our
business activities.  The resolution of these legal matters against us
cannot be accurately predicted.  We do not anticipate that the outcome
of such matters (or the other matters described above) will have a material
adverse effect on our business, financial condition or results of
operations.
  ITEM 4.  RESERVED
  24
  PART
II
  ITEM 5.
              MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES
 
 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 in this Annual Report on Form 10-K, including
warrants, options to purchase common shares, restricted stock units, common
stock prices, 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.
 
 Market
Information
  Our
common stock has been listed on the New York Stock Exchange under the symbol
“ABVT” since May 12, 2009.  Our shares traded on the over-the-counter
market in 2008 and in 2009 prior to our New York Stock Exchange
listing.  The table below sets forth, on a per share basis, for the
periods indicated, the intra-day high and low sales prices for our common shares
on the over-the-counter market as reported to NASDAQ for each quarter of 2008
through May 11, 2009 and as reported by the New York Stock Exchange from May 12,
2009 to December 31, 2009.
 
 High
                                
                                
                                LowYear ended December 31,
      2009First
      Quarter Ended March 31, 2009
                                
                                $
                                24.00
                                
                                
                                $
                                14.50Second
      Quarter Ended June 30, 2009
                                
                                $
                                41.63
                                
                                
                                $
                                22.00Third
      Quarter Ended September 30, 2009
                                
                                $
                                50.57
                                
                                
                                $
                                34.63Fourth
      Quarter Ended December 31, 2009
                                
                                $
                                66.00
                                
                                
                                $
                                46.41Year ended December 31,
2008First
      Quarter Ended March 31, 2008
                                
                                $
                                40.00
                                
                                
                                $
                                29.38Second
      Quarter Ended June 30, 2008
                                
                                $
                                35.88
                                
                                
                                $
                                27.50Third
      Quarter Ended September 30, 2008
                                
                                $
                                32.50
                                
                                
                                $
                                25.50Fourth
      Quarter Ended December 31, 2008
                                
                                $
                                30.00
                                
                                
                                $
                                10.50
  There
were approximately 1,051 stockholders of record of AboveNet’s common stock as of
March 1, 2010.
 
 Dividends
 
 We have
not declared or paid cash dividends on our common stock, and we do not expect to
do so for the foreseeable future.  The payment of future cash
dividends, if any, will be at the discretion of our Board of Directors and will
depend upon, among other things, our liquidity, our operations, capital
requirements and surplus, general financial condition, and such other factors as
our Board of Directors may deem relevant.
 
 Description
of AboveNet’s Equity Securities
 
 In
2003, we 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,andthe rights to purchase 3,338,420
shares of common stock at a price of $14.97715 per share, under a rights
offering, of which the 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 our 2003
Plan.See Note 12, “Stock-Based Compensation,”to the accompanying consolidated
financial statements included elsewhere in this Annual Report on Form
10-K.
  25
  On August
29, 2008, the Board of Directors of the Company approved our 2008 Equity
Incentive Plan, which we refer to as the 2008 Plan.  The 2008 Plan
will be administered by our Compensation Committee unless otherwise determined
by the Board of Directors.  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 in accordance with its terms.  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 as
provided in the 2008 Plan.
 
 In 2003, 1,418,918 shares of
common stock were initially reserved for issuance upon the exercise of the five
year warrants, exercisable at a price of $10.00 per share, which expired on
September 8, 2008 in accordance with their terms.  During the term of
the five year warrants, warrant holders exercised warrants to purchase 1,100,322
shares of common stock.  Additionally, warrants to purchase 318,526
shares of common stock were exercised under the net exercise provisions at the
expiration of the warrants’ term, warrants to purchase 20 shares of common stock
were not deliverable and were cancelled, and warrants to purchase 50 shares of
common stock were cancelled in accordance with instructions from the
holder.  See Item 8, “Financial Statements and Supplementary Data,”
Note 10, “Shareholders’ Equity - Stock Warrants.”
 
 Also in 2003, 1,669,316
shares of common stock were originally reserved for issuance upon the exercise
of the seven year warrants, exercisable at a price of $12.00 per share, of which
warrants to purchase 26 shares of common stock were cancelled, warrants to
purchase 810,760 shares of common stock had been exercised as of December 31,
2009 (including 1,816 warrants exercised pursuant to a cashless exercise, of
which 476 shares were repurchased to fund the cashless exercise) and warrants to
purchase 858,530 shares of common stock were available for exercise in the
future.
 
 The
following table provides the details as of December 31, 2009, regarding our
issuance and repurchase of shares of common stock since
2003.
  Description
                    
                    Number of
                      Shares Issued
                    
                    
                    Shares
                      Repurchased
                    
                    
                    Shares
                      OutstandingShares
      issued at fresh start
                    
                    
                    17,498,276
                    
                    
                    
                    —
                    
                    
                    
                    17,498,276Shares
      issued pursuant to the rights offering
                    
                    
                    3,337,984
                    
                    
                    
                    —
                    
                    
                    
                    3,337,984Shares
      issued pursuant to the exercise of five year warrants
                    
                    
                    1,418,848
                    
                    
                    
                    105,094
                    
                    
                    
                    1,313,754Shares
      issued pursuant to the exercise of seven year warrants
                    
                    
                    810,760
                    
                    
                    
                    476
                    
                    
                    
                    810,284Shares
      repurchased from executives
                    
                    
                    —
                    
                    
                    
                    37,220
                    
                    
                    
                    (37,220
                    )Shares
      issued pursuant  to the delivery of vested restricted stock
      units under the 2003 Plan
                    
                    
                    1,169,432
                    
                    
                    
                    378,438
                    
                    
                    
                    790,994Shares
      issued pursuant to the exercise of options to purchase shares of common
      stock under the 2003 Plan
                    
                    
                    740,626
                    
                    
                    
                    —
                    
                    
                    
                    740,626Shares
      issued pursuant to the delivery of vested restricted stock units under the
      2008 Plan
                    
                    
                    293,862
                    
                    
                    
                    —
                    
                    
                    
                    293,862Shares
      issued pursuant to the exercise of options to purchase shares of common
      stock under the 2008 Plan
                    
                    
                    2,000
                    
                    
                    
                    —
                    
                    
                    
                    2,00025,271,788
                    
                    
                    
                    521,228
                    
                    
                    
                    24,750,560
 
 The
following table provides the details as of December 31, 2009, of the shares of
common stock underlying securities reserved for issuance under our 2003 Plan and
our 2008 Plan.
  Description
                    
                    2003 Plan
                    
                    
                    2008 PlanOptions
      to purchase common shares
                    
                    
                    185,976
                    
                    
                    
                    8,000Restricted
      stock units subject to vesting
                    
                    
                    —
                    
                    
                    
                    612,372Restricted
      stock units granted subject to the attainment of performance
      targets
                    
                    
                    —
                    
                    
                    
                    42,000185,976
                    
                    
                    
                    662,372
 
 There are
no shares available for grant under the 2003 Plan.  There are 541,766
shares available for future grant under the 2008 Plan.
 
 As
described above, there were seven year warrants to purchase 858,530 common
shares available for exercise at December 31, 2009.
  26
  Common
and Preferred Stock
  On
September 8, 2003, we authorized 10,000,000 shares of preferred stock, $0.01 par
value, and 30,000,000 shares of common stock, $0.01 par value.  The
holders of common stock are entitled to one vote for each issued and outstanding
share and are entitled to receive dividends, subject to the rights of the
holders of preferred stock.  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.  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 preferred rights of any
outstanding preferred stock.  In 2006, we designated 500,000 shares as
Series A Junior Participating Preferred Stock in connection with the adoption by
the Board of Directors of a Stockholders’ Rights Plan.
 
 Table
of Securities Authorized for Issuance under Equity Compensation
Plans
  The
information called for by this item relating to “Securities Authorized for
Issuance under Equity Compensation Plans” is provided in Part III, Item 12,
“Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters-Equity Compensation Plan Information - Table of Securities
Authorized for Issuance under Equity Compensation Plans,” of this
report.
 
 Share
Repurchases
  During
2008, we delivered a total of 175,250 shares pursuant to vested restricted stock
units to certain employees and former employees, of which we repurchased 70,372
shares.  With respect to 81,750 of such delivered shares, we
repurchased 34,154 shares to fund amounts in excess of minimum tax withholding
obligations, which resulted in compensation charges aggregating $0.9 million in
the year ended December 31, 2008.  Additionally, in October 2008, we
purchased 37,220 shares of common stock at a price of $25.04 per share for an
aggregate purchase price of $0.9 million (such price being determined based on
the 10 day average closing price for the ten trading days starting on the third
day following the filing of the Company’s Annual Report on Form 10-K for the
year ended December 31, 2007 up to and including October 3, 2008, excluding days
on which there were no trades) from employees (including certain named executive
officers) who had previously been delivered shares of common stock underlying
vested restricted stock units.  Each of the October 2008
purchases was pursuant to a stock purchase agreement, which also included a
provision that restricted the employee from selling or otherwise transferring
any shares of common stock or other securities of the Company until the earlier
of (a) six months after the date on which the Company became current with
respect to its Securities Exchange Act filing obligations; and (b) such time as
the Company’s common stock became listed on a national securities
exchange.
 
 During
2009, we repurchased 18,356 shares of common stock at a per share price equal to
the closing price of our common stock on the date of the relevant delivery of
which 17,880 shares were repurchased to fund minimum tax withholding obligations
associated with the delivery of shares pursuant to vested restricted stock units
and 476 shares were deemed repurchased pursuant to a cashless exercise of stock
purchase warrants.
  27
  Below is
a summary of these repurchases.
 
 Period
                                                
                                                Total Number
                                                  of Shares
                                                  Purchased
                                                
                                                
                                                Average Price
                                                  Paid Per Share
                                                
                                                
                                                Total Number of Shares
                                                  Purchased as Part of Publicly
                                                  Announced Plans or Programs
                                                
                                                
                                                Maximum Number of Shares
                                                  that may yet be Purchased
                                                  Under the Plans or ProgramsJanuary 1 to March 31, 2008 (1)
                                                
                                                
                                                1,222
                                                
                                                
                                                $36.50
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —April 1 to June 30, 2008 (2)
                                                
                                                
                                                48,720
                                                
                                                
                                                $31.29
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —July 1 to September 30, 2008 (1)
                                                
                                                
                                                3,812
                                                
                                                
                                                $30.09
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —October 1 to October 31, 2008 (3)
                                                
                                                
                                                37,220
                                                
                                                
                                                $25.04
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —November 1 to November 30, 2008 (4)
                                                
                                                
                                                15,648
                                                
                                                
                                                $16.00
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —December 1 to December 31, 2008 (4)
                                                
                                                
                                                970
                                                
                                                
                                                $15.00
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —Total
      repurchased in 2008
                                                
                                                
                                                107,592
                                                
                                                
                                                $26.77
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —January 1 to March 31, 2009 (4)
                                                
                                                
                                                9,392
                                                
                                                
                                                $15.45
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —April 1 to June 30, 2009 (4)
                                                
                                                
                                                6,284
                                                
                                                
                                                $24.25
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —July 1 to September 30, 2009 (4)
                                                
                                                
                                                1,556
                                                
                                                
                                                $39.85
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —October 1 to December 31, 2009 (4)
                                                
                                                
                                                1,124
                                                
                                                
                                                $65.72
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —Total
      repurchased in 2009
                                                
                                                
                                                18,356
                                                
                                                
                                                $23.61
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —Total
      repurchased in 2008 and 2009
                                                
                                                
                                                125,948
                                                
                                                
                                                $26.31
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
 
 (1)
              Shares
      repurchased to fund minimum tax withholding obligation and provide
      recipient with funds sufficient to meet our estimates (at their highest
      marginal income tax rates) of the recipient’s income tax
      obligations.
  (2)
              Of
      this amount, 29,120 shares were repurchased to fund minimum tax
      withholding obligations and provide recipients with funds sufficient to
      meet our estimates, (at their highest marginal income tax rates), of the
      recipient’s income tax obligation and 19,600 shares were repurchased to
      fund minimum tax withholding
obligations.
  (3)
              Shares
      purchased from employees who had previously been delivered shares of
      common stock underlying vested restricted stock units pursuant
      to stock purchase agreements.
  (4)
              Shares
      repurchased to fund minimum tax withholding obligations except for 476 in
      the July 1, 2009 to September 30, 2009 period, which were deemed
      repurchased pursuant to a cashless exercise of stock purchase
      warrants.
  28
  Performance Graph
  The following graph compares the
cumulative total stockholder return (stock price appreciation) of our common
stock with the cumulative return (including reinvested dividends) of the NASDAQ
(U.S.) Index and the Russell 2000 Index, for the period from December 31, 2004
through December 31, 2009 assuming a $100 investment on December 31,
2004.The graph also includes the NASDAQ Telecommunications
Index that we will be using in the future instead of the Russell 2000
Index.  We have selected the NASDAQ Telecommunications Index as our
new index because we have determined that it has a greater focus on our
industry.  The stock price performance shown on the graph represents
past performance and should not be considered indicative of future price
performance.  Our shares are currently listed on the New York Stock
Exchange and traded on the over-the-counter market for all periods presented
prior to our New York Stock Exchange listing on May 12, 2009. The stock price performance shown on the
graph represents past performance and should not be considered indicative of
future price performance.
 
 
 
 12/31/04
                                                                        
                                                                        
                                                                        12/31/05
                                                                        
                                                                        
                                                                        12/31/06
                                                                        
                                                                        
                                                                        12/31/07
                                                                        
                                                                        
                                                                        12/31/08
                                                                        
                                                                        
                                                                        12/31/09AboveNet,
      Inc.
                                                                        
                                                                        $100
                                                                        
                                                                        
                                                                        $89
                                                                        
                                                                        
                                                                        $188
                                                                        
                                                                        
                                                                        $244
                                                                        
                                                                        
                                                                        $91
                                                                        
                                                                        
                                                                        $407NASDAQ
      (U.S.)
                                                                        
                                                                        $100
                                                                        
                                                                        
                                                                        $101
                                                                        
                                                                        
                                                                        $111
                                                                        
                                                                        
                                                                        $122
                                                                        
                                                                        
                                                                        $72
                                                                        
                                                                        
                                                                        $104Russell
      2000
                                                                        
                                                                        $100
                                                                        
                                                                        
                                                                        $103
                                                                        
                                                                        
                                                                        $121
                                                                        
                                                                        
                                                                        $118
                                                                        
                                                                        
                                                                        $77
                                                                        
                                                                        
                                                                        $96NASDAQ
      Telecommunications
                                                                        
                                                                        $100
                                                                        
                                                                        
                                                                        $93
                                                                        
                                                                        
                                                                        $128
                                                                        
                                                                        
                                                                        $129
                                                                        
                                                                        
                                                                        $74
                                                                        
                                                                        
                                                                        $109
 The
foregoing performance graph and related information shall not be deemed "filed"
with the SEC and is not to be incorporated by reference into any Company filing
under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether
made before or after the date hereof and irrespective of any general
incorporation language in any such filing.
  29
  ITEM 6.  SELECTED
FINANCIAL DATA
 
 The table below represents selected
consolidated financial data of the Company as of and for the years ended
December 31, 2009, 2008, 2007, 2006 and 2005.  The historical
financial data as of December 31, 2009 and 2008 and for the years ended
December 31, 2009, 2008 and 2007, have been derived from the historical
consolidated financial statements presented elsewhere in this Annual Report on
Form 10-K and should be read in conjunction with such consolidated financial
statements and the accompanying notes.
 
 Upon emergence from bankruptcy on
September 8, 2003 (the “Effective Date”), we adopted fresh start accounting and
reporting in accordance withStatement 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), which resulted in
material adjustments to the historical carrying amounts of our assets and
liabilities.  Fresh start accounting required us to allocate the
reorganization value to our assets and liabilities based upon their estimated
fair values.  Adopting fresh start accounting has resulted in material
adjustments to the historical carrying amount of our assets and
liabilities.  We engaged an independent appraiser to assist in the
allocation of the reorganization value, and in determining the fair market value
of our property and equipment and overall enterprise value.  The
determination of fair values of assets and liabilities is subject to significant
estimation and assumptions.  See Note 1, “Background and Organization
- Bankruptcy Filing and Reorganization,” and Note 2, “Basis of Presentation and
Significant Accounting Policies - Fresh Start Accounting,” to the accompanying
consolidated financial statements included elsewhere in this Annual Report on
Form 10-K, for a complete description of the fresh start accounting impacts on
our Effective Date balance sheet.
  (In millions, except share and per share
information, for the tables set forth below)
  Years
      Ended December 31,2009
                                                                      
                                                                      2008
                                                                      
                                                                      2007
                                                                      
                                                                      2006
                                                                      
                                                                      2005Statements
      of Operations data:Revenue
                                                                      
                                                                      $
                                                                      360.1
                                                                      
                                                                      $
                                                                      319.9
                                                                      
                                                                      $
                                                                      253.6
                                                                      
                                                                      $
                                                                      236.7
                                                                      
                                                                      $
                                                                      219.7Costs
      of revenue (including provision for equipment impairment of $1.2, $0.4 and
      $2.2 for the years ended December 31, 2009, 2008 and 2007,
      respectively)
                                                                      
                                                                      
                                                                      130.7
                                                                      
                                                                      
                                                                      126.0
                                                                      
                                                                      
                                                                      110.3
                                                                      
                                                                      
                                                                      121.9
                                                                      
                                                                      
                                                                      119.2Selling,
      general and administrative expenses (including provision for abandonment
      of $2.3 for the year ended December 31, 2008)
                                                                      
                                                                      
                                                                      82.5
                                                                      
                                                                      
                                                                      90.5
                                                                      
                                                                      
                                                                      80.9
                                                                      
                                                                      
                                                                      71.1
                                                                      
                                                                      
                                                                      69.6Depreciation
      and amortization
                                                                      
                                                                      
                                                                      52.0
                                                                      
                                                                      
                                                                      48.3
                                                                      
                                                                      
                                                                      47.5
                                                                      
                                                                      
                                                                      47.2
                                                                      
                                                                      
                                                                      43.1Loss
      on litigation
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      11.7
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      —Operating
      income (loss)
                                                                      
                                                                      
                                                                      94.9
                                                                      
                                                                      
                                                                      55.1
                                                                      
                                                                      
                                                                      3.2
                                                                      
                                                                      
                                                                      (3.5
                                                                      )
                                                                      
                                                                      (12.2
                                                                      )Gain
      on reversal of foreign currency translation adjustments from liquidation
      of subsidiaries
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      10.3
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      —Interest
      income
                                                                      
                                                                      
                                                                      0.3
                                                                      
                                                                      
                                                                      1.8
                                                                      
                                                                      
                                                                      3.3
                                                                      
                                                                      
                                                                      2.4
                                                                      
                                                                      
                                                                      1.3Interest
      expense
                                                                      
                                                                      
                                                                      (4.8
                                                                      )
                                                                      
                                                                      (3.9
                                                                      )
                                                                      
                                                                      (2.3
                                                                      )
                                                                      
                                                                      (5.8
                                                                      )
                                                                      
                                                                      (5.9
                                                                      )Other
      income (expenses), net
                                                                      
                                                                      
                                                                      3.6
                                                                      
                                                                      
                                                                      (2.4
                                                                      )
                                                                      
                                                                      3.8
                                                                      
                                                                      
                                                                      2.1
                                                                      
                                                                      
                                                                      10.9Gain
      (loss) on sale of data centers
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      48.2
                                                                      
                                                                      
                                                                      (1.3
                                                                      )Income
      (loss) from continuing operations before income taxes
                                                                      
                                                                      
                                                                      94.0
                                                                      
                                                                      
                                                                      50.6
                                                                      
                                                                      
                                                                      18.3
                                                                      
                                                                      
                                                                      43.4
                                                                      
                                                                      
                                                                      (7.2
                                                                      )(Benefit
      from) provision for income taxes
                                                                      
                                                                      
                                                                      (187.6
                                                                      )
                                                                      
                                                                      8.3
                                                                      
                                                                      
                                                                      4.5
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      0.4Income
      (loss) from continuing operations
                                                                      
                                                                      
                                                                      281.6
                                                                      
                                                                      
                                                                      42.3
                                                                      
                                                                      
                                                                      13.8
                                                                      
                                                                      
                                                                      43.4
                                                                      
                                                                      
                                                                      (7.6
                                                                      )Income
      (loss) from discontinued operations, net of taxes
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      3.0
                                                                      
                                                                      
                                                                      (0.8
                                                                      )Net
      income (loss)
                                                                      
                                                                      $
                                                                      281.6
                                                                      
                                                                      $
                                                                      42.3
                                                                      
                                                                      $
                                                                      13.8
                                                                      
                                                                      $
                                                                      46.4
                                                                      
                                                                      $
                                                                      (8.4
                                                                      )Net
      income (loss) per share, basic:Income
      (loss) per share from continuing operations
                                                                      
                                                                      $
                                                                      11.98
                                                                      
                                                                      $
                                                                      1.93
                                                                      
                                                                      $
                                                                      0.64
                                                                      
                                                                      $
                                                                      2.04
                                                                      
                                                                      $
                                                                      (0.36
                                                                      )Income
      (loss) per share from discontinued operations
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      0.14
                                                                      
                                                                      
                                                                      (0.04
                                                                      )Net
      income (loss) per share, basic
                                                                      
                                                                      $
                                                                      11.98
                                                                      
                                                                      $
                                                                      1.93
                                                                      
                                                                      $
                                                                      0.64
                                                                      
                                                                      $
                                                                      2.18
                                                                      
                                                                      $
                                                                      (0.40
                                                                      )Shares
      used in computing basic net income (loss) per share
                                                                      
                                                                      
                                                                      23,504,077
                                                                      
                                                                      
                                                                      21,985,284
                                                                      
                                                                      
                                                                      21,503,842
                                                                      
                                                                      
                                                                      21,338,730
                                                                      
                                                                      
                                                                      21,992,488Net
      income (loss) per share, diluted:Income
      (loss) per share from continuing operations
                                                                      
                                                                      $
                                                                      11.06
                                                                      
                                                                      $
                                                                      1.73
                                                                      
                                                                      $
                                                                      0.57
                                                                      
                                                                      $
                                                                      1.84
                                                                      
                                                                      $
                                                                      (0.36
                                                                      )Income
      (loss) per share from discontinued operations
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      0.13
                                                                      
                                                                      
                                                                      (0.04
                                                                      )Net
      income (loss) per share, diluted
                                                                      
                                                                      $
                                                                      11.06
                                                                      
                                                                      $
                                                                      1.73
                                                                      
                                                                      $
                                                                      0.57
                                                                      
                                                                      $
                                                                      1.97
                                                                      
                                                                      $
                                                                      (0.40
                                                                      )Shares
      used in computing diluted net income (loss) per share
                                                                      
                                                                      
                                                                      25,468,405
                                                                      
                                                                      
                                                                      24,454,150
                                                                      
                                                                      
                                                                      24,368,278
                                                                      
                                                                      
                                                                      23,588,558
                                                                      
                                                                      
                                                                      21,992,488
  30
  At December 31,2009
                          
                          
                          2008
                          
                          
                          2007
                          
                          
                          2006
                          
                          
                          2005Balance
      Sheet data:Cash
      and cash equivalents
                          
                          $
                          165.3
                          
                          
                          $
                          87.1
                          
                          
                          $
                          45.8
                          
                          
                          $
                          70.7
                          
                          
                          $
                          45.9Working
      capital (deficit)
                          
                          
                          88.6
                          
                          
                          
                          11.8
                          
                          
                          
                          (26.1
                          )
                          
                          
                          17.4
                          
                          
                          
                          (5.8
                          )Property
      and equipment, net
                          
                          
                          469.1
                          
                          
                          
                          398.4
                          
                          
                          
                          347.7
                          
                          
                          
                          299.2
                          
                          
                          
                          305.2Total
      assets
                          
                          
                          862.0
                          
                          
                          
                          523.9
                          
                          
                          
                          432.3
                          
                          
                          
                          407.7
                          
                          
                          
                          385.0Long-term
      debt (*)
                          
                          
                          51.0
                          
                          
                          
                          34.3
                          
                          
                          
                          1.6
                          
                          
                          
                          1.5
                          
                          
                          
                          1.6Total
      shareholders’ equity
                          
                          
                          594.2
                          
                          
                          
                          284.3
                          
                          
                          
                          223.7
                          
                          
                          
                          217.9
                          
                          
                          
                          166.9
 (*)
              Prior to 2008, amounts reflect our
      obligation under a capital lease, which was included in other long-term
      liabilities on the respective consolidated balance sheets.  The
      December 31, 2009 and 2008 amounts includes the long-term portion of the
      amounts outstanding under the Term Loans and the Delayed Draw Term Loan
      borrowed pursuant to the Secured Credit Facility totaling $49.7 million
      and $32.8 million, respectively, plus the long-term obligation under a
      capital lease of $1.3 million and $1.5 million,
      respectively.
  Years Ended December 31,2009
                                      
                                      
                                      2008
                                      
                                      
                                      2007
                                      
                                      
                                      2006
                                      
                                      
                                      2005Cash
      flow data:Net
      cash provided by operating activities
                                      
                                      $
                                      157.2
                                      
                                      
                                      $
                                      116.1
                                      
                                      
                                      $
                                      69.7
                                      
                                      
                                      $
                                      51.3
                                      
                                      
                                      $
                                      43.6Net
      cash used in investing activities
                                      
                                      
                                      (118.4
                                      )
                                      
                                      
                                      (115.6
                                      )
                                      
                                      
                                      (89.3
                                      )
                                      
                                      
                                      (27.2
                                      )
                                      
                                      
                                      (42.0
                                      )Net
      cash provided by (used in) financing activities
                                      
                                      
                                      38.9
                                      
                                      
                                      
                                      42.6
                                      
                                      
                                      
                                      (5.4
                                      )
                                      
                                      
                                      (1.0
                                      )
                                      
                                      
                                      (1.1
                                      )
 31
 ITEM 7.  MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
  The following discussion and analysis
should be read together with our consolidated financial statements and related
notes appearing elsewhere in this Annual Report on Form
10-K.
  Executive Summary
  Overview
  We provide telecommunications services
primarily in 15 major metropolitan markets in the U.S. and one in the U.K.
(London).  Our services include high-bandwidth fiber-optic
connectivity solutions primarily to large corporate enterprise clients and
communication carriers, including Fortune 1000 and FTSE 500 companies, in the
U.S. and the U.K.
 
 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 each of the years
ended December 31, 2009, 2008 and 2007, as shown in our consolidated statements
of operations included elsewhere in this Annual Report on Form
10-K.
 
 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 and the current economic
environment could adversely affect demand, we believe that we are well
positioned for continued growth in the future.
  Strategy
  See Item 1, “Business - Business
Strategy,” for a discussion of our business strategy.
  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 and capital committed and expended.
 
 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 646 as of December 31, 2009, 567 of which were employed in the
U.S., 77 in the U.K., one in the Netherlands and one in
Japan.
  2009 Highlights
  Our
consolidated revenue increased by $40.2 million, or 12.6%, from $319.9 million
in the year ended December 31, 2008 to $360.1 million in the year ended December
31, 2009, due principally to a $26.4 million increase in our domestic metro
services.  Additionally, in the U.S., our revenue from fiber
infrastructure and WAN services increased by $8.8 million and $17.3 million,
respectively, for the year ended December 31, 2009 compared to the year ended
December 31, 2008.  Other revenue (which includes contract termination
revenue) was $7.2 million for the year ended December 31, 2009, compared to
$20.6 million for the year ended December 31, 2008.  Revenue from our
foreign operations, primarily in the U.K., increased by $1.1 million in the year
ended December 31, 2009 compared to the year ended December 31,
2008.
  32
 
 For the year ended December 31, 2009, we
generated operating income of $94.9 million, compared to operating income of
$55.1 million for the year ended December 31, 2008 and net income of $281.6
million for the year ended December 31, 2009, compared to $42.3 million for the
year ended December 31, 2008.  At December 31, 2009, we had $165.3
million of unrestricted cash, compared to $87.1 million of unrestricted cash at
December 31, 2008, an increase in liquidity of $78.2
million.  The increase in cash at December 31, 2009
was primarily attributable to cash generated by operating activities of
$157.2 million plus proceeds of $24.5 million provided by borrowings under the
Company’s Secured Credit Facility and cash provided by the exercise of stock
purchase warrants and options to purchase shares of common stock totaling $18.7
million, offset by cash used to purchase property and equipment of $118.7
million.
 
 In 2009, 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 March 31, 2011.
  Our
revenue increased in 2009 compared to 2008 due principally to an increase in
monthly recurring revenue, partially offset by a reduction in contract
termination revenue from $15.4 million in 2008 to $3.9 million in
2009.  Our operating costs during 2009, in the aggregate, were less
than 2008 due principally to the year over year reduction of our general and
administrative expenses associated with the normalization of our financial
reporting and the write-off of our investment in a new information technology
platform of $2.3 million that was recorded in the third quarter of
2008.  See Item 8, “Financial Statements and Supplementary Data,” Note
4, “Property and Equipment - Asset Abandonment.”  While revenue grew
in 2009, revenue growth was slower than in 2008, largely due to the impact of
increased customer terminations and downgrades in 2009.
  Significant
and continuous judgment of management is required in determining the provision
for income tax, deferred tax assets and liabilities, and related valuation
allowance established against the deferred tax assets.  As part of our
evaluation of deferred tax assets in the fourth quarter of 2009, we recognized
non-cash tax benefits of $183.0 million at December 31, 2009. This benefit
relates to the partial release of valuation allowances previously established in
the U.S. and the U.K.  This recognition of the non-cash tax benefits
had the effect of increasing net income by $183.0 million for the year ended
December 31, 2009.
  During
2009, we experienced a shift in the composition of our customer orders as we
increased the number of smaller value customer orders we sold.
 
 2010 Outlook
  While our
2010 outlook is tempered by the overall difficult economic environment, 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.  Our 2010 revenue growth will be negatively
effected by the full year impact of higher 2009 customer terminations and
downgrades compared to 2008.  Additionally, we cannot predict the
impact of 2010 customer terminations and downgrades.
  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 will have the effect of reducing net income and earnings per
share.
  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 and are subsequently amortized into income over the
related service period.
 
 Asubstantial 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.
  33
  In late
2008, we modified our service groupings and the 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.  We recasted our revenue into these
groupings, as applicable, for 2007 and 2006 for comparative purposes and trend
analysis.  However, our revenue for 2007 compared to 2006 included in
Item 7, “Management’s Discussion and Analysis of Financial Condition and Results
of Operations,” reflects the original service groupings as reported in our
Annual Report on Form 10-K for the year ended December 31,
2007.  These groupings consisted of: fiber services, metro transport
services, IP services, and long haul services.
  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,
stock-based compensation expense for employees not directly attributable to
the operation of our networks; (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 Annual Report on Form 10-K.
 
 2008
and 2007 Reclassifications
  Certain
reclassifications have been made to the consolidated financial statements for
the years ended December 31, 2008 and 2007 to conform to the classifications
used for the year ended December 31, 2009.
  34
  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 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.  During 2009, 2008
and 2007, we included the receipts of bankruptcy claim settlements from former
customers as contract termination revenue.  Contract termination
revenue is reported together with other service revenue, and amounted to $3.9
million, $15.4 million and, $8.5 million in 2009, 2008 and 2007,
respectively.
  35
  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.  Due to the current economic climate, the competitive
environment in the telecommunications sector and the volatility of the financial
strength of particular customer segments including resellers and CLECs, the
collectability of receivables and creditworthiness of customers may become more
difficult and unpredictable.  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 December 31, 2009 and December
31, 2008, we had $26.9 million and $14.8 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 $11.4 million, $10.7 million, and $8.6 million for the years ended
December 31, 2009, 2008 and 2007, 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.
  36
  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 $3.1 million,
$2.6 million and $2.2 million for the years ended December 31, 2009, 2008
and 2007, respectively.  We fully depreciated the remaining carrying
value of the network infrastructure rendered unusable, which on an original cost
basis, totaled $0.3 million ($0.2 million on a net book value basis) for each of
the years ended December 31, 2009, 2008 and 2007, 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 for the
years ended December 31, 2009, 2008 and 2007.
 
 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, $0.4 million and $2.2 million for the years ended
December 31, 2009, 2008 and 2007, respectively.  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 6, “Change in Estimate,” to the
accompanying consolidated financial statements included elsewhere in this Annual
Report on Form 10-K.
  37
  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 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 $7.2 million and $7.1 million at December 31, 2009
and 2008, respectively, of which $3.8 million and $3.9 million, respectively,
was included in “Accrued expenses,” and $3.4 million and $3.2 million,
respectively, was included in “Other long-term liabilities” at such
dates.  Accretion expense, which is included in “Interest expense,”
amounted to $0.3 million for each of the years ended December 31, 2009 and 2008,
and $0.2 million for the year ended December 31, 2007.
 
 Derivative
Financial Instruments
  We
utilize interest rate swaps, derivative financial instruments
(“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 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 million (original principal) portion of the Term Loan
provided by SunTrust Bank.  See Note 9, “Long-Term Debt,” to the
accompanying consolidated financial statements included elsewhere in this Annual
Report on Form 10-K.  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 December 31, 2009 and
December 31, 2008 was $1.2 million and $1.6 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.  We do not enter into derivatives for trading
or other speculative purposes.
 
 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
815-10.  As of December 31, 2009 and December 31, 2008, our
consolidated balance sheets included net interest rate swap derivative
liabilities of $1.2 million and $1.6 million, respectively.
  38
  Derivatives
recorded at fair value in our consolidated balance sheets as of December 31,
2009 and December 31, 2008 consisted of the following:
 
 Derivative Liabilities
                              (In millions)Derivatives designated as hedging instruments
                            
                            December 31, 2009
                            
                            
                            December 31, 2008Interest
      rate swap agreements (*)
                            
                            $
                            1.2
                            
                            
                            $
                            1.6Total
      derivatives designated as hedging instruments
                            
                            $
                            1.2
                            
                            
                            $
                            1.6
 
 (*)
      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 December 31, 2009.
 
 Notional Amount
                          
                          
                          
                          Weighted Average Rate(In millions)
                          
                          Maturity Date
                          
                          Pay
                          
                          
                          Receive$
                          21.9
                          
                          August
      2011
                          
                          
                          3.65
                          %
                          
                          
                          1.04
                          %10.9
                          
                          November
      2011
                          
                          
                          2.635
                          %
                          
                          
                          0.51
                          %$
                          32.8
  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.
 
 Fair
Value of Financial Instruments
  We
adopted SFAS No. 157, “Fair Value Measurements,” (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.
 
 Our
investment in overnight money market institutional funds, which amounted to
$154.1 million and $81.9 million at December 31, 2009 and December 31, 2008,
respectively, is included in cash and cash equivalents on the accompanying
balance sheets and is classified as a Level 1 asset.
  39
  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 $1.2 million and $1.6 million in other long-term liabilities in the
consolidated balance sheets at December 31, 2009 and December 31, 2008,
respectively.  We used third parties to value each of the interest
rate swap agreements at December 31, 2009 and December 31, 2008, 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 bases, net operating loss 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 audit 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
position.  We believe that our tax return positions are appropriate
and supportable under appropriate 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 years ended December 31, 2009 and
2008.
  40
  Deferred Taxes
  Our
current and deferred income taxes, and associated valuation allowance, 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.
  We
recognized $183.0 million of non-cash tax benefits at December 31, 2009 as
a result of reducing certain valuation allowances previously established with
respect to deferred tax assets in the U.S. and the U.K.  Additionally,
based on our ability to fully absorb current book income with our deferred tax
assets, as well as
our capacity to carryback certain losses to 2008 and 2007, our current federal
benefit from income taxes is $5.3 million.  Additionally, we provided
$0.7 million for state income taxes in 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; and
(ii) a review of internal financial forecasts demonstrating our expected
capacity to utilize deferred tax assets.
 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 12, “Stock-Based Compensation,”to the accompanying consolidated
financial statements included elsewhere in this Annual Report on Form
10-K.
 
 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.
  41
  The
following are the assumptions used by the Company to calculate the weighted
average fair value of stock options granted:
 Years
      Ended December 31,2009
                      
                      2008
                      
                      2007Dividend
      yield
                      
                      —
                      
                      —
                      
                      —Expected
      volatility
                      
                      —
                      
                      80.00
                      %
                      80.00
                      %Risk-free
      interest rate
                      
                      —
                      
                      2.96
                      %
                      4.61
                      %Expected
      life (years)
                      
                      —
                      
                      5.00
                      
                      5.00Weighted
      average fair value of options granted
                      
                      
                      —
                      
                      $19.68
                      
                      $20.89
 
 For a description of our stock-based
compensation programs, see Note 12, “Stock-Based Compensation,” to the
accompanying consolidated financial statements included elsewhere in this Annual
Report on Form 10-K.
 
 There were no options to purchase shares
of common stock granted in 2009.
 
 Results of Operations for the Year Ended
December 31, 2009 Compared to the Year Ended December 31,
2008
  Consolidated
Results (dollars in millions for the table set forth below):
  Years Ended December 31,2009
                                                              
                                                              
                                                              2008
                                                              
                                                              
                                                              $ Increase/
                                                                (Decrease)
                                                              
                                                              
                                                              % Increase/
                                                                (Decrease)Revenue
                                                              
                                                              $
                                                              360.1
                                                              
                                                              
                                                              $
                                                              319.9
                                                              
                                                              
                                                              $
                                                              40.2
                                                              
                                                              
                                                              
                                                              12.6
                                                              %Costs
      of revenue (excluding depreciation and amortization, shown separately
      below, and including provisions for equipment impairment
      of  $1.2 and $0.4 for the years ended December 31, 2009 and
      2008, respectively)
                                                              
                                                              
                                                              130.7
                                                              
                                                              
                                                              
                                                              126.0
                                                              
                                                              
                                                              
                                                              4.7
                                                              
                                                              
                                                              
                                                              3.7
                                                              %Selling,
      general and administrative expenses
                                                              
                                                              
                                                              82.5
                                                              
                                                              
                                                              
                                                              90.5
                                                              
                                                              
                                                              
                                                              (8.0
                                                              )
                                                              
                                                              
                                                              (8.8
                                                              )%Depreciation
      and amortization
                                                              
                                                              
                                                              52.0
                                                              
                                                              
                                                              
                                                              48.3
                                                              
                                                              
                                                              
                                                              3.7
                                                              
                                                              
                                                              
                                                              7.7
                                                              %Operating
      income
                                                              
                                                              
                                                              94.9
                                                              
                                                              
                                                              
                                                              55.1
                                                              
                                                              
                                                              
                                                              39.8
                                                              
                                                              
                                                              
                                                              72.2
                                                              %Other
      income (expense):Interest
      income
                                                              
                                                              
                                                              0.3
                                                              
                                                              
                                                              
                                                              1.8
                                                              
                                                              
                                                              
                                                              (1.5
                                                              )
                                                              
                                                              
                                                              (83.3
                                                              )%Interest
      expense
                                                              
                                                              
                                                              (4.8
                                                              )
                                                              
                                                              
                                                              (3.9
                                                              )
                                                              
                                                              
                                                              0.9
                                                              
                                                              
                                                              
                                                              23.1
                                                              %Other
      income (expense), net
                                                              
                                                              
                                                              3.6
                                                              
                                                              
                                                              
                                                              (2.4
                                                              )
                                                              
                                                              
                                                              (6.0
                                                              )
                                                              
                                                              
                                                              (250.0
                                                              )%Income
      from continuing operations, before income taxes
                                                              
                                                              
                                                              94.0
                                                              
                                                              
                                                              
                                                              50.6
                                                              
                                                              
                                                              
                                                              43.4
                                                              
                                                              
                                                              
                                                              85.8
                                                              %(Benefit
      from) provision for income taxes
                                                              
                                                              
                                                              (187.6
                                                              )
                                                              
                                                              
                                                              8.3
                                                              
                                                              
                                                              
                                                              (195.9
                                                              )
                                                              
                                                              NMNet
      income
                                                              
                                                              $
                                                              281.6
                                                              
                                                              
                                                              $
                                                              42.3
                                                              
                                                              
                                                              $
                                                              239.3
                                                              
                                                              
                                                              NM
 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 year ended December 31, 2009
was $281.6 million, compared to $42.3 million for the year ended December 31,
2008, an increase of $239.3 million.  The reasons for the increase in
net income were increases in revenue of $40.2 million, a decrease in selling,
general and administrative expenses of $8.0 million, a change (increase) in
other income (expense), net, of $6.0 million, which were partially offset by an
increase in costs of revenue of $4.7 million and an increase in depreciation and
amortization of $3.7 million.  The most significant difference is the
change between the net income tax benefit of $187.6 million recorded for
the year ended December 31, 2009 and the net income tax provision of $8.3
million recorded for the year ended December 31, 2008.  These changes
are discussed more fully below.
 
 42
  Revenue.  Consolidated
revenue was $360.1 million for the year ended December 31, 2009, compared to
$319.9 million for the year ended December 31, 2008, an increase of $40.2
million, or 12.6%.  Revenue from our U.S. operations increased by
$39.1 million, or 13.6%, from $288.2 million for the year ended December 31,
2008 to $327.3 million for the year ended December 31, 2009.  The
principal reason for this increase was due to the continued growth in each of
our metro, fiber infrastructure and WAN services.  The 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 $26.4 million, or 38.6%, from $68.4 million for the
year ended December 31, 2008 to $94.8 million for the year ended December 31,
2009, revenue from fiber infrastructure services increased by $8.8 million, or
5.9%, from $149.5 million for the year ended December 31, 2008 to $158.3 million
for the year ended December 31, 2009 and revenue from WAN services increased by
$17.3 million, or 34.8%, from $49.7 million for the year ended December 31, 2008
to $67.0 million for the year ended December 31, 2009.  These
increases were partially offset by a reduction in other revenue, which includes
contract termination revenue, for the year ended December 31, 2009, compared to
the year ended December 31, 2008.  Revenue from our foreign
operations, primarily in the U.K., increased by $1.1 million, or 3.5%, from
$31.7 million for the year ended December 31, 2008 to $32.8 million for the year
ended December 31, 2009.  The primary reason for this increase was due
to the increase in revenue in local currency from the U.K., which exceeded the
decrease in the translation rate of British pounds to U.S. dollars in the year
ended December 31, 2009 compared to the year ended December 31,
2008
 
 Costs of
revenue.  Consolidated costs of revenue for the year ended
December 31, 2009 was $130.7 million, compared to $126.0 million for the year
ended December 31, 2008, an increase of $4.7 million, or
3.7%.  Consolidated costs of revenue as a percentage of revenue was
36.3% for the year ended December 31, 2009, compared to 39.4% for the year ended
December 31, 2008, resulting in consolidated gross profit margin of 63.7% and
60.6% for the years ended December 31, 2009 and 2008,
respectively.  The costs of revenue for our U.S. operations was $119.3
million and $116.6 million for the years ended December 31, 2009 and 2008,
respectively, an increase of $2.7 million, or 2.3%.  The increase in
the domestic costs of revenue for the year ended December 31, 2009 compared to
the year ended December 31, 2008 was attributable principally to (i) an increase
of $3.9 million in co-location expenses, to support our IP network services and
increase our presence in third party data centers; (ii) an increase of $2.3
million in payroll-related expenses, primarily related to the increase in
headcount in our network management, strategic initiatives and fiber operations;
and (iii) an increase of $1.1 million for expenses associated with third party
network costs.  These increases were partially offset by (i) a
decrease of $2.8 million in long haul expenses from 2008 levels, which included
$1.0 million incurred in 2008 with respect to temporarily needed leased
capacity; (ii) a decrease of $1.4 million in amounts rebilled to customers for
equipment sales (for which there was a corresponding decrease in related
revenue); and (iii) a decrease of $0.4 million for repairs and maintenance
charges for our cable and transmission equipment.  Additionally, the
year ended December 31, 2009 includes a provision for equipment impairment
relating to inventory of $1.2 million, compared to a provision for equipment
impairment relating to inventory of $0.4 million and a lease abandonment cost of
$0.7 million for the year ended December 31, 2008.  The costs of
revenue for our foreign operations was $11.4 million for the year ended December
31, 2009, compared to $9.4 million for the year ended December 31, 2008, an
increase of $2.0 million, or 21.3%.  This increase was due primarily
to increases in right-of-way, third party network costs, leased fiber costs and
repairs and maintenance charges, which were needed to support the increases in
our current and future operations.
  43
  Selling, General
and Administrative Expenses (“SG&A”).  Consolidated
SG&A for the year ended December 31, 2009 was $82.5 million, compared to
$90.5 million for the year ended December 31, 2008, a decrease of $8.0 million,
or 8.8%.  SG&A as a percentage of revenue was 22.9% for the year
ended December 31, 2009, compared to 28.3% for the year ended December 31,
2008.  In the U.S., SG&A was $71.2 million for the year ended
December 31, 2009, compared to $79.6 million for the year ended December 31,
2008, a decrease of $8.4 million, or 10.6%.  SG&A for our U.S.
operations for the year ended December 31, 2009 compared to the year ended
December 31, 2008 decreased primarily due to a $6.3 million decrease in
professional fees due to the normalization of our financial reporting and a
decrease of $3.0 million in domestic non-cash stock-based compensation expense
from $11.8 million in the year ended December 31, 2008 to $8.8 million in the
year ended December 31, 2009.  The primary reasons for the decrease in
non-cash stock-based compensation expense were (i) the non-cash compensation
expense associated with the acceleration of the vesting of restricted stock
units relating to the termination of Mr. Doris’ employment contract; and (ii)
the non-cash compensation expense of $0.7 associated with the modification
of options to purchase common stock in connection with Mr. Doris’ termination,
both of which were incurred during the three months ended March 31, 2008. 
See Note 13, “Employment Contract Termination,” for a further discussion of Mr.
Doris’ employment contract.  We also had an impairment charge of $2.3
million with respect to an asset abandonment during the year ended December 31,
2008.  See Note 4, “Property and Equipment - Asset Abandonment,” for a
further discussion.  These decreases were partially offset by an
increase in domestic payroll and payroll-related expenses of $1.9 million from
$37.8 million for the year ended December 31, 2008 to $39.7 million for the year
ended December 31, 2009 primarily due to an increase in headcount and an
increase in bonus accrual of $0.4 million, partially offset by a decrease in
severance expense of $0.7 million.  In addition, transaction-based
taxes increased by $1.2 million during the year ended December 31, 2009 compared
to the year ended December 31, 2008.  SG&A from our foreign
operations was $11.3 million for the year ended December 31, 2009, compared to
$10.9 million for the year ended December 31, 2008, an increase of $0.4 million,
or 3.7%.  With respect to our foreign operations, local currency
increases in payroll-related expenses and a prior year adjustment for
transaction taxes were far in excess of the reduction in professional fees in
the year ended December 31, 2009 compared to the year ended December 31,
2008.  The net increase in local currency exceeded the reduction
caused by the strengthening of the U.S. dollar against the British pound during
the year ended December 31, 2009 compared to the year ended December 31,
2008.
 
 Depreciation
and amortization.Consolidated depreciation and
amortization was $52.0 millionfor the year ended December 31, 2009,
compared to $48.3million for the year ended December 31, 2008, an
increase of $3.7million,
or 7.7%.  Consolidated depreciation and amortization as a percentage
of revenue was 14.4% for the year ended December 31, 2009, compared
to 15.1% for the year ended December 31, 2008.  Depreciation and
amortization increased as a result of additions to property and equipment in
2009 and the full year effect of depreciation on property and equipment acquired
throughout 2008.  This increase was partially offset by the
elimination of depreciation expense associated with property and equipment sold
or disposed of during 2009 and 2008 and property and equipment that became fully
depreciated during 2009.
  Interest
income.Interest income, substantially
all of which was earned in the U.S., decreased from $1.8million
for the year ended December 31,
2008 to $0.3million for
the year ended December 31, 2009.  The decrease of $1.5
million, or 83.3%, was primarily
due to the decrease in short-term interest rates in 2009 compared to 2008,
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 increased from $3.9 million for the year ended December 31,2008 to $4.8 million for the year ended December 31,2009.  This increase of $0.9 million, or 23.1%, was
primarily due to the full year effect of interest on the $24 million portion of
the Term Loan borrowed on February 29, 2008 and the $12 million portion of the
Term Loan borrowed on October 1, 2008, partially offset by the quarterly
scheduled repayments of principal of $1.08 million on June 30, 2009 and
September 30, 2009, which reduced the balance on which interest expense is
incurred.
  44
  Other
income (expense), net.Other income (expense), net is
composed primarily of income or expense from non-recurring transactions and is
not comparative from a trend perspective.Consolidated other
income (expense), net was net income of $3.6 million for the year ended December
31, 2009, compared to a net expense of $2.4 million for the year ended December
31, 2008, a change of $6.0 million.  In the U.S., other income, net
was $2.7 million for the year ended December 31, 2009, compared to other income,
net of $2.8 million for the year ended December 31, 2008, a decrease of $0.1
million.  For our foreign operations, other income (expense), net was
net income of $0.9 million for the year ended December 31, 2009, compared to a
net expense of $5.2 million for the year ended December 31, 2008, a change of
$6.1 million.  For the year ended December 31, 2009, consolidated
other income, net was comprised of gains arising from the settlement or reversal
of certain tax liabilities of $2.9 million, gains on foreign currency of $1.9
million and other gains of $0.1 million, offset by a net loss on the sale or
disposition of property and equipment of $1.3 million.  For the year
ended December 31, 2008, consolidated other expense, net was comprised of a loss
on foreign currency of $6.5 million, offset by gains arising from the settlement
or reversal of certain tax liabilities of $2.8 million, a net gain on the sale
or disposition of property and equipment of $0.9 million and other gains of $0.4
million.
  Benefit from
income taxes.  We recognized $183.0 million of non-cash
tax benefits at December 31, 2009 as a result of reducing certain valuation
allowances previously established with respect to deferred tax assets in the
U.S. and the U.K.  We believe it is more likely than not that these
deferred tax assets will be utilized to reduce or eliminate tax payments in
future periods.  Our evaluation encompassed (i) a review of our
recent history of profitability in the U.S. for the past three years; and
(ii) a review of internal financial forecasts demonstrating our expected
capacity to utilize deferred tax assets.  Additionally, based on our
ability to fully absorb current book income with our deferred tax assets and our
ability to carryback certain portions of these losses to 2008 and 2007, we
recorded a current federal benefit from income taxes of $5.3
million.  We also provided $0.7 million for state income taxes in
2009.
  Results of Operations for the Year Ended
December 31, 2008 Compared to the Year Ended December 31,
2007
  Consolidated
Results (dollars in millions for the table set forth below):
 Years Ended December 31,2008
                            
                            
                            2007
                            
                            
                            $ Increase/
                              (Decrease)
                            
                            
                            % Increase/
                              (Decrease)Revenue
                            
                            $
                            319.9
                            
                            
                            $
                            253.6
                            
                            
                            $
                            66.3
                            
                            
                            
                            26.1
                            %Costs
      of revenue (excluding depreciation and amortization, shown separately
      below, and including provisions for equipment impairment
      of  $0.4 and $2.2 for the years ended December 31, 2008 and
      2007, respectively)
                            
                            
                            126.0
                            
                            
                            
                            110.3
                            
                            
                            
                            15.7
                            
                            
                            
                            14.2
                            %Selling,
      general and administrative expenses
                            
                            
                            90.5
                            
                            
                            
                            80.9
                            
                            
                            
                            9.6
                            
                            
                            
                            11.9
                            %Depreciation
      and amortization
                            
                            
                            48.3
                            
                            
                            
                            47.5
                            
                            
                            
                            0.8
                            
                            
                            
                            1.7
                            %Loss
      on litigation
                            
                            
                            —
                            
                            
                            
                            11.7
                            
                            
                            
                            (11.7
                            )
                            
                            NMOperating
      income
                            
                            
                            55.1
                            
                            
                            
                            3.2
                            
                            
                            
                            51.9
                            
                            
                            NMOther
      income (expense):Interest
      income
                            
                            
                            1.8
                            
                            
                            
                            3.3
                            
                            
                            
                            (1.5
                            )
                            
                            
                            (45.5
                            ) %Interest
      expense
                            
                            
                            (3.9
                            )
                            
                            
                            (2.3
                            )
                            
                            
                            1.6
                            
                            
                            
                            69.6
                            %Other
      (expense) income, net
                            
                            
                            (2.4
                            )
                            
                            
                            3.8
                            
                            
                            
                            (6.2
                            )
                            
                            NMGain
      on reversal of foreign currency translation adjustments from
      liquidation of subsidiaries
                            
                            
                            —
                            
                            
                            
                            10.3
                            
                            
                            
                            (10.3
                            )
                            
                            NMIncome
      from continuing operations, before income taxes
                            
                            
                            50.6
                            
                            
                            
                            18.3
                            
                            
                            
                            32.3
                            
                            
                            
                            176.5
                            %Provision
      for income taxes
                            
                            
                            8.3
                            
                            
                            
                            4.5
                            
                            
                            
                            3.8
                            
                            
                            
                            84.4
                            %Net
      income
                            
                            $
                            42.3
                            
                            
                            $
                            13.8
                            
                            
                            $
                            28.5
                            
                            
                            
                            206.5
                            %
  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.
  45
  Revenue. Consolidated revenue
was $319.9 million for the year ended December 31, 2008, compared to $253.6
million for the year ended December 31, 2007, an increase of $66.3 million, or
26.1%.  Revenue from our U.S. operations increased by $60.7 million,
or 26.7%, from $227.5 million for the year ended December 31, 2007 to $288.2
million for the year ended December 31, 2008.  The principal reason
for this increase was due to the continued growth in each of our metro, fiber
infrastructure and WAN services.  U.S. revenue from metro services
increased by $25.4 million, or 59.1%, from $43.0 million for the year ended
December 31, 2007 to $68.4 million for the year ended December 31, 2008, revenue
from fiber infrastructure services increased by $12.5 million, or 9.1%, from
$137.0 million for the year ended December 31, 2007 to $149.5 million for the
year ended December 31, 2008 and revenue from WAN services increased by $12.9
million, or 35.1%, from $36.8 million for the year ended December 31, 2007 to
$49.7 million for the year ended December 31, 2008.  A significant
portion of the growth was attributable to new contracts with existing
customers.  Revenue from our foreign operations, primarily in the
U.K., increased by $5.6 million, or 21.5%, from $26.1 million for the year ended
December 31, 2007 to $31.7 million for the year ended December 31,
2008.  The increase was primarily due to our continued focus on
increasing our existing services in the U.K.
 
 Costs of
revenue.  Consolidated costs of revenue for the year ended
December 31, 2008 was $126.0 million, compared to $110.3 million for the year
ended December 31, 2007, an increase of $15.7 million, or
14.2%.  Consolidated costs of revenue as a percentage of revenue was
39.4% for the year ended December 31, 2008, compared to 43.5% for the year ended
December 31, 2007, resulting in consolidated gross profit margin of 60.6% for
the year ended December 31, 2008, compared to 56.5% for the year ended December
31, 2007.  The costs of revenue for our U.S. operations was $116.6
million and $101.9 million for the years ended December 31, 2008 and 2007,
respectively, an increase of $14.7 million, or 14.4%.  The increase in
the domestic costs of revenue for the year ended December 31, 2008 compared to
the year ended December 31, 2007 was attributable principally to (i) an increase
of $4.9 million in co-location expenses to support our IP network services and
increase our presence in third party data centers; (ii) an increase of $3.6
million for repairs and maintenance charges for our cable and transmission
equipment; (iii) an increase of $3.2 million in payroll related expenses,
primarily related to the increase in headcount in our operations’ technical
services and systems engineering groups and (iv) an increase of $2.0 million for
expenses associated with third party circuits.  Additionally, the year
ended December 31, 2008 includes a provision for equipment impairment relating
to inventory of $0.4 million and a lease abandonment cost of $0.7 million,
compared to a provision for
equipment impairment of $2.2 million and a lease abandonment cost of $0.3
million for the year ended December 31, 2007.  The costs of revenue
for our foreign operations was $9.4 million for the year ended December 31,
2008, compared to $8.4 million for the year ended December 31, 2007, an increase
of $1.0 million, or 11.9%.
 
 Selling, General
and Administrative Expenses (“SG&A”).  Consolidated
SG&A for the year ended December 31, 2008 was $90.5 million, compared to
$80.9 million for the year ended December 31, 2007, an increase of $9.6 million,
or 11.9%.  SG&A as a percentage of revenue was 28.3% for the year
ended December 31, 2008, compared to 31.9% for the year ended December 31,
2007.  In the U.S., SG&A was $79.6 million for the year ended
December 31, 2008, compared to $69.3 million for the year ended December 31,
2007, an increase of $10.3 million, or 14.9%.  SG&A for our U.S.
operations for the year ended December 31, 2008 compared to the year ended
December 31, 2007 increased primarily due to the increase of $3.8 million in
non-cash stock-based compensation expense from $8.0 million in the year ended
December 31, 2007 to $11.8 million in the year ended December 31,
2008.  The reasons for this increase were (i) the expense associated
with restricted stock units granted under the 2008 Plan; (ii) the $0.7 million
expense associated with the modification of options to purchase common stock in
connection with Mr. Doris’ termination recognized in the three months ended
March 31, 2008; and (iii) the compensation expense of $0.9 million associated
with the repurchase of shares from recipients of restricted stock units in
excess of minimum withholding requirements.  Additionally, payroll and
payroll-related expenses increased by $4.6 million from $33.2 million for the
year ended December 31, 2007 to $37.8 million for the year ended December 31,
2008 primarily due to an increase in the bonus accrual of $1.2 million; an
increase in severance expense of $0.6 million; an increase in commission expense
of $0.6 million and an increase in salaries of $2.2 million due to year over
year salary increases and increases in headcount.  In 2008, we also
provided for an impairment of $2.3 million with respect to an asset
abandonment.  See Note 4, “Property and Equipment - Asset
Abandonment,” for a further discussion.  These increases were
partially offset by a reduction in transaction-based taxes of $0.5 million and a
reduction in professional fees of $2.4 million.  SG&A for our
foreign operations was $10.9 million for the year ended December 31, 2008,
compared to $11.6 million for the year ended December 31, 2007, a decrease of
$0.7 million, or 6.0%.
 
 Depreciation
and amortization.Consolidated depreciation and
amortization in 2008 was $48.3 million, compared to $47.5million
in 2007, an increase of $0.8million, or
1.7%.  Consolidated depreciation and amortization as a percentage of
revenue was 15.1% in 2008, compared to 18.7% in
2007.  Depreciation and amortization increased as a result of
additions to property and equipment in 2008 and the full year effect of
depreciation on property and equipment acquired throughout 2007.  This
increase was partially offset by the elimination of depreciation expense
associated with property and equipment sold or disposed of during 2008 and 2007
and property and equipment that became fully depreciated during
2008.
  46
  Interest
income.Interest income, substantially
all of which was earned in the U.S., decreased from $3.3million
in 2007 to $1.8million
in 2008.  The decrease
of $1.5 million, or 45.5%,
was primarily due to the decrease in short-term interest rates in 2008 compared
to 2007, partially offset by a slight 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 up front 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 increased from $2.3 million in
2007 to $3.9 million in 2008.  This increase of $1.6
million, or 69.6%, was primarily due to interest expense incurred relating to
the Secured Credit Facility, partially offset by the decrease in interest
expense on the fair market value rent liabilities from $0.6 million in 2007 to
$0.4 million in 2008.
 
 Other
(expense) income, net.Other (expense) income, net is
composed primarily of expense or income from non-recurring transactions and is
not comparative from a trend perspective.Consolidated other
(expense) income, net was a net expense of $2.4 million for the year ended
December 31, 2008, compared to net income, of $3.8 million for the year ended
December 31, 2007, a decrease of $6.2 million.  In the U.S., other
income, net was $2.8 million for the year ended December 31, 2008, compared to
other income, net of $2.7 million for the year ended December 31, 2007, an
increase of $0.1 million.  For our foreign operations, other income,
net was a net expense of $5.2 million for the year ended December 31, 2008,
compared to other income, net of $1.1 million for the year ended December 31,
2007, a decrease of $6.3 million.  For the year ended December 31,
2008, consolidated other expense, net was comprised of a loss on foreign
currency of $6.5 million, offset by gains arising from the settlement or
reversal of certain tax liabilities of $2.8 million, a net gain on the sale or
disposition of property and equipment of $0.9 million and other gains of $0.4
million.  For the year ended December 31, 2007, consolidated other
income, net was comprised of gains
arising from the settlement or reversal of certain tax liabilities of $2.2
million, a gain on a legal settlement of $0.6 million, the recovery of occupancy
taxes previously paid of $0.5 million, gains on foreign currency of $0.3
million, a gain on leased asset termination of $0.3 million and other gains of
$0.4 million, offset by a net loss on sale or disposition of property and
equipment of $0.5 million.
 
 Liquidity and Capital
Resources
  We had working capital of $88.6 million
at December 31, 2009, compared to a working capital of $11.8 million at December
31, 2008, an increase of $76.8 million.This increase was
primarily attributable to an increase in unrestricted cash of $78.2 million from
$87.1 million at December 31, 2008 to $165.3 at December 31,
2009.  The increase in
unrestricted cash at December 31, 2009 was primarily attributable to cash
provided by operating activities of $157.2 million, the proceeds from borrowings
under the Secured Credit Facility, net of financing costs, of $24.5 million and
cash generated by the exercise of stock purchase warrants and options to
purchase shares of common stock totaling $18.7 million, partially offset by the use of cash to
purchase property and equipment of $118.7 million.
 
 Net cash provided by operating
activities was $157.2 million in 2009, compared to $116.1 million in 2008, an
increase of $41.1 million.  Net cash provided by operating activities
in 2009 resulted primarily from the add back of non-cash items deducted in the
determination of net income, principally depreciation and amortization of $52.0
million, stock-based compensation expense of $9.7 million and provisions for
equipment impairment and asset abandonment of $1.2 million to net
income plus the changes in working capital components. Net cash provided
by operating activities in 2008 resulted primarily from the add back of non-cash
items deducted in the determination of net income, principally depreciation and
amortization of $48.3 million, stock-based compensation expense of $12.5 million
and provisions for equipment impairment and asset abandonment of $2.7 million
to
net income plus the changes in working capital
components.
 
 Net cash used in investing activities
was $118.4 millionin 2009, compared to $115.6 million in
2008, an increase of $2.8 million.  Net cash used in investing
activities in 2009 was attributable to the purchases of property and equipment
of $118.7 million, offset by the proceeds generated from sales of
property and equipment of $0.3 million.  Net cash used in investing
activities in 2008 was attributable to the purchases of property and equipment
of $117.2 million, offset by the proceeds generated from sales of
property and equipment of $1.6 million.The property and
equipment that is purchased in each period is used primarily to connect new
customers to our networks and to build our infrastructure.
  47
  Net cash
provided by financing activities was $38.9 million in 2009, which is comprised
of the $24.5 million of net proceeds received from the funding of the Delayed
Draw Term Loan under the Secured Credit Facility, the proceeds from the exercise
of options to purchase shares of common stock of $10.0 million and the proceeds
from the exercise of warrants of $8.7 million, offset by the principal payment
under the Secured Credit Facility of $3.2 million, the principal payment on our
capital lease obligation of $0.5 million, the purchase of treasury stock of $0.4
million and the increase in restricted cash and cash equivalents of $0.2
million.  Net cash provided by financing activities was $42.6 million
in 2008, which is composed of the $33.6 million of net proceeds received from
the funding of the Term Loans under the Secured Credit Facility, the proceeds
from the exercise of warrants of $10.7 million and the release of restricted
cash and cash equivalents of $1.4 million, offset by the purchase from employees
of shares underlying vested restricted stock units of $2.9 millionand the principal payment on our
capital lease obligation of $0.2 million.
 
 In 2009, we generated cash from
operations that was sufficient to fund our operating expenses.  We
also generated $18.7 million from the exercise of stock purchase warrants and
options to purchase shares of common stock andborrowed$24.5million under our Secured Credit
Facility.  During 2009, we used $118.7millionfor capital
expenditures.  Additionally, in 2009, we paid an aggregate of
$0.4 million to repurchase shares of common stock underlying vested restricted
stock units to fund minimum tax withholding obligations.  See Item 11,
“Executive Compensation,” and Note 10, “Shareholders’ Equity - Stock Purchase
Agreements,”andNote
12, “Stock-Based Compensation – Restricted Stock Units,” to the accompanying consolidated
financial statementsincluded elsewhere in this Annual Report on Form
10-K.  We expect that
our cash from operations will continue to exceed our operating expenses and plan
to continue to fund a portion of our future capital projects for both our
existing business and growth with our net cash from
operations.
 
 On February 29, 2008, we entered into
the Secured Credit Facility comprised of: (i) an $18 million Revolver; (ii) a
$24 million Term Loan: and (iii) an $18 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.  We paid $0.9 million for upfront fees to
the lenders and $0.3 million to our financial advisors that assisted us in
obtaining the Secured Credit Facility.  Our 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 our continued ability to
make certain representations and warranties.Among other
things, these covenants limit annual capital expenditures in 2008, 2009 and
2010, provide that our net total funded debt ratio cannot at any time exceed a
specified amount and require that we maintain a minimum consolidated fixed
charges coverage ratio, and originally required that we maintain a minimum of
$20 million in cash deposits at all times (which minimum cash deposit
requirement has been removed).  In addition, 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
million.  On September
26, 2008, we executed a joinder agreementto the Secured Credit Facility that
added SunTrust Bank as an additional lender and increased the amount of the
Secured Credit Facility to $90 million effective October 1, 2008.  In
connection with the joinder agreement, we paid a $0.45 million fee at closing
and an aggregate of $0.25 million of advisory fees.  The availability under the Revolver
increased to $27 million, the Term Loan increased to $36 million and the
available Delayed Draw Term Loan increased to $27
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 million Term Loan and the $12 million Term Loan.  We have
chosen 30 day LIBOR as the interest rate during the term of the interest rate
swaps (30 day LIBOR was 0.23531% at December 31, 2009).
 
 We
believe that our existing cash, cash from operating activities and funds
available under our Secured Credit Facility will be sufficient to fund operating
expenses, planned capital expenditures and other liquidity requirements at least through March 31,
2011.Additionally, at December 31, 2009, we
had $26 million available under the Revolver.
 
 In addition, 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 assurance that any such
funds will be available to us on favorable terms, or at
all.
  48
  Contractual
Obligations
  Certain of our facilities and equipment
are leased under non-cancelable operating and capital
leases.  Additionally, as discussed below, we have certain long-term
obligations for rights-of-way, franchise fees and building access
fees.  The following is a schedule, by fiscal year, of future minimum
rental payments required under current operating leases, our capital lease and
other contractual arrangements as of December 31, 2009 measured from
December31,
2009:
  Payments Due By Period (In
      Millions)Contractual Obligations
                      
                      Total
                      
                      
                      Less than
                        1 Year
                      
                      
                      1-3
                        Years
                      
                      
                      4-5
                        Years
                      
                      
                      More than
                        5 YearsNote
      payable (including interest)
                      
                      $
                      64.7
                      
                      
                      $
                      10.3
                      
                      
                      $
                      21.3
                      
                      
                      $
                      33.1
                      
                      
                      $
                      —Operating
      Lease Obligations
                      
                      
                      98.8
                      
                      
                      
                      13.2
                      
                      
                      
                      23.6
                      
                      
                      
                      19.7
                      
                      
                      
                      42.3Capital
      Lease Obligations (including interest)
                      
                      
                      1.7
                      
                      
                      
                      —
                      
                      
                      
                      0.5
                      
                      
                      
                      0.5
                      
                      
                      
                      0.7Other
      Rights-of-Way, Franchise Fees and Building Access Fees
                      
                      
                      173.2
                      
                      
                      
                      44.4
                      
                      
                      
                      39.5
                      
                      
                      
                      22.6
                      
                      
                      
                      66.7Total
                      
                      $
                      338.4
                      
                      
                      $
                      67.9
                      
                      
                      $
                      84.9
                      
                      
                      $
                      75.9
                      
                      
                      $
                      109.7
 
 Excluded
from this table are estimated capital commitments of $16.7 million at December
31, 2009, which is comprised principally of customer build-outs based upon
contracts recorded in the fourth quarter of 2009 and other construction in
progress.
 
 Note payable outstanding under the Term
Loans are currently hedged for three year terms, which expires August 2011 and
November 2011; the above table assumes interest at the rate fixed by the hedges
for the entire term of the Secured Credit Facility.  The amounts
outstanding under the Delayed Draw Term Loan are not hedged and the above table
assumes 30 dayLIBOR at the
rate effective December 29, 2009.  The table excludes
unusedfees, which are 0.5%
on unused balances.
  49
  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:
  2009
                                  
                                  
                                  2008
                                  
                                  
                                  $ Increase/
                                    (Decrease)
                                  
                                  
                                  % Increase/
                                    (Decrease)Revenue
                                  
                                  $
                                  327.3
                                  
                                  
                                  $
                                  288.2
                                  
                                  
                                  $
                                  39.1
                                  
                                  
                                  
                                  13.6
                                  %Costs
      of revenue (excluding depreciation and amortization, shown separately
      below, and including provision for equipment impairment of  $1.2
      and $0.4 for the years ended December 31, 2009 and 2008,
      respectively)
                                  
                                  
                                  119.3
                                  
                                  
                                  
                                  116.6
                                  
                                  
                                  
                                  2.7
                                  
                                  
                                  
                                  2.3
                                  %Selling,
      general and administrative expenses
                                  
                                  
                                  71.2
                                  
                                  
                                  
                                  79.6
                                  
                                  
                                  
                                  (8.4
                                  )
                                  
                                  
                                  (10.6
                                  )
      %Depreciation
      and amortization
                                  
                                  
                                  45.5
                                  
                                  
                                  
                                  41.9
                                  
                                  
                                  
                                  3.6
                                  
                                  
                                  
                                  8.6
                                  %Operating
      income
                                  
                                  
                                  91.3
                                  
                                  
                                  
                                  50.1
                                  
                                  
                                  
                                  41.2
                                  
                                  
                                  
                                  82.2
                                  %Other
      income (expense):Interest
      income
                                  
                                  
                                  0.3
                                  
                                  
                                  
                                  1.7
                                  
                                  
                                  
                                  (1.4
                                  )
                                  
                                  
                                  (82.4
                                  )
      %Interest
      expense
                                  
                                  
                                  (4.8
                                  )
                                  
                                  
                                  (3.9
                                  )
                                  
                                  
                                  0.9
                                  
                                  
                                  
                                  23.1
                                  %Other
      income, net
                                  
                                  
                                  2.7
                                  
                                  
                                  
                                  2.8
                                  
                                  
                                  
                                  (0.1
                                  )
                                  
                                  
                                  (3.6
                                  )
      %Income
      before income taxes
                                  
                                  
                                  89.5
                                  
                                  
                                  
                                  50.7
                                  
                                  
                                  
                                  38.8
                                  
                                  
                                  
                                  76.5
                                  %(Benefit
      from) provision for income taxes
                                  
                                  
                                  (184.6
                                  )
                                  
                                  
                                  8.3
                                  
                                  
                                  
                                  (192.9
                                  )
                                  
                                  NMNet
      income
                                  
                                  $
                                  274.1
                                  
                                  
                                  $
                                  42.4
                                  
                                  
                                  $
                                  231.7
                                  
                                  
                                  NM
 
 United Kingdom and
others:
  2009
                                  
                                  
                                  2008
                                  
                                  
                                  $ Increase/
                                    (Decrease)
                                  
                                  
                                  % Increase/
                                    (Decrease)Revenue
                                  
                                  $
                                  32.8
                                  
                                  
                                  $
                                  31.7
                                  
                                  
                                  $
                                  1.1
                                  
                                  
                                  
                                  3.5
                                  %Costs
      of revenue (excluding depreciation and amortization, shown separately
      below)
                                  
                                  
                                  11.4
                                  
                                  
                                  
                                  9.4
                                  
                                  
                                  
                                  2.0
                                  
                                  
                                  
                                  21.3
                                  %Selling,
      general and administrative expenses
                                  
                                  
                                  11.3
                                  
                                  
                                  
                                  10.9
                                  
                                  
                                  
                                  0.4
                                  
                                  
                                  
                                  3.7
                                  %Depreciation
      and amortization
                                  
                                  
                                  6.5
                                  
                                  
                                  
                                  6.4
                                  
                                  
                                  
                                  0.1
                                  
                                  
                                  
                                  1.6
                                  %Operating
      income
                                  
                                  
                                  3.6
                                  
                                  
                                  
                                  5.0
                                  
                                  
                                  
                                  (1.4
                                  )
                                  
                                  
                                  (28.0
                                  )
      %Other
      income (expense):Interest
      income
                                  
                                  
                                  —
                                  
                                  
                                  
                                  0.1
                                  
                                  
                                  
                                  (0.1
                                  )
                                  
                                  NMOther
      income (expense), net
                                  
                                  
                                  0.9
                                  
                                  
                                  
                                  (5.2
                                  )
                                  
                                  
                                  6.1
                                  
                                  
                                  
                                  117.3
                                  %Income
      (loss) before income taxes
                                  
                                  
                                  4.5
                                  
                                  
                                  
                                  (0.1
                                  )
                                  
                                  
                                  4.6
                                  
                                  
                                  NM(Benefit
      from) income taxes
                                  
                                  
                                  (3.0
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (3.0
                                  )
                                  
                                  NMNet
      income (loss)
                                  
                                  $
                                  7.5
                                  
                                  
                                  $
                                  (0.1
                                  )
                                  
                                  $
                                  7.6
                                  
                                  
                                  NM
  NM—not meaningful
  50
  United
States:
  2008
                                    
                                    
                                    2007
                                    
                                    
                                    $ Increase/
                                      (Decrease)
                                    
                                    
                                    % Increase/
                                      (Decrease)Revenue
                                    
                                    $
                                    288.2
                                    
                                    
                                    $
                                    227.5
                                    
                                    
                                    $
                                    60.7
                                    
                                    
                                    
                                    26.7
                                    %Costs
      of revenue (excluding depreciation and amortization, shown separately
      below, and including provision for equipment impairment of  $0.4
      and $2.2 for the years ended December 31, 2008 and 2007,
      respectively)
                                    
                                    
                                    116.6
                                    
                                    
                                    
                                    101.9
                                    
                                    
                                    
                                    14.7
                                    
                                    
                                    
                                    14.4
                                    %Selling,
      general and administrative expenses
                                    
                                    
                                    79.6
                                    
                                    
                                    
                                    69.3
                                    
                                    
                                    
                                    10.3
                                    
                                    
                                    
                                    14.9
                                    %Depreciation
      and amortization
                                    
                                    
                                    41.9
                                    
                                    
                                    
                                    41.4
                                    
                                    
                                    
                                    0.5
                                    
                                    
                                    
                                    1.2
                                    %Operating
      income
                                    
                                    
                                    50.1
                                    
                                    
                                    
                                    14.9
                                    
                                    
                                    
                                    35.2
                                    
                                    
                                    
                                    236.2
                                    %Other
      income (expense):Interest
      income
                                    
                                    
                                    1.7
                                    
                                    
                                    
                                    3.1
                                    
                                    
                                    
                                    (1.4
                                    )
                                    
                                    
                                    (45.2
                                    )
      %Interest
      expense
                                    
                                    
                                    (3.9
                                    )
                                    
                                    
                                    (2.3
                                    )
                                    
                                    
                                    1.6
                                    
                                    
                                    
                                    69.6
                                    %Other
      income, net
                                    
                                    
                                    2.8
                                    
                                    
                                    
                                    2.7
                                    
                                    
                                    
                                    0.1
                                    
                                    
                                    
                                    3.7
                                    %Income
      before income taxes
                                    
                                    
                                    50.7
                                    
                                    
                                    
                                    18.4
                                    
                                    
                                    
                                    32.3
                                    
                                    
                                    
                                    175.5
                                    %Provision
      for income taxes
                                    
                                    
                                    8.3
                                    
                                    
                                    
                                    4.5
                                    
                                    
                                    
                                    3.8
                                    
                                    
                                    
                                    84.4
                                    %Net
      income
                                    
                                    $
                                    42.4
                                    
                                    
                                    $
                                    13.9
                                    
                                    
                                    $
                                    28.5
                                    
                                    
                                    
                                    205.0
                                    %
 
 United Kingdom and
others:
  2008
                            
                            
                            2007
                            
                            
                            $ Increase/
                              (Decrease)
                            
                            
                            % Increase/
                              (Decrease)Revenue
                            
                            $
                            31.7
                            
                            
                            $
                            26.1
                            
                            
                            $
                            5.6
                            
                            
                            
                            21.5
                            %Costs
      of revenue (excluding depreciation and amortization, shown separately
      below)
                            
                            
                            9.4
                            
                            
                            
                            8.4
                            
                            
                            
                            1.0
                            
                            
                            
                            11.9
                            %Selling,
      general and administrative expenses
                            
                            
                            10.9
                            
                            
                            
                            11.6
                            
                            
                            
                            (0.7
                            )
                            
                            
                            (6.0
                            )
      %Depreciation
      and amortization
                            
                            
                            6.4
                            
                            
                            
                            6.1
                            
                            
                            
                            0.3
                            
                            
                            
                            4.9
                            %Loss
      on litigation
                            
                            
                            —
                            
                            
                            
                            11.7
                            
                            
                            
                            (11.7
                            )
                            
                            NMOperating
      income (loss)
                            
                            
                            5.0
                            
                            
                            
                            (11.7
                            )
                            
                            
                            16.7
                            
                            
                            
                            142.7
                            %Other
      income (expense):Gain
      on reversal of foreign currency translation adjustmentsfrom
      liquidation of subsidiaries
                            
                            
                            —
                            
                            
                            
                            10.3
                            
                            
                            
                            (10.3
                            )
                            
                            NMInterest
      income
                            
                            
                            0.1
                            
                            
                            
                            0.2
                            
                            
                            
                            (0.1
                            )
                            
                            
                            (50.0
                            )
      %Other
      (expense) income, net
                            
                            
                            (5.2
                            )
                            
                            
                            1.1
                            
                            
                            
                            (6.3
                            )
                            
                            
                            (572.7
                            )
      %Loss
      before income taxes
                            
                            
                            (0.1
                            )
                            
                            
                            (0.1
                            )
                            
                            
                            —
                            
                            
                            
                            —Provision
      for income taxes
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —Net
      loss
                            
                            $
                            (0.1
                            )
                            
                            $
                            (0.1
                            )
                            
                            $
                            —
                            
                            
                            
                            —
  NM—not meaningful
  The segment results for 2009, 2008 and
2007 (above) reflect the elimination of any intercompany sales or
charges.
  51
  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 in the U.S. and
the U.K.  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.  We
place our cash and cash equivalents primarily in commercial bank accounts in the
U.S.  Account balances generally exceed federally insured
limits.  Given recent developments in the financial markets and our
exposure to customers in the financial services industry, our ability to collect
contractual amounts due from certain customers severely impacted by these
developments may be adversely affected.
 
 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.
 
 Recently Issued Accounting
Pronouncements
  During
the third quarter of 2009, we 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 our financial
position, results of operations or cash flows.  All references to
previous GAAP citations in our 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 this statement 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).  We
adopted this statement on January 1, 2008 with respect to our 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 our 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 our financial position, results of operations or cash flows.
  52
  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 our financial position, results of operations or cash flows.
  In
December 2007, the SEC issued SAB No. 110, “Certain Assumptions Used in
Valuation Methods – Expected Term,” (now known as FASB ASC
718-10).  FASB ASC 718-10 allows companies to continue to use the
simplified method, as defined in SAB No. 107, “Share-Based Payment,” (also now
known as FASB ASC 718-10), to estimate the expected term of stock options under
certain circumstances.  The simplified method for estimating expected
term uses the mid-point between the vesting term and the contractual term of the
stock option.  We have analyzed the circumstances in which the use of
the simplified method is allowed.  We have opted to use the simplified
method for stock options it granted in 2008 because management believes that we
do 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 our
shares of common stock have been publicly traded.  There were no
options to purchase shares of common stock granted during the year ended
December 31, 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 ASC
815),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.FASB ASC
815also requires
disclosure of the fair values of derivative instruments and their gains and
losses in a tabular format.  This statementis 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 our 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 our 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 our 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
our financial position, results of operations or cash flows.
  53
  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 us for the three months ended June 30, 2009.  This statement did
not have a material impact on our financial position, results of operations or
cash flows.
 
 In May
2009, the FASB issued SFAS No. 165, "Subsequent Events," ("SFAS No. 165"), (now
known as FASB ASC 855-10), effective for interim or annual financial periods
ending after June 15, 2009.  For calendar year entities, SFAS No. 165
became effective for the three months ended June 30, 2009.  The objective
of FASB ASC 855-10 is to establish general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued.  In
particular, FASB ASC 855-10 sets forth (1) the period after the balance sheet
date during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements; (2) the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements; and (3) the disclosures that an entity should make about
events or transactions that occurred after the balance sheet
date.  The adoption of this statement did not have a material impact
on our 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 our 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 will not have a
material impact on our 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 an impact on our 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.
  54
  ITEM 7A.
 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 2009, our foreign activities
accounted for 9.1% of
consolidated revenue.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 will also increase, thereby increasing the costs of our
investment strategy.For example, if LIBOR was to increase by
1% for the full year, our borrowing costs would increase by $0.573 million (1% x
$57.3million) based upon the amount of the
related debt outstanding at February 28, 2010.  We have chosen 30 day
LIBOR as the interest rate.  Effective August 4, 2008, we entered into
a swap arrangement under which we fixed our borrowing costs with respect to the
$24 million borrowed under the Term Loan on February 29, 2008 for three years at
3.65% per annum, plus the applicable margin of 3.00%.  On October 1,
2008, we borrowed an additional $12 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 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.  After the expiration of each
interest rates swap, the corresponding Term Loan will bear interest at 30 day
LIBOR plus the applicable margin of 3.00%.
 
 As of December 31, 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%.  We have not entered into a swap
arrangement to fix our borrowing costs under the Delayed Draw Term
Loan.
 
 As of December 31, 2009, we had $57.3
million outstanding under the Secured Credit Facility.Additionally, we had a $1.7million 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.
 
 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.
  55
 ITEM 8. 
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 ABOVENET,
INC. AND SUBSIDIARIES
 
 INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 PageReport
      of Independent Registered Public Accounting Firm
                  57Consolidated
      Balance Sheets as of December 31, 2009 and 2008
                  58Consolidated
      Statements of Operations for the years ended December 31, 2009, 2008
      and 2007
                  59Consolidated
      Statements of Shareholders’ Equity for the years ended December 31,
      2009, 2008 and 2007
                  60Consolidated
      Statements of Cash Flows for the years ended December 31, 2009, 2008
      and 2007
                  61Consolidated
      Statements of Comprehensive Income for the years ended December 31,
      2009, 2008 and 2007
                  62Notes
      to Consolidated Financial Statements
                  63
  56
  Report
of Independent Registered Public Accounting Firm
 
 The
Board of Directors and Shareholders of
 AboveNet, Inc.
 White
Plains, New York
 
 We have
audited the accompanying consolidated balance sheets of AboveNet, Inc. (the
“Company”) as of December 31, 2009 and 2008 and the related consolidated
statements of operations, shareholders’ equity, cash flows and comprehensive
income for each of the three years in the period ended December 31,
2009.  These financial statements are the responsibility of the Company’s
management.  Our responsibility is to express an opinion on these financial
statements based on our audits.
 
 We
conducted our audits in accordance with auditing standards of the Public Company
Accounting Oversight Board (United States).  Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement.  An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.  We
believe that our audits provide a reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of AboveNet, Inc. at
December 31, 2009 and 2008, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2009, in
conformity with accounting principles generally accepted in the United States of
America.
 
 We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of AboveNet, Inc.’s
internal control over financial reporting as of December 31, 2009, based on
the criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organization of the
Treadway Commission (COSO) and our report dated March 16, 2010 expressed an
unqualified opinion thereon.
 
 /s/ 
      BDO Seidman, LLPNew
      York, NYMarch
      16, 2010
  57
  ABOVENET,
INC. AND SUBSIDIARIES
 
 CONSOLIDATED
BALANCE SHEETS
 (in
millions, except share and per share information)
  December 31,2009
                  
                  
                  2008ASSETS:Current
      assets:Cash
      and cash equivalents
                  
                  $
                  165.3
                  
                  
                  $
                  87.1Restricted
      cash and cash equivalents
                  
                  
                  3.7
                  
                  
                  
                  3.5Accounts
      receivable, net of allowances of $2.0 and $1.3, at December 31, 2009 and
      2008, respectively
                  
                  
                  20.1
                  
                  
                  
                  19.2Prepaid
      costs and other current assets
                  
                  
                  13.5
                  
                  
                  
                  9.8Total
      current assets
                  
                  
                  202.6
                  
                  
                  
                  119.6Property
      and equipment, net of accumulated depreciation and amortization of $236.5
      and $207.4 at December 31, 2009 and 2008, respectively
                  
                  
                  469.1
                  
                  
                  
                  398.4Deferred
      tax assets
                  
                  
                  183.0
                  
                  
                  
                  —Other
      assets
                  
                  
                  7.3
                  
                  
                  
                  5.9Total
      assets
                  
                  $
                  862.0
                  
                  
                  $
                  523.9LIABILITIES:Current
      liabilities:Accounts
      payable
                  
                  $
                  10.7
                  
                  
                  $
                  13.9Accrued
      expenses, including income taxes payable
                  
                  
                  68.4
                  
                  
                  
                  65.9Deferred
      revenue - current portion
                  
                  
                  27.3
                  
                  
                  
                  24.8Note
      payable - current portion
                  
                  
                  7.6
                  
                  
                  
                  3.2Total
      current liabilities
                  
                  
                  114.0
                  
                  
                  
                  107.8Note
      payable
                  
                  
                  49.7
                  
                  
                  
                  32.8Deferred
      revenue
                  
                  
                  93.8
                  
                  
                  
                  88.5Other
      long-term liabilities
                  
                  
                  10.3
                  
                  
                  
                  10.5Total
      liabilities
                  
                  
                  267.8
                  
                  
                  
                  239.6Commitments
      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, 30,000,000 shares authorized, $0.01 par value, 25,271,788 issued
      and 24,750,560 outstanding at December 31, 2009 and 23,219,474 issued
      and 22,716,602 outstanding at December 31, 2008
                  
                  
                  0.3
                  
                  
                  
                  0.2Additional
      paid-in capital
                  
                  
                  308.2
                  
                  
                  
                  279.9Treasury
      stock at cost, 521,228  and 502,872 shares at December 31, 2009 and
      2008, respectively
                  
                  
                  (16.7
                  )
                  
                  
                  (16.3
                  )Accumulated
      other comprehensive loss
                  
                  
                  (9.0
                  )
                  
                  
                  (9.3
                  )Retained
      earnings
                  
                  
                  311.4
                  
                  
                  
                  29.8Total
      shareholders’ equity
                  
                  
                  594.2
                  
                  
                  
                  284.3Total
      liabilities and shareholders’ equity
                  
                  $
                  862.0
                  
                  
                  $
                  523.9
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  58
  ABOVENET,
INC. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 (in
millions, except share and per share information)
 
 Years Ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007Revenue
                  
                  $
                  360.1
                  
                  
                  $
                  319.9
                  
                  
                  $
                  253.6Costs
      of revenue (excluding depreciation and amortization, shown separately
      below, and including provision for equipment impairment of $1.2, $0.4
      and  $2.2 for the years ended December 31, 2009, 2008 and 2007,
      respectively)
                  
                  
                  130.7
                  
                  
                  
                  126.0
                  
                  
                  
                  110.3Selling,
      general and administrative expenses
                  
                  
                  82.5
                  
                  
                  
                  90.5
                  
                  
                  
                  80.9Depreciation
      and amortization
                  
                  
                  52.0
                  
                  
                  
                  48.3
                  
                  
                  
                  47.5Loss
      on litigation
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  11.7Operating
      income
                  
                  
                  94.9
                  
                  
                  
                  55.1
                  
                  
                  
                  3.2Other
      income (expense):Interest
      income
                  
                  
                  0.3
                  
                  
                  
                  1.8
                  
                  
                  
                  3.3Interest
      expense
                  
                  
                  (4.8
                  )
                  
                  
                  (3.9
                  )
                  
                  
                  (2.3
                  )Other
      income (expense), net
                  
                  
                  3.6
                  
                  
                  
                  (2.4
                  )
                  
                  
                  3.8Gain
      on reversal of foreign currency translation adjustments from liquidation
      of subsidiaries
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  10.3Income
      before income taxes
                  
                  
                  94.0
                  
                  
                  
                  50.6
                  
                  
                  
                  18.3(Benefit
      from) provision for income taxes
                  
                  
                  (187.6
                  )
                  
                  
                  8.3
                  
                  
                  
                  4.5Net
      income
                  
                  $
                  281.6
                  
                  
                  $
                  42.3
                  
                  
                  $
                  13.8Income
      per share, basic:Basic
      net income per share
                  
                  $
                  11.98
                  
                  
                  $
                  1.93
                  
                  
                  $
                  0.64Weighted
      average number of common shares
                  
                  
                  23,504,077
                  
                  
                  
                  21,985,284
                  
                  
                  
                  21,503,842Income
      per share, diluted:Diluted
      net income per share
                  
                  $
                  11.06
                  
                  
                  $
                  1.73
                  
                  
                  $
                  0.57Weighted
      average number of common shares
                  
                  
                  25,468,405
                  
                  
                  
                  24,454,150
                  
                  
                  
                  24,368,278
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  59
  ABOVENET,
INC. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
 (in
millions, except share information)
 
 Common Stock
                    
                    
                    Treasury Stock
                    
                    
                    Other Shareholders’ EquityShares
                    
                    
                    Amount
                    
                    
                    Shares
                    
                    
                    Amount
                    
                    
                    Additional
                      Paid-in
                      Capital
                    
                    
                    Accumulated
                      Other
                      Comprehensive
                      Loss
                    
                    
                    Retained
                      Earnings
                      (Accumulated
                      Deficit)
                    
                    
                    Total
                      Shareholders’
                      EquityBalance
      at January 1, 2007
                    
                    
                    20,946,778
                    
                    
                    $
                    0.2
                    
                    
                    
                    30,554
                    
                    
                    $
                    (0.5
                    )
                    
                    $
                    241.5
                    
                    
                    $
                    3.0
                    
                    
                    $
                    (26.3
                    )
                    
                    $
                    217.9Issuance
      of common stock from exercise of warrants
                    
                    
                    97,882
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1.1
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1.1Issuance
      of common stock from vested restricted stock
                    
                    
                    621,438
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Purchase
      of treasury stock
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    259,632
                    
                    
                    
                    (9.7
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (9.7
                    )Foreign
      currency translation adjustments
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (0.1
                    )
                    
                    
                    —
                    
                    
                    
                    (0.1
                    )Reversal
      of foreign currency translation adjustments from liquidation of
      subsidiaries
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (10.3
                    )
                    
                    
                    —
                    
                    
                    
                    (10.3
                    )Amortization
      of stock-based compensation expense for stock options and restricted stock
      units
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    8.2
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    8.2Tax
      benefit from issuance of restricted stock
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    2.8
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    2.8Net
      income
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    13.8
                    
                    
                    
                    13.8Balance
      at December 31, 2007
                    
                    
                    21,666,098
                    
                    
                    
                    0.2
                    
                    
                    
                    290,186
                    
                    
                    
                    (10.2
                    )
                    
                    
                    253.6
                    
                    
                    
                    (7.4
                    )
                    
                    
                    (12.5
                    )
                    
                    
                    223.7Issuance
      of common stock from exercise of warrants, including cashless
      exercise
                    
                    
                    1,379,850
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    13.9
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    13.9Issuance
      of common stock from vested restricted stock
                    
                    
                    175,250
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Purchase
      of treasury stock
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    107,592
                    
                    
                    
                    (2.9
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (2.9
                    )Purchase
      of treasury stock in cashless exercise of stock warrants
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    105,094
                    
                    
                    
                    (3.2
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (3.2
                    )Foreign
      currency translation adjustments
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (0.3
                    )
                    
                    
                    —
                    
                    
                    
                    (0.3
                    )Change
      in fair value of interest rate swap contract
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (1.6
                    )
                    
                    
                    —
                    
                    
                    
                    (1.6
                    )Amortization
      of stock-based compensation expense for stock options and restricted stock
      units
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    12.5
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    12.5Tax
      effect from  issuance of restricted stock
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (0.1
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (0.1
                    )Shares
      cancelled at conclusion of bankruptcy case.
                    
                    
                    (1,724
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Net
      income
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    42.3
                    
                    
                    
                    42.3Balance
      at December 31, 2008
                    
                    
                    23,219,474
                    
                    
                    
                    0.2
                    
                    
                    
                    502,872
                    
                    
                    
                    (16.3
                    )
                    
                    
                    279.9
                    
                    
                    
                    (9.3
                    )
                    
                    
                    29.8
                    
                    
                    
                    284.3Issuance
      of common stock from exercise of warrants
                    
                    
                    725,326
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    8.7
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    8.7Issuance
      of common stock from vested restricted stock
                    
                    
                    584,362
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Issuance
      of common stock from exercise of options to purchase shares of common
      stock
                    
                    
                    742,626
                    
                    
                    
                    0.1
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    9.9
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    10.0Purchase
      of treasury stock
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    17,880
                    
                    
                    
                    (0.4
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (0.4
                    )Purchase
      of treasury stock in cashless exercise of stock warrants
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    476
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Foreign
      currency translation adjustments
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (0.1
                    )
                    
                    
                    —
                    
                    
                    
                    (0.1
                    )Change
      in fair value of interest rate swap contract
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    0.4
                    
                    
                    
                    —
                    
                    
                    
                    0.4Amortization
      of stock-based compensation expense for stock options and restricted stock
      units
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    9.7
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    9.7Net
      income
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    281.6
                    
                    
                    
                    281.6Balance
      at December 31, 2009
                    
                    
                    25,271,788
                    
                    
                    $
                    0.3
                    
                    
                    
                    521,228
                    
                    
                    $
                    (16.7
                    )
                    
                    $
                    308.2
                    
                    
                    $
                    (9.0
                    )
                    
                    $
                    311.4
                    
                    
                    $
                    594.2
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  60
 
 ABOVENET,
INC. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (in
millions)
 
 Years Ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007Cash
      flows provided by operating activities:Net
      income
                  
                  $
                  281.6
                  
                  
                  $
                  42.3
                  
                  
                  $
                  13.8Adjustments
      to reconcile net income  to net cash provided by
      operations:Depreciation
      and amortization
                  
                  
                  52.0
                  
                  
                  
                  48.3
                  
                  
                  
                  47.5Reversal
      of valuation allowance on deferred tax assets
                  
                  
                  (183.0
                  )
                  
                  
                  —
                  
                  
                  
                  —Provisions
      for equipment impairment and asset abandonment
                  
                  
                  1.2
                  
                  
                  
                  2.7
                  
                  
                  
                  2.2Gain
      on reversal of foreign currency translation adjustments from liquidation
      of subsidiaries
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (10.3
                  )Provision
      for bad debts
                  
                  
                  0.9
                  
                  
                  
                  0.7
                  
                  
                  
                  0.5Non-cash
      stock-based compensation expense
                  
                  
                  9.7
                  
                  
                  
                  12.5
                  
                  
                  
                  8.2Gain
      on leased asset termination
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (0.4
                  )Loss
      (gain) on sale or disposition of property and equipment,
    net
                  
                  
                  1.3
                  
                  
                  
                  (0.9
                  )
                  
                  
                  0.2Other
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  0.1Changes
      in operating working capital:Accounts
      receivable
                  
                  
                  (1.2
                  )
                  
                  
                  (5.6
                  )
                  
                  
                  (0.8
                  )Prepaid
      costs and other current assets
                  
                  
                  (3.5
                  )
                  
                  
                  1.8
                  
                  
                  
                  (2.2
                  )Accounts
      payable
                  
                  
                  (3.4
                  )
                  
                  
                  6.5
                  
                  
                  
                  (6.7
                  )Accrued
      expenses
                  
                  
                  (4.6
                  )
                  
                  
                  2.4
                  
                  
                  
                  14.1Other
      assets
                  
                  
                  (1.3
                  )
                  
                  
                  (0.3
                  )
                  
                  
                  (0.1
                  )Deferred
      revenue and other long-term liabilities
                  
                  
                  7.5
                  
                  
                  
                  5.7
                  
                  
                  
                  3.6Net
      cash provided by operating activities
                  
                  
                  157.2
                  
                  
                  
                  116.1
                  
                  
                  
                  69.7Cash
      flows used in investing activities:Proceeds
      from sales of property and equipment
                  
                  
                  0.3
                  
                  
                  
                  1.6
                  
                  
                  
                  0.2Proceeds
      from sale of discontinued operations
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1.3Purchases
      of property and equipment
                  
                  
                  (118.7
                  )
                  
                  
                  (117.2
                  )
                  
                  
                  (90.8
                  )Net
      cash used in investing activities
                  
                  
                  (118.4
                  )
                  
                  
                  (115.6
                  )
                  
                  
                  (89.3
                  )Cash
      flows provided by (used in) financing activities:Proceeds
      from note payable, net of financing costs
                  
                  
                  24.5
                  
                  
                  
                  33.6
                  
                  
                  
                  —Proceeds
      from exercise of options to purchase shares of common
stock
                  
                  
                  10.0
                  
                  
                  
                  —
                  
                  
                  
                  —Proceeds
      from exercise of warrants
                  
                  
                  8.7
                  
                  
                  
                  10.7
                  
                  
                  
                  1.1Excess
      tax benefit realized from share-based payment arrangements
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  2.8Change
      in restricted cash and cash equivalents
                  
                  
                  (0.2
                  )
                  
                  
                  1.4
                  
                  
                  
                  0.5Principal
      payments – note payable
                  
                  
                  (3.2
                  )
                  
                  
                  —
                  
                  
                  
                  —Purchase
      of treasury stock
                  
                  
                  (0.4
                  )
                  
                  
                  (2.9
                  )
                  
                  
                  (9.7
                  )Principal
      payments - capital lease obligation
                  
                  
                  (0.5
                  )
                  
                  
                  (0.2
                  )
                  
                  
                  (0.1
                  )Net
      cash provided by (used in) financing activities
                  
                  
                  38.9
                  
                  
                  
                  42.6
                  
                  
                  
                  (5.4
                  )Effect
      of exchange rates on cash
                  
                  
                  0.5
                  
                  
                  
                  (1.8
                  )
                  
                  
                  0.1Net
      increase (decrease) in cash and cash equivalents
                  
                  
                  78.2
                  
                  
                  
                  41.3
                  
                  
                  
                  (24.9
                  )Cash
      and cash equivalents, beginning of year
                  
                  
                  87.1
                  
                  
                  
                  45.8
                  
                  
                  
                  70.7Cash
      and cash equivalents, end of year
                  
                  $
                  165.3
                  
                  
                  $
                  87.1
                  
                  
                  $
                  45.8Supplemental
      cash flow information:Cash
      paid for interest
                  
                  $
                  2.7
                  
                  
                  $
                  2.1
                  
                  
                  $
                  0.1Cash
      paid for income taxes
                  
                  $
                  2.8
                  
                  
                  $
                  1.0
                  
                  
                  $
                  1.5Non-cash
      financing activity:Non-cash
      exercise of five year warrants at maturity
                  
                  $
                  —
                  
                  
                  $
                  3.2
                  
                  
                  $
                  —Non-cash
      purchase of shares into treasury
                  
                  $
                  —
                  
                  
                  $
                  3.2
                  
                  
                  $
                  —
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  61
  ABOVENET,
INC. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
 (in
millions)
 
 Years Ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007Net
      income
                  
                  $
                  281.6
                  
                  
                  $
                  42.3
                  
                  
                  $
                  13.8Change
      in fair value of interest rate swap contract
                  
                  
                  0.4
                  
                  
                  
                  (1.6
                  )
                  
                  
                  —Foreign
      currency translation adjustments
                  
                  
                  (0.1
                  )
                  
                  
                  (0.3
                  )
                  
                  
                  (0.1
                  )Reversal
      of foreign currency translation adjustments from liquidation of
      subsidiaries
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (10.3
                  )Comprehensive
      income
                  
                  $
                  281.9
                  
                  
                  $
                  40.4
                  
                  
                  $
                  3.4
  The
accompanying notes are an integral part of these consolidated financial
statements.
  62
  ABOVENET,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (in
millions, except share and per share information)
 
 NOTE
1:    BACKGROUND AND ORGANIZATION
 
 Bankruptcy
Filing and Reorganization
  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.
 
 Business
  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.
  63
  ABOVENET,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (in
millions, except share and per share information)
 
 Basis
of Presentation and Use of Estimates
  The
accompanying 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.  In the
opinion of management, the accompanying consolidated financial statements
reflect all adjustments considered necessary for a fair presentation of the
Company’s results as of December 31, 2009 and 2008 and for the years ended
December 31, 2009, 2008 and 2007.
 
 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.
 
 Fresh
Start Accounting
  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).  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 Shareholders’ Rights
Plan.  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 12, “Stock-Based
Compensation.”)
  64
  ABOVENET,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (in
millions, except share and per share information)
 
 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.
 
 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).
  65
  ABOVENET,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (in
millions, except share and per share information)
 
 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.  During 2009, 2008 and
2007, the Company included the receipts of bankruptcy claim settlements from
former customers as contract termination revenue.  Contract termination
revenue is reported together with other service revenue, and amounted to $3.9,
$15.4, and $8.5 in 2009, 2008 and 2007, respectively.
 
 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 years ended December 31, 2009, 2008 and
2007.
 
 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.
  66
  ABOVENET,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (in
millions, except share and per share information)
 
 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.
 
 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 December 31, 2009 and December 31,
2008, the Company had $26.9 and $14.8, 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 $11.4, $10.7, and $8.6 for the years ended December 31, 2009,
2008 and 2007, 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.
  67
  ABOVENET,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (in
millions, except share and per share information)
 
 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
$3.1, $2.6 and $2.2 for the years ended December 31, 2009, 2008 and 2007,
respectively.  The Company fully depreciated the remaining carrying value
of the network infrastructure rendered unusable, which on an original cost
basis, totaled $0.3 ($0.2 on a net book value basis) for each of the years ended
December 31, 2009, 2008 and 2007.  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 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 for the years ended December 31, 2009, 2008 and
2007.
 
 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, $0.4 and $2.2 for
the years ended December 31, 2009, 2008 and 2007, respectively.  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 6,
“Change in Estimate.”)
 
 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 $7.2 and
$7.1 at December 31, 2009 and 2008, respectively, of which $3.8 and $3.9,
respectively, was included in “Accrued expenses,” and $3.4 and $3.2,
respectively, was included in “Other long-term liabilities” at such dates. 
Accretion expense, which is included in “Interest expense,” amounted to $0.3 for
each of the years ended December 31, 2009 and 2008, and $0.2 for the year ended
December 31, 2007.
  68
  ABOVENET,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (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 bases, net operating loss 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
million during the fourth quarter of 2009.  See Note 8, “Income Taxes,” for
a further discussion.
 
 The
Company is subject to audit 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 local 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 years ended December 31, 2009 and 2008.  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 such 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 have 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 calculations; 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 years ended December 31, 2009 and 2008.
  69
  ABOVENET,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (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 12,
“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.
 
 The
following are the assumptions used by the Company to calculate the weighted
average fair value of stock options granted:
  Years Ended December 31,2009
                    
                    
                    2008
                    
                    
                    2007Dividend
      yield
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Expected
      volatility
                    
                    
                    —
                    
                    
                    
                    80.00
                    %
                    
                    
                    80.00
                    %Risk-free
      interest rate
                    
                    
                    —
                    
                    
                    
                    2.96
                    %
                    
                    
                    4.61
                    %Expected
      life (years)
                    
                    
                    —
                    
                    
                    
                    5.00
                    
                    
                    
                    5.00Weighted
      average fair value of options granted
                    
                    
                    —
                    
                    
                    $
                    19.68
                    
                    
                    $
                    20.89
 
 There
were no options to purchase shares of common stock granted during the year ended
December 31, 2009
  70
  ABOVENET,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (in
millions, except share and per share information)
 
 Restricted
Stock Units
  Compensation
cost for restricted stock unit awards is measured based upon the quoted closing
market price for our stock on the date of grant.  The compensation cost is
recognized on a straight-line basis over the vesting period.  (See Note 12,
“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.  Stock warrants to purchase shares of common stock exercised
totaled 725,326, 1,379,850, and 97,882 in 2009, 2008 and 2007,
respectively.
 
 Under the terms of the five
year and seven year warrant agreements (collectively, the “Warrant Agreements”),
if the market price of our 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.
 
 At
September 8, 2008, the expiration date of the five year warrants, the required
conditions were met for the Net Exercise.  In total, five year warrants to
purchase 318,526 shares of common stock were deemed exercised pursuant to the
Net Exercise (including warrants to purchase 778 shares of common stock, which
were exercised on a net exercise basis prior to expiration), of which 213,432,
shares were issued to the warrant holders, 105,094 shares were returned to
treasury and $0.004 was paid to recipients for fractional shares.  In
addition, five year warrants to purchase 50 shares of common stock were
cancelled in accordance with instructions from warrant holders.
 
 In 2009,
seven year warrants to purchase 1,816 shares of common stock were exercised
pursuant to the Net Exercise.  Seven year warrants to purchase 26 shares of
common stock were determined to be undeliverable and were cancelled.  At
December 31, 2009, seven year warrants to purchase 858,530 shares of common
stock were outstanding.
  71
  ABOVENET,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (in
millions, except share and per share information)
 
 Derivative
Financial Instruments
  The
Company utilizes interest rate swaps, derivative financial instruments
(“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 (original principal) portion of the Term Loan (as such
term is defined in Note 3, “Note Payable”) and the Company purchased a second
interest rate swap on November 14, 2008 to hedge the interest rate on the
additional $12 (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 December 31, 2009 and December 31, 2008
was $1.2 and $1.6, 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.
 
 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.  The Company does not enter into derivatives for
trading or other speculative purposes.
 
 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.  As of
December 31, 2009 and December 31, 2008, the Company’s consolidated balance
sheets included net interest rate swap derivative liabilities of $1.2 and $1.6,
respectively.
 
 Derivatives
recorded at fair value in the Company’s consolidated balance sheets as of
December 31, 2009 and December 31, 2008 consisted of the following:
 
 Derivative LiabilitiesDerivatives designated as hedging instruments
                        
                        December 31, 2009
                        
                        
                        December 31, 2008Interest
      rate swap agreements (*)
                        
                        $
                        1.2
                        
                        
                        $
                        1.6Total
      derivatives designated as hedging instruments
                        
                        $
                        1.2
                        
                        
                        $
                        1.6
 
 (*)
                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.
  72
  ABOVENET,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (in
millions, except share and per share information)
 
 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 December 31, 2009.
 
 Weighted Average RateNotional Amount
                              
                              Maturity Date
                              
                              
                              Pay
                              
                              
                              Receive$
                              21.9
                              
                              August
      2011
                              
                              
                              
                              3.65
                              %
                              
                              
                              1.04
                              %$
                              10.9
                              
                              November
      2011
                              
                              
                              
                              2.635
                              %
                              
                              
                              0.51
                              %$
                              32.8
  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.
 
 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 $154.1 and $81.9 at December 31, 2009 and December 31, 2008,
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 $1.2 and $1.6 in other
long-term liabilities in the consolidated balance sheets at December 31, 2009
and December 31, 2008, respectively.  The Company used third parties to
value each of the interest rate swap agreements at December 31, 2009 and
December 31, 2008, 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.
  73
 
 ABOVENET,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (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 plan under which contributions are made up to a
maximum of 8% when U.K. employee contributions reach 5% of salary.  The
Company’s subsidiaries in the U.K. have a plan under which 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 $1.5 for each of the years ended December 31, 2009 and
2008, and $1.4 for the year ended December 31, 2007, 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’s policy is to record taxes within the scope of FASB ASC
605-45 on a net basis.
  2008
and 2007 Reclassifications
  Certain
reclassifications have been made to the consolidated financial statements for
the years ended December 31, 2008 and 2007, to conform to the classifications
used for the year ended December 31, 2009.
  74
  ABOVENET,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (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.
  75
 ABOVENET,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (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 year ended December 31, 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.
  76
  ABOVENET,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (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 will 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 an 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.
  77
  ABOVENET,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (in
millions, except share and per share information)
 
 NOTE
3:   PREPAID EXPENSES AND OTHER CURRENT ASSETS
 
 Prepaid expenses and other current
assets consist of the following:
  December 31,2009
                      
                      
                      2008Prepaid
      property taxes
                      
                      $
                      2.4
                      
                      
                      $
                      2.3State
      and federal income tax deposits
                      
                      
                      2.4
                      
                      
                      
                      0.6Prepaid
      right-of-way charges
                      
                      
                      2.1
                      
                      
                      
                      1.8Prepaid
      insurance
                      
                      
                      1.7
                      
                      
                      
                      1.3Reimbursable
      relocation
                      
                      
                      1.6
                      
                      
                      
                      0.4Prepaid
      maintenance
                      
                      
                      1.4
                      
                      
                      
                      1.0Prepaid
      rent
                      
                      
                      0.4
                      
                      
                      
                      0.7Prepaid
      telecom
                      
                      
                      0.3
                      
                      
                      
                      0.5Other
      receivables
                      
                      
                      0.6
                      
                      
                      
                      0.7Other
      prepaids
                      
                      
                      0.6
                      
                      
                      
                      0.5Total
                      
                      $
                      13.5
                      
                      
                      $
                      9.8
 
 NOTE
4:  PROPERTY AND EQUIPMENT
 
 Property and equipment consist of the
following:
  December 31,2009
                      
                      
                      2008Leasehold
      improvements
                      
                      $
                      3.8
                      
                      
                      $
                      1.5Furniture,
      fixtures and equipment
                      
                      
                      28.4
                      
                      
                      
                      24.5Network
      infrastructure assets, including transmission and IP
    equipment
                      
                      
                      673.4
                      
                      
                      
                      579.8Total
      property and equipment
                      
                      
                      705.6
                      
                      
                      
                      605.8Accumulated
      depreciation and amortization
                      
                      
                      (236.5
                      )
                      
                      
                      (207.4
                      )Property
      and equipment, net
                      
                      $
                      469.1
                      
                      
                      $
                      398.4
 
 Included
in network infrastructure assets was certain transmission and IP equipment held
in inventory for future use, which had an original cost (adjusted for provisions
for equipment impairment of $0.4 at both December 31, 2009 and 2008) of $39.3
and $44.6, accumulated depreciation of $25.7 and $34.6 and net carrying values
of $13.6 and $10.0 at December 31, 2009 and 2008,
respectively.
 
 In
addition, at December 31, 2009 and 2008, the Company had assets held for sale or
disposition with net book values totaling $0.2 and $1.1, respectively, (adjusted
for provisions for equipment impairment of $0.3 at both December 31, 2009 and
2008), which were included in property and equipment in the accompanying
consolidated balance sheets.
 
 Depreciation
and amortization expense related to property and equipment for the years ended
December 31, 2009, 2008, and 2007 was approximately $52.0, $48.3 and $47.5,
respectively.
 
 Included in costs of revenue for the
years ended December 31, 2009, 2008 and 2007 are provisions for equipment
impairment of $1.2, $0.4 and $2.2, respectively, with respect to certain assets
removed from the network and either sold or disposed or made available for sale
or disposition.
  78
  ABOVENET,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (in
millions, except share and per share information)
 
 Asset
Abandonment
  In 2006, the Company acquired
software for an enterprise resource planning system (“ERP System”), which was
expected to be the Company’s information technology platform for capitalized
costs totaling $2.3.  In September 2008, management decided to abandon
the implementation of this ERP System and investigate other alternatives,
including enhancements and upgrades to its current
systems.Accordingly, the Company recorded an impairment
charge of $2.3 with respect to the abandonment, which is reflected in selling,
general and administrative expenses, in the year ended December 31, 2008.  Additionally,
the Company accrued maintenance fees of $0.3 for the year ended December 31,
2008, which have not been paid or settled as of December 31,
2009.
 
 NOTE
5: SUBORDINATED INVESTMENT
  In
January 2008, the Company became a strategic member, as defined, of
MediaXstream, LLC, a newly formed limited liability company that was created to
provide transport and managed network services for the production and broadcast
industries (“MediaX”).  MediaX was formed with preferred members who
contributed cash, and strategic members and management members who contribute
services.  The Company’s interest did not provide any voting rights on
MediaX’s Board of Managers.  The Company agreed to contribute certain
monthly services pursuant to a 51 month contract, which commenced April 2008,
for an interest in MediaX.  Distributions to the Company were
subordinated to distributions to the preferred members of their original
investment plus a preferred return.  Based upon amounts contributed,
the Company’s nominal ownership interest was approximately 15.4% of
equity.  MediaX was a start-up company with no operating
history.  Distributions on the Company’s investment were subordinated
to the distributions to the preferred members and the Company’s interest does
not provide any level of control.  These factors indicated that the
fair value of the Company’s investment in MediaX was not
significant.  Accordingly, the Company has not reflected the services
contributed as revenue or the corresponding investment in MediaX in its
financial statements.  The cost of providing such services is included
in costs of revenue in the relevant period.  The Company contributed
services to MediaX of $1.7 and $1.3 in the years ended December 31, 2009 and
2008, respectively, which represents the estimated fair value of the services
and not the actual costs of providing such services, which are not
significant.  In December 2009, all of the ownership interests in
MediaX, including the ownership interest held by us, were purchased by Hibernia
Group ehf (“Hibernia”).  Pursuant to the purchase agreement, the
Company is entitled to an earnout payment in the event that MediaX achieves
certain financial performance results.  The Company will continue to
contribute services in accordance with the original contract.  The
Company will record distributions from its investment in MediaX, if any, as
income when received.
 
 Additionally,
the Company provides other services to MediaX on the same basis as it provides
to other customers.  The Company billed MediaX for services and
reimbursements of $0.6 and $0.5 during the years ended December 31, 2009 and
2008, respectively.  There were no services provided during the year
ended December 31, 2007.
 
 NOTE
6: 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.  The effect of these changes on our operating results and
future operating results is not material.
  79
  ABOVENET,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (in
millions, except share and per share information)
 
 NOTE
7:  ACCRUED EXPENSES
 
 Accrued expenses consist of the
following:
 December 31,2009
                    
                    
                    2008Accrued
      transaction taxes
                    
                    $
                    19.2
                    
                    
                    $
                    19.9Accrued
      capital expenditures
                    
                    
                    14.4
                    
                    
                    
                    7.7Accrued
      payroll, bonuses and employee benefits
                    
                    
                    12.4
                    
                    
                    
                    11.6Accrued
      property tax
                    
                    
                    5.9
                    
                    
                    
                    5.2Accrued
      conduit, right-of-way and occupancy expenses
                    
                    
                    4.6
                    
                    
                    
                    3.0Asset
      retirement obligations
                    
                    
                    3.8
                    
                    
                    
                    3.9Accrued
      telecommunication costs
                    
                    
                    2.4
                    
                    
                    
                    2.0Current
      income taxes payable
                    
                    
                    1.2
                    
                    
                    
                    6.9Accrued
      repairs and maintenance
                    
                    
                    0.9
                    
                    
                    
                    0.9Current
      portion of deferred fair market value rent liability
                    
                    
                    0.8
                    
                    
                    
                    1.2Accrued
      litigation costs
                    
                    
                    0.6
                    
                    
                    
                    1.2Accrued
      accounting and auditing fees
                    
                    
                    0.4
                    
                    
                    
                    0.5Accrued
      other professional fees, including directors’ fees
                    
                    
                    0.4
                    
                    
                    
                    0.4Accrued
      utilities
                    
                    
                    0.3
                    
                    
                    
                    0.2Accrued
      interest
                    
                    
                    0.2
                    
                    
                    
                    0.2Capital
      lease obligation
                    
                    
                    0.1
                    
                    
                    
                    0.1Other
                    
                    
                    0.8
                    
                    
                    
                    1.0Total
                    
                    $
                    68.4
                    
                    
                    $
                    65.9
 
 NOTE
8:  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 (benefit from) provision for income taxes
for the years ended December 31, 2009, 2008 and 2007 are as
follows:
  Years Ended December 31,2009
                    
                    
                    2008
                    
                    
                    2007CurrentFederal
                    
                    $
                    (5.3
                    )
                    
                    $
                    5.7
                    
                    
                    $
                    3.3State
                    
                    
                    0.7
                    
                    
                    
                    2.6
                    
                    
                    
                    1.2Foreign
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —(4.6
                    )
                    
                    
                    8.3
                    
                    
                    
                    4.5DeferredFederal
                    
                    
                    (157.5
                    )
                    
                    
                    —
                    
                    
                    
                    —State
                    
                    
                    (22.5
                    )
                    
                    
                    —
                    
                    
                    
                    —Foreign
                    
                    
                    (3.0
                    )
                    
                    
                    —
                    
                    
                    
                    —(183.0
                    )
                    
                    
                    —
                    
                    
                    
                    —Total
      (benefit from) provision for income taxes
                    
                    $
                    (187.6
                    )
                    
                    $
                    8.3
                    
                    
                    $
                    4.5
  80
  ABOVENET,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (in
millions, except share and per share information)
 
 Deferred
income taxes result from temporary differences in the financial reporting basis
and tax basis of assets and liabilities.  The following is a summary
of the significant items giving rise to the components of the Company’s deferred
tax assets and liabilities.
  December 31,2009
                    
                    
                    2008Deferred
      tax assets:Property
      and equipment
                    
                    $
                    214.8
                    
                    
                    $
                    436.0Net
      operating loss (“NOL”) carryforwards
                    
                    
                    89.8
                    
                    
                    
                    348.1Accruals
      and reserves
                    
                    
                    13.0
                    
                    
                    
                    8.8Rent
                    
                    
                    0.8
                    
                    
                    
                    1.2Deferred
      compensation
                    
                    
                    1.3
                    
                    
                    
                    9.3AMT
      credit
                    
                    
                    1.3
                    
                    
                    
                    —Other
                    
                    
                    13.3
                    
                    
                    
                    8.0Total
      deferred tax assets
                    
                    
                    334.3
                    
                    
                    
                    811.4Valuation
      allowance
                    
                    
                    (65.9
                    )
                    
                    
                    (718.1
                    )Net
      deferred tax assets
                    
                    
                    268.4
                    
                    
                    
                    93.3Deferred
      tax liability: deferred revenue
                    
                    
                    (85.4
                    )
                    
                    
                    (93.3
                    )Total
      net deferred tax assets
                    
                    $
                    183.0
                    
                    
                    $
                    —
 
 With
respect to 2009, the above table reflects the reduction of deferred tax assets
totaling $429.0, a significant portion of which was domestic NOLs, which were
limited under Section 382 of the United States Internal Revenue Code and have no
realizable value.
 
 Based on
the Company’s ability to fully absorb current book income with the utilization
of its deferred tax assets, the Company’s current provision for income taxes for
the 2009, 2008 and 2007 years was principally related to the
U.S. alternative minimum tax.  For the year ended
December 31, 2009, the Company recorded a current net tax benefit for
income taxes of $4.6, which was composed of a $5.3 federal benefit from income
taxes, offset by a $0.7 provision for state income taxes, representing the
carryback of certain tax losses generated in 2009.  Additionally, in
the fourth quarter of 2009, the Company recognized $183.0 of non-cash tax
benefits at December 31, 2009 as a result of reducing certain valuation
allowances previously established with respect to deferred tax assets in the
U.S. and the U.K.  We believe it is more likely than not that we 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. 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.
 Years Ended December 31,2009
                    
                    
                    2008
                    
                    
                    2007Income
      before income taxes:Domestic
                    
                    $
                    89.5
                    
                    
                    $
                    50.7
                    
                    
                    $
                    18.4Foreign
                    
                    
                    4.5
                    
                    
                    
                    (0.1
                    )
                    
                    
                    (0.1
                    )Total
                    
                    $
                    94.0
                    
                    
                    $
                    50.6
                    
                    
                    $
                    18.3Rate
      Reconciliation:Tax
      at statutory rate
                    
                    
                    35.0
                    %
                    
                    
                    35.0
                    %
                    
                    
                    35.0
                    %State
      income tax, net of federal benefit
                    
                    
                    0.5
                    %
                    
                    
                    4.0
                    %
                    
                    
                    4.1
                    %Valuation
      allowance
                    
                    
                    (233.0
                    )%
                    
                    
                    (21.3
                    )%
                    
                    
                    (15.8
                    )%Permanent
      items
                    
                    
                    (2.1
                    )%
                    
                    
                    (1.3
                    )
      %
                    
                    
                    1.3
                    %Tax
      (benefit) provision
                    
                    
                    (199.6
                    )
      %
                    
                    
                    16.4
                    %
                    
                    
                    24.6
                    %
  81
  ABOVENET,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (in
millions, except share and per share information)
 
 In
connection with the Company’s emergence from bankruptcy, the Company realized
substantial cancellation of debt income (“CODI”).  This income was not
taxable for U.S. income tax purposes because the CODI resulted from the
Company’s reorganization under the Bankruptcy Code.  However, for U.S.
income tax reporting purposes, the Company is required to reduce certain tax
attributes, including (a) net operating loss carryforwards,
(b) capital losses, (c) certain tax credit carryforwards, and
(d) tax basis in assets, in a total amount equal to the gain on the
extinguishment of debt.  The reorganization of the Company on the
Effective Date constituted an ownership change under Section 382 of the
Internal Revenue Code, and the use of any of the Company’s NOL’s, capital
losses, and tax credit carryforwards, remaining after applying these provisions,
and certain subsequently recognized “built-in” losses and deductions, if any,
existing prior to the ownership change, were subject to an overall annual
limitation through December 31, 2008.
 
 As of
December 31, 2009, the Company has domestic NOL carryforwards of $195.0 and
foreign NOL carryforwards of $40.8.  Certain of these NOL
carryforwards begin to expire in 2024.  The Company’s use of $162.1 of
its domestic NOL carryforward is limited to $8.1 per annum and $32.9 is
unlimited.  These NOL carryforwards may be subject to future limitation by
Section 382 of the United States Internal Revenue Code.
 
 The
Company and its subsidiaries’ income tax returns are routinely examined by
various tax authorities.  The statute of limitations is open with
respect to tax years 2001 to 2008.  The statute of limitations for
these years will begin to expire in 2011.
 
 NOTE
9: LONG-TERM DEBT
 
 Secured
  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 senior secured credit facility (the “Secured Credit
Facility”), consisting of an $18 revolving credit facility (the “Revolver”) and
a $42 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, which was advanced at closing and up to $18 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 0.23531% at December 31, 2009).  Additionally, the Company
was originally required to maintain an unrestricted cash balance at all times of
at least $20.  On February 29, 2008, the Company received proceeds of
$24, 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
limit 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.  The Company is in compliance with all of its debt
covenants as of December 31, 2009.
  82
  ABOVENET,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (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 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, the Term Loan increased to $36
and the available Delayed Draw Term Loan increased to $27.  The
additional amount of the Term Loan of $12 was advanced on October 1,
2008.
 
 The Term
Loan provides for monthly payments of interest and quarterly installments of
principal of $1.08 beginning June 30, 2009, increasing to $1.44 on June 30, 2012
with the balance of $18.72, plus accrued unpaid interest, due on February 28,
2013.
 
 Effective
August 4, 2008, the Company entered into a swap arrangement under which it fixed
its borrowing costs with respect to the $24 outstanding for three years at
3.65%, plus the applicable margin of 3.25%, which was reduced to 3.00% 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 $12 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 (“Amendment No. 2 to 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
million on each of June 30, 2009 and September 30, 2009 and a further $0.81
million reduction on December 31, 2009.  In addition, the obligation
to commence making principal payments on any outstanding Delayed Draw Term Loan
was extended to March 31, 2010 and the Company’s obligation to maintain a
minimum balance of $20 million in cash deposits at all times was
eliminated.
 
 On
December 23, 2009, the Company provided notice to the Lenders of their intention
to borrow the $24.57 million available under the Delayed Draw Term Loan
effective December 31, 2009.  The borrowings under the Delayed
Draw Term Loan bear interest at 30 day LIBOR (0.23094% at December 29, 2009)
plus the applicable margin of 3.00%.  The Delayed Draw Term Loan
provides for monthly payments of interest and, beginning March 31, 2010,
quarterly payments of principal of $0.81 million increasing to $1.08 million
starting on June 30, 2012 with the balance of $14.04 million plus accrued
interest due on February 28, 2013.
 
 The
outstanding amounts of $57.3 under the Term Loan of the Secured Credit Facility
at December 31, 2009 are scheduled to be repaid as follows:
 
 Year
                      
                      Amount2010
                      
                      $
                      7.62011
                      
                      7.62012
                      
                      9.42013
                      
                      32.757.3Less:
      current portion of note payable
                      
                      (7.6
                      )$
                      49.7
 
 Additionally,
the Company executed a $1.0 standby letter of credit in favor of New York City
to secure the Company’s franchise agreement, which was collateralized by $1.0 of
availability under the Revolver.  The standby letter of credit,
originally scheduled to expire May 1, 2009, was renewed and extended until May
1, 2010.  At December 31, 2009, the Company had $26 available under
the Revolver.
  83
  ABOVENET,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (in
millions, except share and per share information)
 
 Obligation
under Capital Lease
  The
Company is obligated under a capital lease for certain indefeasible
rights-of-use, which is included as network infrastructure assets in property
and equipment, net.
 
 At December 31, 2009, future
minimum payments under the capital lease are as follows:
  Year
                        
                        Amount2010
                        
                        $
                        —2011
                        
                        
                        0.22012
                        
                        
                        0.32013
                        
                        
                        0.22014
                        
                        
                        0.3Thereafter
                        
                        
                        0.7Total
      minimum lease payments
                        
                        
                        1.7Less:
      amount representing interest
                        
                        
                        (0.4
                        )Obligation
      under capital lease
                        
                        
                        1.3Less:
      current portion
                        
                        
                        —Total
      long-term obligation
                        
                        $
                        1.3
 
 The
long-term portion is reported within “Other long-term liabilities.”
 
 NOTE
10:  SHAREHOLDERS’ EQUITY
 
 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 (as amended, the “Amended and Restated
Rights Agreement”).  The Rights (as defined below) under the Amended
and Restated Rights Agreement will expire on August 3, 2010 if the Amended and
Restated Rights Agreement is not ratified by the Company’s stockholders by such
date and, if ratified, will continue to remain in effect until August 7, 2012
unless sooner terminated by the Company’s Board of Directors.  The
Amended and Restated Rights Agreement was amended to remove an exception to the
definition of “Acquiring Person” for an Excluded
Stockholder.  “Excluded Stockholder” was defined to mean JGD
Management Corp., York Capital Management, L.P. and certain of their affiliated
funds and managed accounts holding Company securities (the “York Group”) and
their respective affiliates and associates; provided, however, that, except as
otherwise provided in the definition of “Acquiring Person” in the Amended and
Restated Rights Agreement, none of the members of the York Group or their
affiliates or associates would be an Excluded Stockholder if any such party,
individually or collectively, became the beneficial owner of 20% or more of the
outstanding Common Shares without the prior written consent of the
Company.  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, which is 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, which is 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.
  84
  ABOVENET,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (in
millions, except share and per share information)
 
 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.  The Rights will
expire on August 7, 2012, unless earlier redeemed or exchanged, subject to
shareholder ratification by August 3, 2010.
 
 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.
  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 for a 60-day period have
the right to receive upon exercise that number of Common Shares having a market
value of two times the 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).  This
right will terminate 60 days after the date on which the Rights become
non-redeemable (as described below), unless there is an injunction or similar
obstacle to exercise the Rights, in which event this right will terminate 60
days after the date on which the Rights again become exercisable.
 
 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.
 
 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.
  85
  ABOVENET,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (in
millions, except share and per share information)
 
 Stock
Warrants
  Under the
Plan of Reorganization, unsecured note holder claims and general secured claims
were settled, in part, by the distribution of five year warrants to purchase
1,418,918 shares of common stock at $10.00 per share and seven year warrants to
purchase 1,669,316 shares of common stock at $12.00 per share.  (See
Note 1, “Background and Organization.”)
 
 The following table summarizes the
activity for the Company’s warrants for the periods
presented:
 
 Five year
                        Stock Warrants
                      
                      
                      Seven year
                        Stock Warrants
                      
                      
                      Weighted Average
                        Warrant
                        Exercise PriceBalance
      as of January 1, 2007
                      
                      
                      1,405,494
                      
                      
                      
                      1,656,190
                      
                      
                      $
                      11.08Exercised
                      
                      
                      (52,814
                      )
                      
                      
                      (45,068
                      )
                      
                      $
                      10.92Balance
      as of December 31, 2007
                      
                      
                      1,352,680
                      
                      
                      
                      1,611,122
                      
                      
                      $
                      11.08Exercised
                      
                      
                      (1,034,084
                      )
                      
                      
                      (27,240
                      )
                      
                      $
                      10.05Deemed
      exercised under the Net Exercise provisions of the Warrant
      Agreements
                      
                      
                      (318,526
                      )*
                      
                      
                      —
                      
                      
                      $
                      10.00Cancelled
      in connection with conclusion of the bankruptcy case
                      
                      
                      (20
                      )
                      
                      
                      (24
                      )
                      
                      $
                      11.09Cancelled
      in accordance with instructions from the warrant holders
                      
                      
                      (50
                      )
                      
                      
                      —
                      
                      
                      $
                      10.00Balance
      as of December 31, 2008
                      
                      
                      —
                      
                      
                      
                      1,583,858
                      
                      
                      $
                      12.00Exercised
                      
                      
                      —
                      
                      
                      
                      (723,510
                      )
                      
                      $
                      12.00Deemed
      exercised under the Net Exercise provisions of the Warrant
      Agreements
                      
                      
                      —
                      
                      
                      
                      (1,816
                      ) **
                      
                      $
                      12.00Cancelled
                      
                      
                      —
                      
                      
                      
                      (2
                      )
                      
                      $
                      12.00Balance
      as of December 31, 2009
                      
                      
                      —
                      
                      
                      
                      858,530
                      
                      
                      $
                      12.00
 
 *
Under the Net Exercise provisions, 105,094 shares were returned to treasury to
settle the aggregate exercise price of the related shares.
 
 **
Under the Net Exercise provision, 476 shares were returned to treasury to settle
the aggregate exercise price of the related shares.
 
 Under the terms of the
Warrant Agreements described in Note 2, “Basis of Presentation and Significant
Accounting Policies - Stock Warrants” if the market price of our common stock,
as defined in the respective 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 are 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, are paid in cash.  Prior to the expiration date of
the five year warrants, five year warrants to purchase 778 shares of common
stock were exercised on a Net Exercise basis, resulting in the issuance
of 520 common shares being issued and 258 common shares being returned to
treasury.  At September 8, 2008, the expiration date of the five year
warrants, the required conditions were met for Net Exercise.  Five
year warrants to purchase 50 shares of common stock were cancelled in accordance
with instructions from warrant holders.  Additionally, five year
warrants to purchase 317,748 shares of common stock were deemed exercised on a
Net Exercise basis, of which 212,912 shares were issued to the warrant holders,
104,836 shares were returned to treasury and $0.004 was paid to recipients for
fractional shares.
  86
  ABOVENET,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (in
millions, except share and per share information)
 
 Stock
Purchase Agreements
  In
October 2008, the Company purchased from employees, who had previously received
distributions of common stock pursuant to vested restricted stock units, 37,220
shares of common stock at a price of $25.035 per share or for an aggregate
purchase price of $0.9, such price being determined based on the average trading
price set by the Board of Directors after the filing of the Company’s Annual
Report on Form 10-K for the year ended December 31, 2007.  Each of
these purchases was pursuant to a stock purchase agreement, which also included
a provision that restricts the employee from selling or otherwise transferring
any shares of common stock or other securities of the Company until the earlier
of (a) six months after the date on which the Company becomes current with
respect to its Securities Exchange Act filing obligations; and (b) such time as
the Company’s common stock becomes listed on a national securities
exchange.
 
 NOTE
11:  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 23,504,077, 21,985,284 and 21,503,842 for the years
ended December 31, 2009, 2008, and 2007, respectively.  Total
weighted average shares utilized in computing diluted net income per common
share were 25,468,405, 24,454,150, and 24,368,278 for the years ended
December 31, 2009, 2008, and 2007, respectively.  Dilutive
securities include options to purchase shares of common stock, restricted stock
units and stock warrants.  For the years ended December 31, 2009
and 2007, there were no potentially dilutive securities excluded from the
calculation of diluted income per common share.  For the year ended
December 31, 2008, potentially dilutive securities to acquire 23,800 shares of
common stock were excluded from the calculation of diluted income per common
share as they were anti-dilutive.
 
 NOTE
12: STOCK-BASED COMPENSATION
 
 Adoption
of 2008 Equity Incentive Plan
  On August
29, 2008, the Board of Directors of the Company approved the Company’s 2008
Plan.  The 2008 Plan will be administered by the Company’s
Compensation Committee unless otherwise determined by the Board of
Directors.  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 Company 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.  At December 31, 2009, 1,169,432 common shares had
been issued pursuant to vested restricted stock units (including shares
repurchased), 740,626 shares had been issued pursuant to options exercised to
purchase common shares, 185,976 common shares were reserved pursuant to
outstanding options to purchase shares of common stock and 33,878 common
shares were cancelled.
 
 Under the
2008 Plan, the Company was authorized to issue share-based awards of up to
1,500,000 common shares in accordance with its terms.  As of December
31, 2009, 2,000 common shares had been issued pursuant to the exercise of
options to purchase shares of common stock, 293,862 common shares were issued
pursuant to the delivery of vested restricted stock units, 8,000 common shares
were reserved pursuant to outstanding options to purchase shares of common
stock, 654,372 were reserved pursuant to outstanding restricted stock units and
541,766 common shares were reserved for future grants.
  87
  ABOVENET, INC. AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (in
millions, except share and per share information)
 
 Stock
Options
  Pursuant
to the 2008 Plan, during the year ended December 31, 2008, the Company awarded
options to purchase 10,000 shares of common stock, which have a ten year life
from the date of grant vested on the first anniversary of the date of grant and
have per share exercise prices of $30.00.
 
 During
the year ended December 31, 2007, the Company awarded options to purchase 42,650
shares of common stock, which have a ten year life from the date of grant vested
on the first anniversary of the date of grant and have per share exercise prices
of $28.00 (26,950 options) and $36.50 (15,700 options).
 
 There
were no options to purchase shares of common stock granted in the year ended
December 31, 2009.
 
 The
Company recognized non-cash stock-based compensation expense amounting to $0.2,
$1.2 and $1.7, for the years ended December 31, 2009, 2008 and 2007,
respectively, with respect to stock options granted, which had an effect of
decreasing net income by $0.01 per basic common share and by $0.01 per diluted
common share for the year ended December 31, 2009, by $0.06 per basic
common share and by $0.05 per diluted common share for the year ended December
31, 2008, and by $0.08 per basic common share and by $0.07 per diluted common
share for the year ended December 31, 2007.
 
 All such
options are subject to forfeiture as specified in the respective award
agreement.
 
 Information
regarding options to purchase common stock granted, exercised and outstanding
for the years ended December 31, 2009, 2008 and 2007 is summarized
below:
 
 Number
                      Outstanding
                    
                    
                    Weighted
                      Average
                      Exercise Price
                      Per Share
                    
                    
                    Aggregate
                      Intrinsic
                      Value
                    
                    
                    Weighted
                      Average Grant
                      Date
                      Fair Value
                      Per ShareBalance
      as of January 1, 2007
                    
                    
                    955,034
                    
                    
                    $
                    13.21
                    
                    
                    
                    
                    
                    $
                    8.32Granted
                    
                    
                    42,650
                    
                    
                    $
                    31.13
                    
                    
                    
                    
                    
                    $
                    20.88Forfeited
                    
                    
                    (53,790
                    )
                    
                    $
                    18.05
                    
                    
                    
                    
                    
                    $
                    11.72Balance
      as of December 31, 2007
                    
                    
                    943,894
                    
                    
                    $
                    13.74
                    
                    
                    
                    
                    
                    $
                    8.70Granted
                    
                    
                    10,000
                    
                    
                    $
                    30.00
                    
                    
                    
                    
                    
                    $
                    19.68Forfeited
                    
                    
                    (11,792
                    )
                    
                    $
                    19.73
                    
                    
                    
                    
                    
                    $
                    12.76Balance
      as of December 31, 2008
                    
                    
                    942,102
                    
                    
                    $
                    13.84
                    
                    
                    
                    
                    
                    $
                    8.76Exercised
                    
                    
                    (742,626
                    )
                    
                    $
                    13.52
                    
                    
                    
                    
                    
                    $
                    8.62Forfeited
                    
                    
                    (5,500
                    )
                    
                    $
                    18.46
                    
                    
                    
                    
                    
                    $
                    12.09Balance
      as of December 31, 2009
                    
                    
                    193,976
                    
                    
                    $
                    14.93
                    
                    
                    $
                    9.7
                    
                    
                    $
                    9.66Vested
      as of December 31, 2009
                    
                    
                    193,976
                    
                    
                    $
                    14.93
                    
                    
                    
                    
                    
                    
                    $
                    9.66Exercisable
      as of December 31, 2009
                    
                    
                    193,976
                    
                    
                    $
                    14.93
                    
                    
                    $
                    9.7
                    
                    
                    $
                    9.66
 
 The grant
date fair value of vested options to purchase common stock was as follows at
December 31:
  Number of Options
                        to Purchase Common
                        Stock Vested
                      
                      
                      Total Grant Date Fair
                        Value of Vested Options2009
                      
                      
                      193,976
                      
                      
                      $
                      1.92008
                      
                      
                      932,102
                      
                      
                      $
                      8.12007
                      
                      
                      868,956
                      
                      
                      $
                      7.1
 
 The
aggregate grant date fair value of options to purchase shares of common stock
that vested during the years ended December 31, 2009, 2008 and 2007 was $0.2
(10,000 shares), $1.0 (72,008 shares), and $1.4 (124,118 shares),
respectively.
  88
  ABOVENET,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (in
millions, except share and per share information)
 
 Information
regarding the fair value of unvested options to purchase common stock is as
follows:
 
 Number
                      Outstanding
                    
                    
                    Weighted Average
                      Fair Value
                      Per ShareUnvested
      options, January 1, 2009
                    
                    
                    10,000
                    
                    
                    $
                    19.68Vested
                    
                    
                    (10,000
                    )
                    
                    $
                    19.68Unvested
      options, December 31, 2009
                    
                    
                    —
                    
                    
                    $
                    —
 
 At
December 31, 2009, all options to purchase shares of common stock were
vested and, accordingly, the Company had no unearned stock-based compensation
expense associated with options to purchase shares of common stock.
 
 In
November 2005, the FASB issued FASB Staff Position No. SFAS 123(R)-3,
“Transition Election Related to Accounting for the Tax Effects of Share-Based
Payment Awards.” The alternative transition method includes simplified methods
to establish the beginning balance of the additional paid-in capital pool (“APIC
Pool”) related to the tax effects of employee share-based compensation, and to
determine the subsequent impact on the APIC Pool and consolidated statements of
cash flows of the tax effects of employee share-based compensation awards that
are outstanding upon adoption of SFAS No. 123(R).  The Company
has adopted this method and determined the APIC Pool to be $2.8.  The
Company reduced the APIC Pool by $0.1 in 2008 to reflect the tax effect of the
delivery of common shares underlying restricted stock units in
2008.  There were 742,626 options exercised to purchase common shares
in the year ended December 31, 2009.  There were no options to
purchase common shares exercised in the years ended December 31, 2008 and
2007.
 
 The
following table summarizes information concerning outstanding and exercisable
options to purchase common stock at December 31, 2009:
  Exercise Prices
                        
                        Options
                          Outstanding
                        
                        
                        Weighted Average
                          Remaining
                          Contractual Life
                          (Years)
                        
                        
                        Weighted Average
                          Exercise Price
                          Per Share of Options
                          Outstanding
                        
                        
                        Options
                          Exercisable
                        
                        
                        Weighted Average
                          Remaining
                          Contractual Life
                          (Years)
                        
                        
                        Weighted Average
                          Exercise Price
                          Per Share of
                          Exercisable Options$10.48
                        
                        
                        101,499
                        
                        
                        
                        3.7
                        
                        
                        $
                        10.48
                        
                        
                        
                        101,499
                        
                        
                        
                        3.7
                        
                        
                        $
                        10.48$12.50
                        
                        
                        35,306
                        
                        
                        
                        5.7
                        
                        
                        $
                        12.50
                        
                        
                        
                        35,306
                        
                        
                        
                        5.7
                        
                        
                        $
                        12.50$15.00
      - $19.99
                        
                        
                        17,571
                        
                        
                        
                        4.6
                        
                        
                        $
                        16.82
                        
                        
                        
                        17,571
                        
                        
                        
                        4.6
                        
                        
                        $
                        16.82$20.00
      - $24.99
                        
                        
                        11,725
                        
                        
                        
                        5.3
                        
                        
                        $
                        22.47
                        
                        
                        
                        11,725
                        
                        
                        
                        5.3
                        
                        
                        $
                        22.47$25.00
      - $29.99
                        
                        
                        11,325
                        
                        
                        
                        6.9
                        
                        
                        $
                        27.90
                        
                        
                        
                        11,325
                        
                        
                        
                        6.9
                        
                        
                        $
                        27.90$30.00
                        
                        
                        8,000
                        
                        
                        
                        8.7
                        
                        
                        $
                        30.00
                        
                        
                        
                        8,000
                        
                        
                        
                        8.7
                        
                        
                        $
                        30.00$36.50
                        
                        
                        8,550
                        
                        
                        
                        7.6
                        
                        
                        $
                        36.50
                        
                        
                        
                        8,550
                        
                        
                        
                        7.6
                        
                        
                        $
                        36.50Total
                        
                        
                        193,976
                        
                        
                        
                        5.4
                        
                        
                        $
                        14.93
                        
                        
                        
                        193,976
                        
                        
                        
                        5.4
                        
                        
                        $
                        14.93
  89
  ABOVENET,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (in
millions, except share and per share information)
 
 Restricted
Stock Units
  On
December 3, 2009, pursuant to the 2008 Plan, the Company awarded 182,700
restricted stock units (i.e., an agreement to provide common shares in the
future) to certain employees and the independent members of the Board of
Directors.  The fair value of the grant was $53.90 per share, the
closing price of the Company’s common stock on that day.  5,900 of
these restricted stock units vest on November 16, 2010, 12,000 vest equally on
each of November 16, 2010 and November 16, 2011 and 164,800 of these restricted
stock units (including 3,000 restricted stock units to each of the five
independent members of the Board of Directors) vest 40% on November 16, 2010 and
60% on November 16, 2011.
 
 On
September 8, 2008, pursuant to the 2008 Plan, the Company granted to certain
employees an aggregate 648,200 restricted stock units, 380,000 of which vested
30% on the first anniversary of the date of grant, 10% of which are scheduled to
vest on the second anniversary of the date of grant and 60% of which are
scheduled to vest on the third anniversary of the date of grant, 172,000 of
which vested or are scheduled to vest ratably on each of the first, second and
third anniversaries of the date of grant and 96,200 of which were scheduled to
vest (2,666 of such restricted stock unit were forfeited) on the first
anniversary of the date of grant.  The fair value of these grants
was $30.00 per share, the closing price of the Company’s stock on the day of
grant.  Additionally, William G. LaPerch, the President and Chief Executive
Officer of the Company, was granted an additional 42,000 restricted stock units,
which vest ratably in 2010, 2011 and 2012 based upon the achievement of certain
performance targets for the fiscal years 2009, 2010 and 2011, which had not been
established as of December 31, 2009 with respect to the 2010 and 2011
grants.  The Company also granted 70,000 restricted stock units in the
fourth quarter of 2008, which vested 30% on November 16, 2009, and are scheduled
to vest 10% on November 15, 2010 and 60% on November 15, 2011.  The
fair value of this grant was $19.50 per share, the closing price of the
Company’s stock on the day of grant.  Additionally, in the fourth
quarter of 2008, the Company granted 8,000 restricted stock units, which vested
on November 16, 2009.
 
 On May 2,
2008, the Company awarded 18,000 restricted stock units to employees under the
2003 Plan.  The underlying shares had a fair value of $35.00 per
share, which was the closing price of our stock on the date of grant and the
stock units vested on the first anniversary of the date of grant.
 
 Additionally,
in 2008, in connection with the delivery of 81,750 shares pursuant to vested
restricted stock units (of the 175,250 shares described above), the Company
repurchased 34,154 shares to fund estimated income tax obligations, which
exceeded the Company’s minimum tax withholding
obligations.  Accordingly, the Company recorded a compensation charge
of $0.9 in the year ended December 31, 2008 in accordance with the provisions of
SFAS No. 123(R).  No such amounts were recorded in the year ended
December 31, 2007.
 
 During
the year ended December 31, 2007, the Company awarded restricted stock
units to employees of the Company under the 2003 Plan.  210,000 of the
restricted stock units granted on August 7, 2007, which vested on the one year
anniversary of the date of grant, and 113,000 of the restricted stock units
granted on October 17, 2007 were scheduled to vest ratably on each of the first
and second anniversaries of the date of grant.  The underlying shares had
fair value of $41.25 and $41.50 per share with respect to the August 7, 2007 and
October 17, 2007 grants, which represented the closing price of the stock on the
respective grant dates.
  The
Company records as stock-based compensation expense, the fair value of
restricted stock units awarded as of the grant date, ratably over the vesting
period.  The Company recognized non-cash stock-based compensation
expense amounting to $9.5, $11.3 and $6.5 for the years ended December 31,
2009, 2008 and 2007 respectively, with respect to restricted stock units
awarded, which had the effect of decreasing net income by $0.40 per basic common
share and by $0.37 per diluted common share for the year ended December 31,
2009, $0.51 per basic common share and by $0.46 per diluted common share for the
year ended December 31, 2008, and $0.30 per basic common share and $0.27 per
diluted common share for the year ended December 31, 2007.
  90
  ABOVENET,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (in
millions, except share and per share information)
 
 The
following schedule summarizes the activity for the Company’s “Restricted Stock
Units” for the periods presented.
  Number of
                      Restricted
                      Stock Units
                    
                    
                    Weighted Average
                      Grant Date Fair
                      Market ValueBalance
      as of January 1, 2007
                    
                    
                    775,188
                    
                    
                    $
                    13.31Granted
                    
                    
                    323,000
                    
                    
                    $
                    41.34Issued
                    
                    
                    (621,438
                    )
                    
                    $
                    12..03Forfeited
                    
                    
                    (17,000
                    )
                    
                    $
                    22.25Balance
      as of December 31, 2007
                    
                    
                    459,750
                    
                    
                    $
                    34.42Granted
                    
                    
                    744,200
                    
                    
                    $
                    28.99Issued
                    
                    
                    (175,250
                    )
                    
                    $
                    25.07Forfeited
                    
                    
                    (12,000
                    )
                    
                    $
                    41.50Balance
      as of December 31, 2008
                    
                    
                    1,016,700
                    
                    
                    $
                    31.65Granted
                    
                    
                    182,700
                    
                    
                    $
                    53.90Issued
                    
                    
                    (584,362
                    )
                    
                    $
                    34.35Forfeited
                    
                    
                    (2,666
                    )
                    
                    $
                    30.00Balance
      as of December 31, 2009
                    
                    
                    612,372
                    
                    
                    $
                    36.29
 
 The above
table excludes restricted stock units granted to Mr. LaPerch, the President and
Chief Executive Officer of the Company,which may vest up to an
additional 14,000 restricted stock units in each of 2010, 2011 and 2012 based
upon the achievement of certain performance targets in 2009, 2010 and
2011.
 
 At
December 31, 2009, the Company had $21.0 of unearned stock-based
compensation expense associated with the vesting of the outstanding restricted
stock unit awards, which is expected to be recognized in 2010 and 2011
(excluding the 28,000 restricted stock units granted to Mr. LaPerch described
above).
 
 NOTE
13:   EMPLOYMENT CONTRACT TERMINATION
  On March
4, 2008, the employment contract of Michael A. Doris, the Company’s former
Senior Vice President and Chief Financial Officer, was modified and then
terminated.  Pursuant to the modification, the Company paid Mr. Doris
upon termination (i) $0.3; (ii) all salary and bonuses earned but not
yet paid; (iii) all accrued and unused paid time off days; and (iv) health
and welfare benefits for eighteen (18) months, and executed and delivered a
consulting agreement with Mr. Doris.  The consulting agreement
provided that in exchange for Mr. Doris’ provision of consulting services to the
Company for a period of nine months, Mr. Doris was to be paid (i) his
annual salary of $0.3, pro rated per week for nine months; and (ii) (a) a bonus
of $0.05 (the “2006 Filing Bonus”) upon the filing with the SEC of
Form 10-K with respect to the Company’s fiscal year ended December 31,
2006 and (b) a bonus of $0.05 (the “2007 Filing Bonus”) upon the filing
with the SEC of Form 10-K with respect to the Company’s fiscal year ended
December 31, 2007.  In addition, Mr. Doris’ stock unit agreement
dated as of August 7, 2007 was amended to provide that (i) the shares
underlying the 10,000 restricted stock units (which became vested upon his
termination without cause) be delivered to Mr. Doris on January 5, 2009;
and (ii) the Company repurchase at the then market price such number of
shares as required to meet the Company’s estimate of Mr. Doris’ federal and
state income taxes due with respect to the delivery of the restricted stock
units.  The aggregate value of the benefits delivered to Mr. Doris
(including the value of restricted stock units that vested in accordance with
their terms) was $1.6, of which $1.2 was recognized in selling, general and
administrative expenses in 2008.  Additionally, the Company recorded
additional non-cash stock-based compensation expense of $0.7 relating to the
modification of his options to purchase common shares in connection with the
modification and termination of Mr. Doris’ employment
agreement.
  91
  ABOVENET,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (in
millions, except share and per share information)
 
 NOTE
14: OTHER INCOME (EXPENSE), NET
 
 Other
income (expense), net consists of the following:
 
 Years Ended December 31,2009
                        
                        
                        2008
                        
                        
                        2007Gain
      on settlement or reversal of liabilities (*)
                        
                        $
                        2.9
                        
                        
                        $
                        2.8
                        
                        
                        $
                        2.2Gain
      on legal settlement
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        0.6Recovery
      of occupancy taxes previously paid
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        0.5Gain
      (loss) on foreign currency
                        
                        
                        1.9
                        
                        
                        
                        (6.5
                        )
                        
                        
                        0.3(Loss)
      gain on sale or disposition of property and equipment
                        
                        
                        (1.3
                        )
                        
                        
                        0.9
                        
                        
                        
                        (0.5
                        )Gain
      on leased asset termination
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        0.3Other
                        
                        
                        0.1
                        
                        
                        
                        0.4
                        
                        
                        
                        0.4Total
                        
                        $
                        3.6
                        
                        
                        $
                        (2.4
                        )
                        
                        $
                        3.8
 
 (*)
              Represents
      the reversal of certain transaction tax liabilities resulting primarily
      from the expiration of statute of limitations and in 2007, settlements
      with certain taxing authorities.
 
 NOTE
15: COMMITMENTS AND CONTINGENCIES
 
 The
Company has commitments under various non-cancelable operating leases for office
and equipment space, equipment rentals, right-of-way contracts, building access
and franchise fees and network capacity contracts with terms expiring through
2026.  The Company has various sublet arrangements with third
parties.  Estimated future payments, net of receipts with respect to
these contractual obligations are as follows:
  2010
                    
                    $
                    57.62011
                    
                    35.92012
                    
                    27.22013
                    
                    22.62014
                    
                    19.7Thereafter
                    
                    109.0Total
                    
                    $
                    272.0
 
 The
expenses incurred for the above described obligations for the years ended
December 31, 2009, 2008 and 2007 operations were $33.2, $30.3, and $30.5,
respectively, which is net of sublease receipts of $2.2, $2.4 and $1.9 for the
years ended December 31, 2009, 2008 and 2007, respectively.  The
rental expense reflected is also net of the amortization of deferred fair value
rent liability, which represents the difference between the present value of the
contractual obligations under the leases in place as of the fresh start date and
the fair market value of such obligations.  The Company recorded $1.2,
$1.5 and $1.6 in the years ended December 31, 2009, 2008 and 2007,
respectively, as reductions to rent expense in continuing
operations.  At December 31, 2009 and 2008, the deferred fair
value rent liability was $2.1 and $2.9, respectively, of which $0.8 and $1.2,
respectively, are included in accrued expenses and $1.3 and $1.7, respectively,
are included in other long-term liabilities on the related consolidated balance
sheets.
  At
December 31, 2009, the Company had commitments for customer build-outs and
infrastructure totaling $16.7.
  92
  ABOVENET,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (in
millions, except share and per share information)
 
 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.
 
 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.
  93
  ABOVENET,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (in
millions, except share and per share information)
 
 NOTE
16:  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.  We recorded a loss on litigation of $11.7 at December 31,
2007, of which $0.8 was paid in 2007 and $10.9 was included in accrued expenses
on the consolidated balance sheet at December 31, 2007, of which $8.5 was paid
in 2008, $0.7 was paid in 2009 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.
 
 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.
  94
  ABOVENET,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (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 termination revenue for the year ended December 31,
2008.
 
 Telekenex
  In May
2008, Telekenex, Inc. (“Telekenex”), a customer, filed a complaint against the
Company in the San Francisco County Superior Court alleging that the Company
failed to deliver to Telekenex fiber optic capacity under a certain ten year
contract between Telekenex and the Company.  Telekenex asserted in the
complaint that it is entitled to such fiber optic capacity and unspecified
damages.  On September 29, 2008, the Company signed a settlement with
Telekenex pursuant to which the Company agreed to pay $0.35 and provide
Telekenex additional fiber access in order to resolve the
dispute.  Such amount was paid in October 2008.  Pursuant to
the settlement agreement, the parties released each other from any claims
related to the dispute and Telekenex dismissed the complaint.  In
December 2008, the Company recovered the entire amount under its insurance
policy.
 
 SEC
Investigation
  The SEC
initiated a formal investigation of MFN (the pre-bankruptcy emergence
predecessor to the Company) in June 2002.  On December 15,
2006, the Company received a “Wells” notice from the SEC staff in connection
with such investigation indicating that the SEC staff was considering
recommending that the SEC bring a civil injunctive action against the Company
alleging that the Company violated various provisions of the federal securities
laws.  In response to the Wells notice, the Company provided the SEC
with a written submission setting forth reasons why the Company believed that a
civil injunctive action should not be authorized by the SEC.  On
March 19, 2007 the Company received a notice from the SEC staff stating
that the investigation of MFN has been terminated and that no enforcement action
has been recommended to the SEC.  Such notice was provided to the
Company under the guidelines of the final paragraph of Securities Act Release
No. 5310 which states, among other things, that “[such notice] must in no
way be construed as indicating that the party has been exonerated or that no
action may ultimately result from the staff’s investigation of that particular
matter.  All that such a communication means is that the staff has
completed its investigation and that at that time no enforcement action has been
recommended to the SEC.”
 
 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.
  95
 ABOVENET,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (in
millions, except share and per share information)
 
 NOTE
17:  RELATED PARTY TRANSACTIONS
 
 A member
of the Company’s Board of Directors 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 the
telecommunications company in the amount of $0.35 in the year ended December 31,
2009 and $0.3 in both 2008 and 2007.  No related accounts receivable
were outstanding at each of December 31, 2009 and 2008.  All
activity between the parties was 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.
 
 NOTE
18:  SEGMENT REPORTING
 
 SFAS
No. 131, “Disclosures about Segments of an Enterprise and Related
Information,” 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
our revenue based on the location of our 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:
 
 Years
      Ended December 31,2009
                    
                    
                    2008
                    
                    
                    2007RevenueUnited
      States
                    
                    $
                    328.0
                    
                    
                    $
                    288.5
                    
                    
                    $
                    227.8United
      Kingdom
                    
                    
                    35.8
                    
                    
                    
                    36.1
                    
                    
                    
                    29.4Other
                    
                    
                    0.1
                    
                    
                    
                    —
                    
                    
                    
                    —Eliminations
                    
                    
                    (3.8
                    )
                    
                    
                    (4.7
                    )
                    
                    
                    (3.6
                    )Consolidated
      Worldwide
                    
                    $
                    360.1
                    
                    
                    $
                    319.9
                    
                    
                    $
                    253.6
 
 December 31,2009
                    
                    
                    2008Long-lived
      assetsUnited
      States
                    
                    $
                    440.8
                    
                    
                    $
                    374.5United
      Kingdom
                    
                    
                    28.3
                    
                    
                    
                    23.8Other
                    
                    
                    —
                    
                    
                    
                    0.1Consolidated
      Worldwide
                    
                    $
                    469.1
                    
                    
                    $
                    398.4
  96
  ABOVENET,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (in
millions, except share and per share information)
 
 NOTE
19: QUARTERLY FINANCIAL DATA (UNAUDITED)
 
 The
following table present the unaudited quarterly results for the year ended
December 31, 2009.
 2009 Quarter EndedMarch 31
                                                                                        
                                                                                        June 30
                                                                                        
                                                                                        September 30
                                                                                        
                                                                                        December 31Revenue
                                                                                        
                                                                                        $
                                                                                        85.4
                                                                                        
                                                                                        
                                                                                        $
                                                                                        88.0
                                                                                        
                                                                                        
                                                                                        $
                                                                                        92.4
                                                                                        
                                                                                        
                                                                                        $
                                                                                        94.3Costs
      of revenue
                                                                                        
                                                                                        
                                                                                        29.4
                                                                                        
                                                                                        
                                                                                        
                                                                                        32.3
                                                                                        (1)
                                                                                        
                                                                                        
                                                                                        33.9
                                                                                        (2)
                                                                                        
                                                                                        
                                                                                        35.1
                                                                                        (3)Selling,
      general and administrative expenses
                                                                                        
                                                                                        
                                                                                        20.7
                                                                                        
                                                                                        
                                                                                        
                                                                                        20.1
                                                                                        
                                                                                        
                                                                                        
                                                                                        20.3
                                                                                        
                                                                                        
                                                                                        
                                                                                        21.4Depreciation
      and amortization
                                                                                        
                                                                                        
                                                                                        11.9
                                                                                        
                                                                                        
                                                                                        
                                                                                        12.3
                                                                                        
                                                                                        
                                                                                        
                                                                                        13.5
                                                                                        
                                                                                        
                                                                                        
                                                                                        14.3Operating
      income
                                                                                        
                                                                                        
                                                                                        23.4
                                                                                        
                                                                                        
                                                                                        
                                                                                        23.3
                                                                                        
                                                                                        
                                                                                        
                                                                                        24.7
                                                                                        
                                                                                        
                                                                                        
                                                                                        23.5Other
      income (expense):Interest
      income
                                                                                        
                                                                                        
                                                                                        0.2
                                                                                        
                                                                                        
                                                                                        
                                                                                        0.1
                                                                                        
                                                                                        
                                                                                        
                                                                                        —
                                                                                        
                                                                                        
                                                                                        
                                                                                        —Interest
      expense
                                                                                        
                                                                                        
                                                                                        (1.2
                                                                                        )
                                                                                        
                                                                                        
                                                                                        (1.1
                                                                                        )
                                                                                        
                                                                                        
                                                                                        (1.3
                                                                                        )
                                                                                        
                                                                                        
                                                                                        (1.2
                                                                                        )Other
      income (expense), net
                                                                                        
                                                                                        
                                                                                        (0.1
                                                                                        )
                                                                                        
                                                                                        
                                                                                        2.5
                                                                                        
                                                                                        
                                                                                        
                                                                                        (0.5
                                                                                        )
                                                                                        
                                                                                        
                                                                                        1.7Income
      before income taxes
                                                                                        
                                                                                        
                                                                                        22.3
                                                                                        
                                                                                        
                                                                                        
                                                                                        24.8
                                                                                        
                                                                                        
                                                                                        
                                                                                        22.9
                                                                                        
                                                                                        
                                                                                        
                                                                                        24.0(Benefit
      from) provision for income taxes
                                                                                        
                                                                                        
                                                                                        (5.1
                                                                                        )
                                                                                        
                                                                                        
                                                                                        0.2
                                                                                        
                                                                                        
                                                                                        
                                                                                        0.2
                                                                                        
                                                                                        
                                                                                        
                                                                                        (182.9
                                                                                        )(4)Net
      income
                                                                                        
                                                                                        $
                                                                                        27.4
                                                                                        
                                                                                        
                                                                                        $
                                                                                        24.6
                                                                                        
                                                                                        
                                                                                        $
                                                                                        22.7
                                                                                        
                                                                                        
                                                                                        $
                                                                                        206.9Basic
      net income per share
                                                                                        
                                                                                        $
                                                                                        1.19
                                                                                        
                                                                                        
                                                                                        $
                                                                                        1.07
                                                                                        
                                                                                        
                                                                                        $
                                                                                        0.96
                                                                                        
                                                                                        
                                                                                        $
                                                                                        8.43Weighted
      average number of common shares
                                                                                        
                                                                                        
                                                                                        22,922,284
                                                                                        
                                                                                        
                                                                                        
                                                                                        23,026,298
                                                                                        
                                                                                        
                                                                                        
                                                                                        23,500,655
                                                                                        
                                                                                        
                                                                                        
                                                                                        24,549,240Diluted
      net income per share
                                                                                        
                                                                                        $
                                                                                        1.11
                                                                                        
                                                                                        
                                                                                        $
                                                                                        0.97
                                                                                        
                                                                                        
                                                                                        $
                                                                                        0.88
                                                                                        
                                                                                        
                                                                                        $
                                                                                        7.96Weighted
      average number of common shares
                                                                                        
                                                                                        
                                                                                        24,613,712
                                                                                        
                                                                                        
                                                                                        
                                                                                        25,227,006
                                                                                        
                                                                                        
                                                                                        
                                                                                        25,612,176
                                                                                        
                                                                                        
                                                                                        
                                                                                        25,994,937
  Fluctuations
in revenue reported by period were impacted by contract termination revenue
recognized by quarter as follows:
 Quarter
      ended March 31, 2009
                    
                    $
                    1.9Quarter
      ended June 30, 2009
                    
                    $
                    0.8Quarter
      ended September 30, 2009
                    
                    $
                    0.3Quarter
      ended December 31, 2009
                    
                    $
                    0.9
  (1)
              Includes
      provision for equipment impairment of
$0.5.
 
 (2)
              Includes
      provision for equipment impairment of
$0.4.
 
 (3)
              Includes
      provision for equipment impairment of
$0.3.
 
 (4)
              Includes
      the recognition of $183.0 of non-cash tax benefits resulting from the
      reduction of certain valuation allowances previously established with
      respect to deferred tax assets in the U.S. and the
  U.K.
  97
  ABOVENET,
INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (in
millions, except share and per share information)
 
 NOTE
19: QUARTERLY FINANCIAL DATA (UNAUDITED) (Cont’d)
 
 The
following table present the unaudited quarterly results for the year ended
December 31, 2008.
  2008
      Quarter EndedMarch 31
                        
                        June 30
                        
                        September 30
                        
                        December 31Revenue
                        
                        $
                        70.9
                        
                        
                        $
                        77.1
                        
                        
                        $
                        82.1
                        
                        
                        $
                        89.8Costs
      of revenue
                        
                        
                        30.8
                        
                        
                        
                        31.6
                        
                        
                        
                        32.1
                        (3)
      (4)
                        
                        
                        31.5Selling,
      general and administrative expenses
                        
                        
                        24.8
                        (1)
                        
                        
                        21.1
                        (2)
                        
                        
                        22.9
                        (5)
                        
                        
                        21.7Depreciation
      and amortization
                        
                        
                        12.6
                        
                        
                        
                        12.2
                        
                        
                        
                        12.2
                        
                        
                        
                        11.3
                        (6)Operating
      income
                        
                        
                        2.7
                        
                        
                        
                        12.2
                        
                        
                        
                        14.9
                        
                        
                        
                        25.3Other
      income (expense):Interest
      income
                        
                        
                        0.5
                        
                        
                        
                        0.4
                        
                        
                        
                        0.5
                        
                        
                        
                        0.4Interest
      expense
                        
                        
                        (0.7
                        )
                        
                        
                        (0.9
                        )
                        
                        
                        (1.1
                        )
                        
                        
                        (1.2
                        )Other
      income (expense), net
                        
                        
                        1.5
                        
                        
                        
                        —
                        
                        
                        
                        (2.0
                        )
                        
                        
                        (1.9
                        )Income
      before income taxes
                        
                        
                        4.0
                        
                        
                        
                        11.7
                        
                        
                        
                        12.3
                        
                        
                        
                        22.6Provision
      for income taxes
                        
                        
                        0.6
                        
                        
                        
                        0.5
                        
                        
                        
                        1.9
                        
                        
                        
                        5.3Net
      income
                        
                        $
                        3.4
                        
                        
                        $
                        11.2
                        
                        
                        $
                        10.4
                        
                        
                        $
                        17.3Basic
      net income per share
                        
                        $
                        0.16
                        
                        
                        $
                        0.52
                        
                        
                        $
                        0.47
                        
                        
                        $
                        0.76Weighted
      average number of common shares
                        
                        
                        21,445,950
                        
                        
                        
                        21,482,624
                        
                        
                        
                        22,068,514
                        
                        
                        
                        22,937,434Diluted
      net income per share
                        
                        $
                        0.14
                        
                        
                        $
                        0.46
                        
                        
                        $
                        0.42
                        
                        
                        $
                        0.71Weighted
      average number of common shares
                        
                        
                        24,476,996
                        
                        
                        
                        24,290,390
                        
                        
                        
                        24,465,230
                        
                        
                        
                        24,604,984
 
 Fluctuations
in revenue reported by period were impacted by contract termination revenue
recognized by quarter as follows:
 Quarter
      ended March 31, 2008
                    
                    $
                    0.3Quarter
      ended June 30, 2008
                    
                    $
                    2.0Quarter
      ended September 30, 2008
                    
                    $
                    4.4Quarter
      ended December 31, 2008
                    
                    $
                    8.7
 
 (1)
              Included
      in selling, general and administrative expenses in the three months ended
      March 31, 2008 was non-cash compensation expense of $0.7 associated with
      the modification of a certain stock option agreement, non-cash
      compensation of $0.5 associated with the acceleration of the vesting of
      options granted to Mr. Doris and $0.7 of severance related expenses
      associated with the modification and termination of his employment
      agreement.  (See Note 13, “Employment Contract
      Termination.”)
 
 (2)
              Included
      in selling, general and administrative expenses in the three months ended
      June 30, 2008 was non-cash compensation expense of $0.8 associated with
      the repurchase of shares in excess of minimum tax withholding
      requirements.
 
 (3)
              Includes
      a charge for lease termination of
$0.7.
 
 (4)
              Includes
      the reversal of certain right-of-way obligations, which were reduced
      pursuant to a negotiated settlement totaling
  $0.5.
 
 (5)
              Included
      in selling, general and administrative expenses in the three months ended
      September 30, 2008 was an impairment charge of $2.3 with respect to the
      abandonment of an information technology
  platform.
 
 (6)
              Depreciation
      expense decreased in the three months ended December 31, 2008 compared to
      the three months ended September 30, 2008 because certain assets,
      principally inventory, became fully depreciated in the three months ended
      September 30, 2008.
  98
  ITEM 9.  CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
 
 Not
applicable.
 
 ITEM
9A. CONTROLS AND PROCEDURES
 
 Evaluation
of Disclosure Controls and Procedures
  As of
December 31, 2009, 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 our
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 December 31, 2009 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 its 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. Currently,
the Company operates several systems that produce financial information. The
Company is evaluating methods to integrate processes and systems for better
information flow.
 
 Management’s
Report on Internal Control Over Financial Reporting
  The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control
over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external reporting purposes in accordance with
accounting principles generally accepted in the United States of America.
Internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the Company; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the Company are being made only in accordance with authorizations of management
and directors of the Company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the Company’s assets that could have a material effect on the interim or
annual consolidated financial statements.
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect all misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
  99
 
 A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the Company’s annual or interim financial
statements will not be prevented or detected on a timely basis. Material
weaknesses have been identified as of December 31, 2008 related to entity level
controls, financial close and financial statement reporting, income taxes,
property and equipment and inventory processes.
  Management
conducted an evaluation of the effectiveness of the Company’s internal control
over financial reporting as of December 31, 2009. In performing its assessment
of the effectiveness of the Company’s internal control over financial reporting,
management applied the criteria described in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”). Based on this assessment, management has concluded that the
Company’s internal control over financial reporting was effective as of December
31, 2009. The Company’s independent registered public accounting firm, BDO
Seidman, LLP, has audited the effectiveness of our internal control over
financial reporting, and has issued an attestation report below that reflects an
unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2009.
 
 Changes
in Internal Control Over Financial Reporting
  As
discussed above, the Company continued to develop and refine its controls at the
entity level, controls over financial close and financial statement reporting,
income taxes, property and equipment and inventory processes.  The
operating effectiveness and design of the controls were tested throughout the
year by the Company’s management and in the fourth quarter of 2009, by the
Company’s independent registered public accountants as part of their integrated
audit of the consolidated financial statements.  Both the Company’s
management and the independent registered public accountants concluded that
the controls were now effectively operating.  As such, the material
weaknesses described above had been remediated.
  100
  Report
of Independent Registered Public Accounting Firm
 
 The
Board of Directors and Shareholders of
 AboveNet,
Inc.
 White
Plains, New York
 
 We have
audited AboveNet, Inc.’s (the “Company”) internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal Control - Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). AboveNet, Inc.’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying “Management’s Report on Internal Control
Over Financial Reporting” in Item 9A. Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on our
audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
 
 A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
 
 In our
opinion, AboveNet, Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2009, based on the COSO
criteria.
 
 We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets as of December
31, 2009 and 2008, and the related consolidated statements of operations,
shareholders’ equity, cash flows and comprehensive income for each of the three
years in the period ended December 31, 2009 and our report dated March 16, 2010,
expressed an unqualified opinion thereon.
 
 /s/ BDO
Seidman, LLP
  New York,
NY
 March 16,
2010
 
 ITEM
9B. OTHER INFORMATION
  Not
applicable.
  101
  PART
III
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE
  Directors
  Set forth
below are the names of the persons who are our directors, their ages and
respective business backgrounds, including directorships of other public
companies, as well as the specific experiences, qualifications, attributes and
skills that have led the Board to determine that such Board members should serve
on the Board of Directors:
 
 Jeffrey
A. Brodsky
  Mr.
Brodsky, 51, has been a member of the Company’s Board of Directors since
September 2003 and has been Chairman of the Audit Committee since that date. He
became non-executive Chairman of the Board in December 2005. He is currently
leading Quest Turnaround Advisors, L.L.C. (“Quest”) in its role as Plan
Administrator of Adelphia Communications Corporation and is also Chairman,
President and Chief Executive Officer of PTV, Inc. Mr. Brodsky co-founded Quest,
a financial advisory and restructuring firm in Purchase, NY in 2000 and has been
a Managing Director there since that time. Mr. Brodsky holds a Bachelor’s degree
from New York University College of Business and Public Administration, and a
Master’s degree from its Graduate School of Business. He is a Certified Public
Accountant. Mr. Brodsky is currently a Director of PTV, Inc., TVMAX, Inc., Motor
Coach Industries International, Inc. and Euramax International, Inc. Mr.
Brodsky’s significant experience in the areas of accounting and finance and
general business matters as well as his past experience with us are important to
the Board’s ability to review our financial statements, assess potential
financings and strategies and otherwise supervise and evaluate our business
decisions.
 
 Michael
J. Embler
  Mr.
Embler, 45, has been a member of the Board of Directors since September 2003 and
is a member of the Governance and Nominating Committee. From 2005 until May
2009, Mr. Embler served as the Senior Vice President and Chief Investment
Officer at Franklin Mutual Advisers, LLC (“FMA”), a firm he joined in 2001 as
Vice President. Funds managed by FMA collectively are the Company’s largest
stockholder. From 1992 to 2001, Mr. Embler served in various management
positions with Nomura Holding America, Inc., most recently as Managing Director.
Mr. Embler currently serves as a director of CIT Group Inc., a publicly-traded
company. Mr. Embler has previously served as a Director of Kindred Healthcare,
Inc. from 2001 to 2008 and Grand Union Company, both publicly-traded companies,
and several private companies. Mr. Embler holds a Bachelor’s degree from the
State University of New York at Albany and a Master of Business Administration
from George Washington University. Mr. Embler’s significant experience with
respect to finance, investing and general business matters as well as his past
experience with us are important to the Board’s ability to review our financial
statements and our investor communications, assess potential financings and
strategies and otherwise supervise and evaluate our business
decisions.
 
 Richard
Postma
  Mr.
Postma, 59, has been a member of the Board of Directors since September 2003 and
is a member of the Audit Committee, the Compensation Committee and the Strategy
Committee. Mr. Postma has been the Co-Chairman and Chief Executive Officer of US
Signal Company LLC, since the time he co-founded it in 2000. He also currently
serves as Chairman of Turnkey Network Solutions LLC, Littlefield Group, Inc.,
R.T. London, Inc., P&V Capital Holdings, LLC, and RVP Development
Corporation. Since November 2009, Mr. Postma has served as the Chairman of
Macatawa Bank Corporation. Mr. Postma has also served as Co-Chairman and Chief
Executive Officer of US Xchange, LLC, and has previously served on the Board of
Directors and Audit Committee of Choice One Communications, Inc. (NASDAQ). From
1983 to 1996, Mr. Postma served as General Counsel to Teledial America, Inc.,
Teledial America of North Carolina, Digital Signal, Inc., City Signal, Inc., and
US Signal. Prior to this, Mr. Postma was a Partner in the Grand Rapids, Michigan
law firm of Miller, Johnson, Snell and Cummiskey, P.L.C., where he spent 15
years. Mr. Postma is a graduate of Calvin College and the University of Michigan
Law School. Mr. Postma’s significant experience with respect to law,
telecommunications and general business matters as well as his past experience
with us are important to the Board’s ability to evaluate our product and service
offerings, assess potential financings and strategies and otherwise supervise
and evaluate our business decisions.
  102
  Richard
Shorten, Jr.
  Mr.
Shorten, 42, has been a member of the Board of Directors since September 2003
and is a member of the Audit Committee, the Compensation Committee, and serves
as the Chairman of the Governance and Nominating Committee and the Strategy
Committee. Mr. Shorten owns and operates Power Play Solar, LLC, a development
company providing solar solutions in the U.S. He is also the Managing Director
of Silvermine Capital Resources, LLC, a firm that he founded in 2001 to
originate, structure and manage private investment transactions for hedge funds.
Mr. Shorten is also a member of the Board of Directors of Enterprise
Informatics, Inc. (where he currently also serves as President during the
wind-down of the company’s activities), Infinia Corporation and Movie Gallery,
Inc. and previously served as a member of the Board of Directors of First Avenue
Networks, Inc. from December 2001 through August 2006, and Mpower Holding
Corporation from July 2002 to February 2006. From 2000 to 2001, Mr. Shorten was
Executive Vice President and Director of Graphnet, Inc., where he had
broad-based operating responsibilities for development, finance, marketing,
legal affairs and human resources. From 1997 to 2000, he was with Destia
Communications and its acquirer, Viatel, Inc., where Mr. Shorten was appointed
Senior Vice President, Data Services. Mr. Shorten received a Juris Doctorate
degree, with honors, from Rutgers Law School and holds a Bachelor of Arts degree
from Colgate University. Mr. Shorten’s significant experience with respect to
law, telecommunications and general business matters as well as his past
experience with us are important to the Board’s ability to evaluate our product
and service offerings, assess potential financings and strategies and otherwise
supervise and evaluate our business decisions.
 
 Stuart
Subotnick
  Mr.
Subotnick, 67, has been a member of the Board of Directors since 1997 and is
Chairman of the Compensation Committee and a member of the Strategy Committee.
Since 1986, Mr. Subotnick has been a General Partner, Executive Vice President
of Metromedia Company, a management and investment company. Mr. Subotnick
started with Metromedia Inc., a predecessor of Metromedia Company, as a tax
attorney in 1967, and spent two decades in various management roles, becoming
Chief Financial Officer in 1981 and Senior Vice President of Finance and
Administration in 1983. Since 1981, Mr. Subotnick has been responsible for
negotiating all of the major Metromedia corporate transactions, including the
sale of certain of Metromedia divisions. Mr. Subotnick is also the lead Director
of Carnival Corporation and is a Director of both the Shubert Organization and
Conair Corporation. He served as a member of the Board of Directors of
Metromedia International Group, Inc. from the mid-1990s until 2007. He is
Chairman of the Board of Trustees of Brooklyn Law School and a member of the
Board of Baruch College (CUNY). Mr. Subotnick also serves as a Vice Chair of the
New York Racing Association. Mr. Subotnick earned a Bachelor of Business
Administration degree from Baruch College, a Master of Law degree from Brooklyn
Law School and a Juris Doctorate degree from New York University. Mr.
Subotnick’s significant experience with respect to finance, investing and
general business matters, as well as his past experience with us are important
to the Board’s ability to review our investor communications, assess potential
financings and strategies and otherwise supervise and evaluate our business
decisions.
 
 William
G. LaPerch
  Mr.
LaPerch, 54, has been the President and Chief Executive Officer and a member of
the Board of Directors of the Company since March 2004. From 1999 to March 2004,
Mr. LaPerch served in various executive positions relating to the Company’s
operations. From 1989 to 1999, Mr. LaPerch served as Vice President of Network
Services for MCI where he managed that company’s local, long distance, data and
Internet networks. Previously, Mr. LaPerch held executive positions at NYNEX.
Mr. LaPerch is a graduate of the United States Military Academy at West Point,
where he earned a Bachelor of Science degree in Engineering. Mr. LaPerch also
received a Master of Business Administration from Columbia University. Mr.
LaPerch’s experience and his role as our President and CEO enable him to play an
important role as a member of the Board of Directors.
 
 There are
no family relationships among any of our directors or the executive
officers.
  103
  Executive
Officers
  The
following table sets forth the name, age and position of each of our executive
officers as of March 1, 2010. Our executive officers are appointed by and serve
at the discretion of the Company’s Board of Directors.
  Name
              
              Age
              
              PositionWilliam
      G. LaPerch
              
              54
              
              President
      and Chief Executive Officer, and DirectorJoseph
      P. Ciavarella
              
              54
              
              Senior
      Vice President and Chief Financial OfficerRobert
      Sokota
              
              46
              
              Senior
      Vice President, General Counsel, Chief Administrative Officer and
      SecretaryRajiv
      Datta
              
              39
              
              Senior
      Vice President and Chief Technology OfficerJohn
      Jacquay
              
              57
              
              Senior
      Vice President, Sales and MarketingDouglas
      Jendras
              
              42
              
              Senior
      Vice President, Operations
  Information
about Mr. LaPerch is set forth above in this Item 10 under “Directors.” The
background information of our other executive officers is set forth
below.
 
 Robert
Sokota
  Mr.
Sokota, 46, is currently the Senior Vice President, General Counsel, Chief
Administrative Officer and Secretary, overseeing and advising on all of the
Company’s legal and contractual issues and negotiations.  He became
the Senior Vice President, General Counsel and Secretary in January 2001 and the
Chief Administrative Officer in 2004.  He originally joined the
Company in January 2000 as Vice President, Legal.  Prior to joining
the Company, Mr. Sokota was Vice President of the legal department for
Metromedia International Telecommunications, Inc.  He also worked as
an associate with the firm Steptoe & Johnson in Washington, D.C. from 1989
to 1994.  Mr. Sokota holds a Juris Doctorate degree from the
University of Chicago and a Bachelor of Arts degree from George Washington
University.
 
 Rajiv
Datta
  Mr.
Datta, 39, joined the Company in 1998 and has served in a number of significant
technical and engineering positions for the Company becoming Vice President in
2002.  Mr. Datta was promoted to Senior Vice President and Chief
Technology Officer in May 2004, a role in which he oversees all aspects of
Engineering, IT and Product Development activities across our metro, long haul
and IP networks.  Prior to joining the Company, Mr. Datta held various
engineering and development positions at Alcatel Telecommunications Cable in
North Carolina and at Alcatel’s Optical Fiber Competency Center near Paris,
France.  Mr. Datta holds a Bachelor of Science degree and a Master of
Science degree in Engineering from Rutgers University and is a member of Tau
Beta Pi, the National Engineering Honors Society.
 
 John
Jacquay
  Mr.
Jacquay, 57, joined the Company in 2004 as Senior Vice President, Sales and
Marketing.  From February 2002 to June 2004, Mr. Jacquay was the
President of National Sales at XO Communications.  Prior to joining XO
Communications, Mr. Jacquay was Chairman and Chief Executive Officer of Pagoo, a
Silicon Valley VOIP start-up.  From 1985 to 1996, Mr. Jacquay was in
charge of various regional and national sales organizations of MCI
Telecommunications.  From 1974 to 1985, Mr. Jacquay held various
leadership positions in finance and sales with GTE Corp.  Mr. Jacquay
holds undergraduate degrees in Finance and Accounting, as well as an MSBA in
Economics from Indiana University and is a Certified Public
Accountant.
 
 Douglas
Jendras
  Mr.
Jendras, 42, joined the Company in January 2000, became the Vice President,
Operations in July 2000 and was promoted to the position of Senior Vice
President, Operations in May 2004.  Mr. Jendras held various
management positions at MCI Telecommunications where he worked in operations and
business development from July 1991 to October 1999.  He earned his
Bachelor’s degree from the State University of New York at Albany and his Master
of Business Administration in Financial Management from Pace
University.
  104
  Joseph
P. Ciavarella
  Mr. Ciavarella,
54, was appointed as Acting Chief Financial Officer, effective March 4,
2008 and Senior Vice President and Chief Financial Officer effective October 27,
2008.  Mr. Ciavarella had been an independent consultant since
December 2006 and served as Vice President and Chief Financial Officer of
Langer, Inc., a provider of custom orthotic devices, related orthopedic and
skin care products, from February 2004 to November 2006.  From
August 2002 to February 2004, Mr. Ciavarella was the Chief
Financial Officer of New York Medical, Inc., a medical practice management
company and, from 1998 through July 2002, he was Senior Vice President -
Finance of Aviation Capital Group, an independent aircraft leasing and finance
company that became a subsidiary of Pacific Life Insurance
Company.  Prior to that, from 1994 to 1998, Mr. Ciavarella was Chief
Financial Officer in the alternative investment division of Painewebber, Inc.
and, from 1983 to 1993, was Corporate Vice President of Integrated Resources,
Inc. (and Chief Financial Officer of its equipment leasing and alternative
investment division).  He began his career at Touche Ross &
Company (Deloitte & Touche, LLP).  Mr. Ciavarella received a
Bachelor of Business Administration degree from Hofstra University, Hempstead,
New York, in 1977, and became a Certified Public Accountant in
1979.
 
 Director
and Executive Officer Involvement in Legal Proceedings
 
 Messrs. LaPerch
and Sokota served as President, Enterprise Services and Senior Vice President
and General Counsel, respectively, for Metromedia Fiber Network, Inc. at the
time that it filed for bankruptcy protection in May 2002.
 
 Corporate
Governance
  In
December 2005, the Board of Directors documented the governance practices to be
followed by the Company by adopting Corporate Governance Guidelines to promote
the functioning of the Board and its committees and set forth a common set of
expectations as to how the Board should perform its functions.  The
Corporate Governance Guidelines set forth the practices the Board intends to
follow with respect to, among other things, board composition and selection,
board meetings and involvement of senior management, and board committees and
director compensation.  The Corporate Governance Guidelines can be found
through the “Investors - Corporate Governance” section of our website
at www.above.net and
a printed copy will be provided to any shareholder upon request.
 
 The Board
of Directors and the committees of the Board of Directors met numerous times
during 2009.  The Board of Directors held 13 meetings in
2009.  The Company’s independent directors held regularly scheduled
executive sessions at which only independent directors were
present.  Meetings of the Board of Directors and executive sessions of
the Board are led by the Chairman of the Board, Jeffrey A.
Brodsky.  We believe each of our members of the Board of Directors is
qualified to serve on the Board of Directors based on their experience and
ability to bring different perspectives to the Company’s business as set forth
above.
 
 In 2009,
the Company had a standing Audit Committee, Compensation Committee, Governance
and Nominating Committee and Strategy Committee.  The Audit Committee
met eight times in 2009.  The Compensation Committee met three times
in 2009.  The Governance and Nominating Committee met once in
2009.  The Strategy Committee did not meet in 2009.  Each
director attended 75% or more of the meetings of the Board of Directors and the
committees on which he served.
  Each of
the existing committees, other than the Strategy Committee, operates pursuant to
a written charter, copies of which are available through the “About - Board of
Directors - Highlights” section of our website at www.above.net.A printed copy of the
charter of any of our Board committees will be provided to any shareholder upon
request.  The committees of the Board of Directors are described in
more detail below.
  The
Company has adopted a Code of Conduct that applies to all of our employees,
including our executive officers and directors.  Our Code of Conduct,
which satisfies the SEC requirements for a code of ethics, can be found through
the “About – Overview” section of our website at www.above.net.  A
printed copy of the Code of Conduct will be provided to any shareholder upon
request.  If a waiver of our Code of Conduct is granted to any of our
executive officers or directors, we will promptly disclose the amendment or
waiver on our website as required by SEC and New York Stock Exchange
rules.
  105
  Board
Leadership Structure and Role in Risk Oversight
 
 We
maintain a Board leadership structure that separates the positions of Chairman
of the Board of Directors from Chief Executive Officer.  By having
separate individuals serve as Chairman of the Board of Directors and Chief
Executive Officer, we believe that we provide for additional independence of and
oversight by the Board of Directors and enable our Chief Executive Officer to
focus his time and attention on the Company’s operations and strategic
direction.
 
 The Board
of Directors has general risk oversight responsibilities.  The Audit
Committee of the Board of Directors oversees risk issues with respect to our
financial reporting and accounting.  Our internal audit department,
which monitors our compliance with financial reporting and accounting risk
controls, reports to the Audit Committee.  The Board believes that its
structure enables it to effectively oversee risk management.
 
 Audit
Committee
  The Audit
Committee consists of Messrs. Brodsky (Chairman), Postma and Shorten, each of
whom satisfies the applicable independence and other qualification requirements
of the New York Stock Exchange corporate governance and SEC rules for serving on
an audit committee.  The Board has determined that Mr. Brodsky, the
Audit Committee’s Chairman, is an “audit committee financial expert” as defined
in the applicable SEC rules.  The primary purpose of the Audit
Committee is to assist the Board of Directors in fulfilling its responsibility
for the integrity of the Company’s financial reports.  The Audit
Committee also carries out other functions from time to time as assigned to it
by the Board.  The Audit Committee, or in some cases the Board,
reviews and approves related party transactions.
  In
carrying out its purpose, the goal of the Audit Committee is to serve as an
independent and objective monitor of the Company’s financial reporting process
and internal control systems, including the activities of the Company’s
independent auditors and internal audit function, and to provide an open avenue
of communication with the Board of Directors for, and among, the independent
auditor, internal audit operations and financial and executive
management.
 
 Report
of the Audit Committee
  Management
is responsible for the preparation of the Company’s financial statements and the
Company’s independent registered public accountants are responsible for auditing
those statements.  In connection with the preparation of the
December 31, 2009 financial statements, the Audit Committee
(i) reviewed and discussed the audited financial statements with
management; (ii) discussed with the independent registered public
accountants the matters required to be discussed under standards of the Public
Company Accounting Oversight Board (“PCAOB”), including Statement on Auditing
Standards No. 61 (as the same may be amended or supplemented); and
(iii) received the written report, disclosures and the letter from the
independent registered public accountants required by the PCAOB Rule 3526,
“Communication with Audit Committees Concerning Independence,” and the Audit
Committee has reviewed, evaluated and discussed with that firm the written
report and its independence from the Company.  The Audit Committee
also has discussed with management of the Company and the independent registered
public accountants such other matters and received such assurances from them as
the Audit Committee deemed appropriate.
  Based
upon these reviews and discussions, the Audit Committee recommended, and the
Board of Directors approved,  the inclusion of our audited financial
statements in this Annual Report on Form 10-K for the fiscal year ended
December 31, 2009, for filing with the SEC.
  THE AUDIT
COMMITTEE
 Jeffrey
A. Brodsky, Chairman
 Richard
Postma
 Richard
Shorten, Jr.
  106
  Compensation
Committee
  The
Compensation Committee consists of Messrs. Subotnick (Chairman), Postma and
Shorten, each of whom satisfies the independence and other qualification
requirements of New York Stock Exchange corporate governance
rules.  The Compensation Committee’s role is to establish and review
our overall compensation philosophy and policies and to approve the compensation
for the Company’s senior executive officers (including our executive officers
named in the Summary Compensation table set forth below (the “named executive
officers”)) and related matters.  In this regard, the Compensation
Committee approves the Company’s overall bonus plan, grants all equity
compensation and approves salary changes for senior executive
officers.  The Compensation Committee meets several times during the
year, and the Compensation Committee Chairman periodically reports on
Compensation Committee actions and recommendations at Board
meetings.  In addition, the Compensation Committee unofficially
conferred without the participation of management in executive session on a
number of occasions.  The Committee has the power to retain the
services of outside counsel, advisors, experts and others to assist the
Committee.
 
 The
Compensation Committee assists the Board in establishing compensation packages
for our executive officers and non-employee directors and administering our
incentive plans.  The Compensation Committee is generally responsible
for setting and administering the policies which govern annual executive
salaries, raises and bonuses and certain awards of stock options, restricted
stock awards and other awards under our incentive plans and
otherwise.
  Governance
and Nominating Committee
  The
Governance and Nominating Committee consists of Messrs. Shorten (Chairman) and
Embler, each of whom satisfies the independence requirements of the New York
Stock Exchange corporate governance rules.  The Governance and
Nominating Committee assists the Board in fulfilling its responsibility to the
stockholders by (i) identifying individuals qualified to serve as directors
and recommending that the Board support the selection of the nominees for all
directorships, whether such directorships are filled by the Board or the
stockholders, (ii) developing and recommending to the Board a set of
corporate governance guidelines and principles and (iii) recommending
improvements to the corporate governance process when necessary.
  The
Governance and Nominating Committee recommends to the Board for selection
candidates to the Board to serve as nominees for election as directors at the
annual meeting of stockholders.  The Board is responsible for filling
vacancies on the Board that may occur between annual meetings of
stockholders.  As part of its process, the Governance and Nominating
Committee will consider nominees proposed by stockholders of the
Company.  In considering possible candidates for election as a
director, the Governance and Nominating Committee is guided by the following
principles: (a) each director should be an individual of the highest character
and integrity; (b) each director should have substantial experience which is of
particular relevance to the Company, and the Board should encompass a broad
range of knowledge and expertise; (c) each director should have sufficient time
available to devote to the affairs of the Company; (d) each director should
represent the best interests of the stockholders as a whole rather than special
interest groups; (e) the size of the Board should facilitate substantive
discussions in which each director can participate meaningfully; (f) a majority
of the Board should consist of directors who are neither officers nor employees
of the Company or its subsidiaries (and have not been officers or employees
within the previous three years), do not have a relationship which, in the
opinion of the Board, would interfere with the exercise of independent judgment
in carrying out the responsibilities of a director, and who are otherwise
“independent” under the rules of the New York Stock Exchange as in effect from
time to time; and (g) such other factors as the Governance and Nominating
Committee determines appropriate.  In considering possible candidates
for election as a director, the Governance and Nominating Committee considers
diversity of business backgrounds to ensure that the Company is provided with
different perspectives from various professional backgrounds including directors
with experience in accounting, finance, law and
telecommunications.
  107
  Since our
emergence from bankruptcy protection in 2003, the Governance and Nominating
Committee has not nominated any new members to the Board of
Directors.  Upon the appointment of Mr. LaPerch to the position of
Chief Executive Officer in March 2004, the Board determined to appoint him to
the Board (taking the position of the prior Chief Executive Officer John
Gerdelman who resigned in December 2003).  Upon the resignation of
Dennis O’Connell from the Board in May 2006, the Board of Directors determined
that it was not necessary at that time to appoint another director to replace
Mr. O’Connell.  In May 2009, the Board of Directors reduced the number
of Board positions from seven to six.
 
 The
Governance and Nominating Committee will consider director candidates
recommended by stockholders.  The Governance and Nominating Committee
does not intend to alter the manner in which it evaluates candidates, including
the criteria set forth above, based on whether or not the candidate was
recommended by a stockholder.  Stockholders who wish to recommend
individuals for consideration by the Governance and Nominating Committee to
become nominees for election to the Board may do so by delivering a written
recommendation to the Governance and Nominating Committee at the following
address: AboveNet, Inc., c/o Secretary at 360 Hamilton Avenue, White Plains, NY
10601 at least 120 days prior to the anniversary date of the mailing of the
Company’s proxy statement for the last annual meeting of
stockholders.  Submissions must include the full name of the proposed
nominee, a description of the proposed nominee’s business experience for at
least the previous five years, complete biographical information, a description
of the proposed nominee’s qualifications as a director and a representation that
the nominating stockholder is a beneficial or record holder of the Company’s
stock and has been a holder for at least one year.  Any such
submission must be accompanied by the written consent of the proposed nominee to
be named as a nominee and to serve as a director if elected.
  Strategy
Committee
  The
Strategy Committee, which consists of Messrs. Shorten (Chairman), Postma and
Subotnick, was formed in September 2007.  The purpose of this
Committee is to provide assistance and advice to management on a number of
issues including Company strategy, financing and organization.
 
 Communications
with the Board of Directors
  Stockholders
and other interested persons may send communications to the Board of Directors,
including to any of our non-management directors, our Chairman or any committee
of the Board by writing to them at AboveNet, Inc., c/o Secretary at 360 Hamilton
Avenue, White Plains, NY 10601 or by sending an e-mail to shareholdercommunications@above.net.  The
Secretary will distribute all stockholder communications to the intended
recipients.
 
 SECTION
16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
  Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our directors
and executive officers and any persons who beneficially own more than 10% of our
common stock to file with the SEC (and, if such security is listed on a national
securities exchange, with such exchange), various reports as to ownership of
such common stock.  Such persons are required by SEC regulations to
furnish us with copies of all Section 16(a) forms they file.  Based
solely on our review of the copies of such reports and written representations
from certain reporting persons, the Company believes that during the fiscal year
ended December 31, 2009, all filings required by our executive officers,
directors and greater than 10% beneficial owners under Section 16(a) were timely
except that (i) Forms 4 for Messrs. Brodsky, Embler, Postma, Shorten and
Subotnick were not filed timely with respect to certain restricted stock unit
grants on December 3, 2009; (ii) a Form 4 for Mr. LaPerch was not filed timely
with respect to the exercise of options to purchase 1,600 shares of our common
stock on November 10, 2009; and (iii) Forms 4 for the York Group were not
filed timely with respect to certain shares in 2009.
  108
  ITEM 11.  EXECUTIVE
COMPENSATION
  Compensation
Discussion and Analysis
  Overview
  The goal
of our compensation program is to improve our financial and operational
performance and thereby increase value for our stockholders.  Our
compensation program is designed to provide certain fixed base salary
compensation, to provide variable compensation linked to measures of our
performance that contribute to increased value and to provide compensation in
the form of equity to align the interests of our employees with those of our
shareholders.  Our compensation program for employees takes into
account the following goals: enhancing shareholder value; enabling us to attract
and retain top quality employees; rewarding successful performance and providing
appropriate relative internal compensation balance among our
employees.
 
 Executive
Compensation Component Summary
  The major
components of compensation for the executive officers listed in the Summary
Compensation Table below (Messrs. LaPerch, Sokota, Jacquay, Datta, Jendras and
Ciavarella), who are referred to herein as the named executive officers, are
base salary, annual incentive bonuses and equity compensation.  We
believe that the compensation provided to our named executive officers is
reasonable and not excessive.
 
 In
setting 2009 compensation for the named executive officers, we have considered
many factors including the following:
 
 (1)
              our steadily improving
      performance in recent years, which we believe has and will result in
      increased value to our
shareholders;
 (2)
              the significant experience and
      industry knowledge of our named executive officers and the demonstrated
      quality and effectiveness of their leadership;
  and
 (3)
              a
      significant portion of the overall 2009 compensation was represented by
      variable, performance-based pay.
 
 We
believe that the current combination of annual salary, benefits, incentive cash
bonus, and equity compensationrepresents an appropriate
mix of both short-term and long-term compensation for realizing our goals for
compensation of the named executive officers.
 
 Roles
of the Compensation Committee and Management in the Compensation-Setting
Process
  Management
plays a significant role in the compensation-setting process for the named
executive officers (other than the Chief Executive Officer) by among other
things, making recommendations to the Compensation
Committee.  However, the Compensation Committee approves the
compensation for the named executive officers and retains complete discretion to
accept, reject or modify any management recommendations.  The most
significant contributions by management to the compensation process
are:
 
 ·
                evaluating employee
      performance;
 ·
              providing information to the
      Compensation Committee related to compensation to our
      employees;
 ·
              providing input regarding the
      accounting, tax and legal impact of our compensation
      policies;
 ·
              recommending business performance
      targets and objectives; and
 ·
              recommending
      salary levels, bonus amounts and equity
awards.
 
 Both the
Chief Executive Officer and the General Counsel work with the Compensation
Committee Chairman to set the agenda for Compensation Committee
meetings.  Management also prepares supplemental information for each
Compensation Committee meeting.  Other than in executive sessions of
the Compensation Committee, the Chief Executive Officer, General Counsel, the
Chief Financial Officer and the Assistant Secretary typically participate in the
meetings of the Compensation Committee.  With respect to employees
other than himself, the Chief Executive Officer often provides:
 
 ·
              background information regarding
      our objectives;
 ·
              his evaluation of the performance
      of our employees; and
 ·
              compensation
      recommendations for our
employees.
  109
 
 The
Compensation Committee has the authority to retain outside compensation
consultants to assist it in setting our compensation policies. In May 2008, the
Compensation Committee retained Strategic Apex Group, LLC to provide advice with
respect to certain compensation changes made in 2008. Other than providing such
services to the Compensation Committee in 2008, Strategic Apex Group, LLC has
not been retained to provide any other services to us.
 
 Setting
Named Executive Officer Compensation
  In
September 2008, the Company entered into new employment agreements with Mr.
LaPerch, President and Chief Executive Officer, Mr. Sokota, Senior
Vice-President, General Counsel, Secretary and Chief Administrative Officer, Mr.
Datta, Senior Vice-President and Chief Technology Officer, Mr. Jacquay, Senior
Vice-President, Sales and Marketing and Mr. Jendras, Senior Vice-President of
Operations (the “September 2008 Employment Agreements”). In October 2008, the
Company entered into a contract with Mr. Ciavarella on substantially the same
terms as the September 2008 Employment Agreements with the other Senior Vice
Presidents, except that he was paid $50,000 at the inception of the contract and
had a different bonus target for 2008 (the “October 2008 Employment Agreement,”
and together with the September 2008 Employment Agreements, the “2008 Employment
Agreements”). Each of the 2008 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 term. Each of the 2008 Employment Agreements provides
for a base rate of compensation, which may increase (but cannot decrease) during
the term of the contract, and provides for incentive cash bonus targets.
Additionally, each executive officer will generally be entitled to the same
benefits offered to the Company’s other executives. Each of the 2008 Employment
Agreements provides for payment of severance and the provision of other benefits
in connection with certain termination events, as provided below, and includes
confidentiality, non-compete and assignment of intellectual property covenants
by each of the executive officers.
 
 The
annual base salary for each of the named executive officers set forth in the
September 2008 Employment Agreements, other than the Chief Executive Officer,
was recommended by the Chief Executive Officer to the Compensation Committee,
after the Compensation Committee’s compensation consultant completed a study of
the Company’s compensation levels and plans, which amounts were approved by the
Compensation Committee. The Chief Executive Officer also recommended the 2009
annual incentive cash bonus amounts for named executive officers other than
himself to the Compensation Committee, which amounts were approved by the
Compensation Committee. The Compensation Committee sets the annual base salary
and incentive cash bonus for the Chief Executive Officer.
 
 The
employment contracts in place until September 2008 for each named executive
officer except Mr. Ciavarella (the “Prior Employment Agreements”) expired or
terminated in September 2008.
 
 The 2008
Employment Agreements provide that in the event that the applicable named
executive officer’s employment is terminated prior to the end of the term of
employment:
 
 ·
              without “cause” (as defined
      therein) by the Company or for “good reason” (as defined therein) by the
      named executive officer, the named executive officer will be entitled to
      one year’s base salary, any accrued but unpaid base salary, earned but
      unpaid bonus, a pro-rated bonus for the year of termination (assuming 100%
      of the target is achieved), accrued paid time off and one year’s
      continuation of health and welfare
  benefits;
 ·
              upon “disability” (as defined
      therein) or death, the named executive officer or his beneficiaries will
      be entitled to any accrued but unpaid base salary, earned but unpaid
      bonus, pro rated bonus for the year of termination (assuming 100% of the
      target is achieved), and accrued paid time off;
  or
 ·
              for
      cause by the Company or without good reason by the named executive
      officer, the named executive officer will be entitled to any accrued but
      unpaid base salary, accrued paid time off and any accrued benefits under
      the Company’s health and welfare
plans.
  110
  Base
Salary
  The base
salaries provided to the named executive officers are intended to retain such
executives and provide them with a firm base of compensation.  Base
salaries of the named executive officers are intended to relate to their
corresponding level of authority, responsibilities, experience and past
achievement.  Base salaries are reviewed annually, but are not
automatically increased if we believe that the existing base salary is
appropriate or if other compensation is better suited to reward prior
accomplishments.
  Base
salaries for the named executive officers were initially set in the 2008
Employment Agreements, and were increased effective March 15, 2010, with the
exception of Mr. LaPerch’s and Mr. Sokota’s base salaries, which will remain at
$550,000 and $315,000, respectively.  The new base salaries are
reflected below:
 
 Name
                              
                              Base
      SalaryJoseph
      P. Ciavarella
                              
                              $321,000John
      Jacquay
                              
                              $310,000Rajiv
      Datta
                              
                              $302,000Douglas
      Jendras
                              
                              $290,000
 
 Incentive
Cash Bonus Program
  The 2009
annual incentive cash bonus program for most U.S.-based employees was designed
to incentivize employees towards the common goal of maximizing our earnings
before interest, taxes, depreciation and amortization (“EBITDA”).  A
bonus pool calculation for U.S.-based employees was approved for various target
levels of achieved adjusted U.S. EBITDA.  Each adjusted U.S. EBITDA target
level provided for a bonus percentage for each employment level tier.  The
bonus pool was determined by multiplying the applicable bonus percentages by the
2009 earnings of the eligible employees in each employee tier.  An
additional discretionary amount was also provided for achieving certain adjusted
U.S. EBITDA targets.  To calculate adjusted U.S. EBITDA, we added back to
EBITDA certain non-recurring, non-operational and non-cash items, including
share-based compensation expenses.  These adjustments totaled $8.8 million
in 2009.  The applicable percentages and discretionary amount for the
calculation of the bonus pool were determined based on our achieving adjusted
U.S. EBITDA of $141.2 million, surpassing the adjusted U.S. EBITDA target in
2009 of $123.2 million.  We believe that the achievement of the annual
adjusted U.S. EBITDA target set in our annual business plan was the most
appropriate target for the bonus pool given the important link between EBITDA
and valuation in the telecommunications industry.
 
 The 2008
Employment Agreements provide for a bonus target equal to 35% of the named
executive officer’s base salary (or in the case of Mr. Jacquay, an annual
cash bonus target of $250,000) in the event that the Company meets the targets
set by the Compensation Committee.  For 2009, the target set by the
Compensation Committee was the achievement of $123.2 million in adjusted U.S.
EBITDA.  Amounts paid in excess of the amounts payable pursuant to the
2008 Employment Agreements are at the discretion of the Compensation
Committee.  All such amounts are included in the Summary Compensation
Table below.  Management makes the determination of bonus payments for
the Company’s employees who are not named executive officers.  Employees
eligible to participate in our sales compensation plan were generally not
eligible to participate in the incentive cash bonus program except to the extent
that an employee served in both a sales and non-sales role.
 
 In
accordance with the Compensation Committee’s determination, incentive cash
bonuses for 2009 for employees will be paid on March 15,
2010.  Payments to the named executive officers are scheduled as
follows:
 
 Name
                    
                    BonusWilliam
      G. LaPerch
                    
                    $
                    350,000Joseph
      P. Ciavarella
                    
                    $
                    215,000Robert
      Sokota
                    
                    $
                    215,000John
      Jacquay
                    
                    $
                    350,000Rajiv
      Datta
                    
                    $
                    225,000Douglas
      Jendras
                    
                    $
                    215,000
  111
  In
setting annual incentive bonus amounts for the named executive officers, the
Compensation Committee considered a number of factors including the extent to
which the named executive officer (a) contributed to the achievement of our
financial goals; (b) assisted in completing or implementing new sales; (c)
increased the level of customer satisfaction; (d) improved our operating and
administrative performance; (e) helped us to achieve our strategic objectives;
and (f) helped achieve other important Company goals.  Pursuant to
the 2008 Employment Agreements, target bonuses for Messrs. LaPerch,
Ciavarella, Sokota, Datta and Jendras are set at 35% of base salary, and Mr.
Jacquay’s target bonus is set at $250,000.
 
 Our
U.K.-based employees receive quarterly incentive cash bonuses based upon the
achievement of quarterly adjusted U.K. EBITDA targets and other quantitative and
qualitative factors.  Incentive cash bonuses paid in the U.K. are
approved by our senior management.
  On March
1, 2010, the Compensation Committee approved our 2010 Bonus Plan (the “2010
Bonus Plan”).  The 2010 Bonus Plan provides for the creation of an employee
bonus pool for most U.S.-based employees based on the achievement in 2010 of
certain adjusted U.S. EBITDA (domestic net earnings reduced for certain excess
contract termination revenue and before interest, taxes, depreciation and
amortization, adjusted for certain non-recurring, non-operational and non-cash
items) targets established by the Compensation Committee.  A base
bonus pool has been set for achievement of $151.6 million in adjusted U.S.
EBITDA (the “Base Bonus Target”).  While the Base Bonus Target also serves
as the bonus target for the named executive officers under the
2008 Employment Agreements, the Compensation Committee retains the right to
pay such officers additional discretionary amounts.  The base bonus
pool will be increased in the event that we achieve adjusted U.S. EBITDA in
excess of the Base Bonus Target and will be reduced in the event that we achieve
adjusted U.S. EBITDA less than the Base Bonus Target in amounts set forth in the
2010 Bonus Plan.  Bonus payments to employees from the bonus pool are
generally discretionary except that in accordance with their employment
agreements, each of the named executive officers is entitled to a bonus in the
amount specified above upon the achievement of the Base Bonus Target.  If
the Base Bonus Target is not achieved, no bonus payments are required to be made
to such executives.  We believe that there is a reasonable possibility that
we will achieve the Base Bonus Target in 2010.
 
 Equity
Compensation
  We
believe that the provision of equity compensation to our employees, whether by
granting stock options or restricted stock units (i.e., an agreement to provide
stock in the future) to employees helps to align the interests of our
employees with those of our stockholders and to focus the employees on
increasing value for our stockholders.
 
 2003
Plan
 
 Pursuant to the 2003 Plan, we
granted certain restricted stock units and stock options to the employees and
member of the Board of Directors of the Company through May
2008.  Such grants included a grant of 40,000 restricted stock units
to William LaPerch and 20,000 stock units to each of Rajiv Datta, John Jacquay,
Douglas Jendras and Robert Sokota made on August 7, 2007, which restricted stock
units vested on August 7, 2008 and the underlying shares were delivered on
August 17, 2009.
 
 2008
Plan
  On August
29, 2008, the Board of Directors of the Company approved the Company’s 2008
Plan.  The 2008 Plan will be administered by the Company’s
Compensation Committee unless otherwise determined by the Board of
Directors.  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 were
initially reserved for issuance pursuant to awards granted under the 2008 Plan
in accordance with its terms.  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 as provided in the 2008
Plan.
  112
  On
September 8, 2008, Mr. LaPerch was granted 100,000 restricted stock units, which
vest 30,000 on the first anniversary of the date of grant, 10,000 on the second
anniversary of the date of grant and 60,000 on the third anniversary of the date
of grant.  Mr. LaPerch was also granted an additional 42,000
restricted stock units, which vest ratably in each of 2010, 2011 and 2012 based
on the achievement of certain performance targets for fiscal years 2009, 2010
and 2011.  The Compensation Committee established a number of
quantitative and qualitative goals for Mr. LaPerch for 2009 to earn the initial
14,000 restricted stock units scheduled to vest and be delivered in March
2010.  On March 1, 2010, the Compensation Committee determined that
Mr. LaPerch has earned the 14,000 restricted stock units and, the underlying
shares will be delivered to him on March 15, 2010.  On March 9, 2010,
the Compensation Committee set a number of quantitative and qualitative goals
for Mr. LaPerch in 2010 against which his performance will be measured in
determining whether he earns the 14,000 restricted stock units scheduled to vest
in 2011.  We believe there is a reasonable possibility that Mr.
LaPerch will meet some or all of these goals for 2010.  No goals have been
set for the 14,000 restricted stock units scheduled to vest in
2012.  Each of Messrs. Sokota, Jacquay, Datta, and Jendras was granted
70,000 restricted stock units, 21,000 of which vested on the first anniversary
of the date of grant.  7,000 restricted stock units will vest on the
second anniversary of the date of grant and 42,000 on the third anniversary of
the date of grant.
  On
October 27, 2008, in connection with executing his October 2008 Employment
Agreement, Mr. Ciavarella was granted 70,000 restricted stock units, 21,000 of
which vested on November 16, 2009.  7,000 restricted stock units will
vest on November 15, 2010 and 42,000 on November 15, 2011.
  Upon the
occurrence of a termination of the named executive officers’ employment by the
Company without cause or by the named executive officer for good reason or in
the event of a change in control, or certain other events, all unvested
restricted stock units granted to the named executive officers will
vest.
  On
September 8, 2008, Messrs. Brodsky, Embler, Postma, Shorten and Subotnick were
each granted 1,000 restricted stock units and options to purchase 2,000 shares
of common stock.  All such grants vested on the first anniversary of
the date of grant.
 
 On
December 3, 2009, we granted to each outside director 3,000 restricted stock
units, 40%, of which will vest and the underlying shares will be delivered on
November 16, 2010, and 60%, of which will vest and the underlying shares will be
delivered on November 16, 2011.  The fair value of the each restricted
stock unit is $59.30 per share, which was the closing price of our stock on the
date of grant.
 
 Benefits
  We offer
our named executive officers the same health and welfare benefit and disability
plans that we offer to all our employees except that named executive officers
are each provided with term life insurance providing for a death benefit of
$1,000,000 and a term accidental death and dismemberment insurance (“AD&D”)
benefit of $1,000,000 whereas most other employees receive group term and
AD&D in smaller amounts as a multiple of base salary.  We believe
that this benefit provided to the named executive officers is reasonable and
assists in retaining the named executive officers.
 
 Perquisites
 
 We do not
believe that the provision of perquisites should play a significant role in the
compensation of our employees.  We provide very limited perquisites to
the named executive officers, less than $10,000 in total in 2009.  The
only perquisite consisted of the payment for travel expenses of the spouse of
Mr. LaPerch to attend a customer sponsored reception in California in March 2009
and a gross up to fund the taxes on such payment.  We believed that
the participation of Mr. LaPerch’s spouse was important for Mr. LaPerch’s
participation at this customer event.
  113
  Severance
 
 Severance
amounts for named executive officers under the 2008 Employment Agreements are
discussed below under “Potential Payments Upon Termination or
Change-in-Control.”  In the event of a termination without cause by
the Company or termination for good reason by the named executive officer, the
named executive officer would have been entitled to one year’s base salary, a
bonus relating to the portion of the year worked, any accrued but unpaid bonus
from the prior year, salary through the date of termination, one year’s benefits
and full vesting of unvested stock units.
 
 We
believe that the provision of these cash severance and accelerated vesting
amounts upon the termination of the named executive officers’ employment is
appropriate and we plan to continue to provide the same or similar benefits to
our named executive officers in the future.  We believe that offering
these severance packages is necessary to be competitive in the industry and to
attract and retain talented executives.  Further, we believe that the
provision of these severance amounts provide us greater ability to enforce any
post-employment restrictions.
 
 Post-Employment
Restrictions
 
 Pursuant
to the 2008 Employment Agreements, Messrs. LaPerch, Sokota, Jacquay, Ciavarella,
Datta and Jendras have agreed that they will not compete with us for six months
following termination of their employment and will not solicit any employees or
customers of ours in competition with us for one year following termination of
their employment.
 
 Stock
Purchase and Sale Guidelines
 
 In
compliance with U.S. securities laws and regulations, our policies prohibit
employees and directors from purchasing or selling our securities to third
parties to the extent that they are in possession of material non-public
information.  Our policies contain other restriction on the purchase
and sale of our securities by our employees to ensure compliance with applicable
securities laws and regulations.  We have no executive stock ownership
guidelines for directors or executive officers.
 
 Tax
and Accounting Treatment of Compensation
 
 Section 162(m)
of the Internal Revenue Code of 1986 limits the U.S. federal income tax
deductibility of certain annual compensation payments in excess of $1 million to
a company’s chief executive officer or to any of its four other most highly
compensated executive officers.  The compensation paid to each of our
senior executive officers in 2009 exceeded the $1 million threshold under
Section 162(m) and in the aggregate $5.1 million in deductions will be
disallowed under Section 162(m).  However, due to the built-in loss
associated with depreciation deductions, the disallowance of such deductions
will not impact our overall tax position.
 
 Compensation
Committee Report*
 
 The
Compensation Committee has submitted the following report for inclusion in this
Annual Report:
 
 The
Compensation Committee has reviewed and discussed the Compensation Discussion
and Analysis contained in this Annual Report with management.  Based
on the Compensation Committee’s review of and the discussions with management
with respect to the Compensation Discussion and Analysis, the Compensation
Committee has recommended to the Board of Directors that the Compensation
Discussion and Analysis be included in the Company’s proxy statement for its
2010 annual meeting of stockholders and in this Annual Report on Form 10-K for
the year ended December 31, 2009.
 
 MEMBERS
OF THE COMPENSATION COMMITTEE
 Stuart
Subotnick, Chairman
 Richard
Postma
 Richard
Shorten, Jr.
 
 * The material in this report
is not deemed "filed" with the SEC and is not to be incorporated by reference
into any Company filing under the Securities Act of 1933 or the Securities
Exchange Act of 1934, whether made before or after the date hereof and
irrespective of any general incorporation language in any such
filing.
  114
  Summary
Compensation Table
  The
following summary compensation table sets forth information concerning the
annual and long-term compensation earned by our named executive officers during
the years ended December 31, 2009, 2008 and 2007.
  Name
      and Principal Position
                                                        
                                                        Year
                                                        
                                                        Salary
                                                          ($)
                                                        
                                                        
                                                        Bonus
                                                          ($)
      (1)
                                                        
                                                        
                                                        Stock
      Awards
                                                          ($)
      (2)
                                                        
                                                        
                                                        Option
                                                          Awards
      ($)
                                                        
                                                        
                                                        Non-Equity
                                                          Incentive
                                                          Plan
                                                          Compensation
      (1)
                                                        
                                                        
                                                        Changes
      in
                                                          Pension
      Value
                                                          and
      Nonqualified
                                                          Deferred
                                                          Compensation
                                                          Earnings
                                                        
                                                        
                                                        All
      Other
                                                          Compensation
                                                          ($)
                                                        
                                                        
                                                        Total
                                                          ($)William
      G. LaPerch,
                                                        
                                                        2009
                                                        
                                                        $
                                                        550,000
                                                        
                                                        
                                                        $
                                                        157,500
                                                        
                                                        
                                                        $
                                                        280,000
                                                        (3)
                                                        
                                                        $
                                                        —
                                                        
                                                        
                                                        $
                                                        192,500
                                                        
                                                        
                                                        $
                                                        —
                                                        
                                                        
                                                        $
                                                        19,575
                                                        (4)
                                                        
                                                        $
                                                        1,199,575President
      and
                                                        
                                                        2008
                                                        
                                                        
                                                        516,667
                                                        
                                                        
                                                        
                                                        275,000
                                                        
                                                        
                                                        
                                                        3,000,000
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        21,961
                                                        (5)
                                                        
                                                        
                                                        3,813,628Chief
      Executive Officer
                                                        
                                                        2007
                                                        
                                                        
                                                        500,000
                                                        
                                                        
                                                        
                                                        225,000
                                                        
                                                        
                                                        
                                                        1,650,000
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        19,717
                                                        (6)
                                                        
                                                        
                                                        2,394,717Joseph
      P. Ciavarella
                                                        
                                                        2009
                                                        
                                                        
                                                        315,000
                                                        
                                                        
                                                        
                                                        104,750
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        110,250
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        19,402
                                                        (7)
                                                        
                                                        
                                                        549,402Senior
      Vice President
                                                        
                                                        2008
                                                        
                                                        
                                                        58,557
                                                        
                                                        
                                                        
                                                        175,000
                                                        
                                                        
                                                        
                                                        1,365,000
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        577,371
                                                        (8)
                                                        
                                                        
                                                        2,175,928and
      Chief Financial Officer
                                                        
                                                        2007
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —Robert
      Sokota,Senior
      Vice President,
                                                        
                                                        2009
                                                        
                                                        
                                                        315,000
                                                        
                                                        
                                                        
                                                        104,750
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        110,250
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        17,341
                                                        (9)
                                                        
                                                        
                                                        547,341General  Counsel,
                                                        
                                                        2008
                                                        
                                                        
                                                        315,000
                                                        
                                                        
                                                        
                                                        225,000
                                                        
                                                        
                                                        
                                                        2,100,000
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        17,207
                                                        (10)
                                                        
                                                        
                                                        2,657,207Chief
      Administrative Officer and Secretary
                                                        
                                                        2007
                                                        
                                                        
                                                        315,000
                                                        
                                                        
                                                        
                                                        175,000
                                                        
                                                        
                                                        
                                                        825,000
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        17,023
                                                        (11)
                                                        
                                                        
                                                        1,332,023John
      Jacquay
                                                        
                                                        2009
                                                        
                                                        
                                                        300,000
                                                        
                                                        
                                                        
                                                        100,000
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        250,000
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        13,538
                                                        (12)
                                                        
                                                        
                                                        663,538Senior
      Vice President,
                                                        
                                                        2008
                                                        
                                                        
                                                        293,333
                                                        
                                                        
                                                        
                                                        125,000
                                                        
                                                        
                                                        
                                                        2,100,000
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        225,000
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        17,305
                                                        (13)
                                                        
                                                        
                                                        2,760,638Sales
      & Marketing
                                                        
                                                        2007
                                                        
                                                        
                                                        290,000
                                                        
                                                        
                                                        
                                                        150,000
                                                        
                                                        
                                                        
                                                        825,000
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        225,000
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        18,137
                                                        (14)
                                                        
                                                        
                                                        1,508,137Rajiv
      Datta
                                                        
                                                        2009
                                                        
                                                        
                                                        290,000
                                                        
                                                        
                                                        
                                                        123,500
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        101,500
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        17,820
                                                        (15)
                                                        
                                                        
                                                        532,820Senior
      Vice President
                                                        
                                                        2008
                                                        
                                                        
                                                        284,767
                                                        
                                                        
                                                        
                                                        225,000
                                                        
                                                        
                                                        
                                                        2,100,000
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        17,758
                                                        (16)
                                                        
                                                        
                                                        2,627,525Chief
      Technology Officer
                                                        
                                                        2007
                                                        
                                                        
                                                        277,875
                                                        
                                                        
                                                        
                                                        175,000
                                                        
                                                        
                                                        
                                                        825,000
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        16,912
                                                        (17)
                                                        
                                                        
                                                        1,294,787Douglas
      Jendras
                                                        
                                                        2009
                                                        
                                                        
                                                        280,000
                                                        
                                                        
                                                        
                                                        117,000
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        98,000
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        17,837
                                                        (18)
                                                        
                                                        
                                                        512,837Senior
      Vice President,
                                                        
                                                        2008
                                                        
                                                        
                                                        268,763
                                                        
                                                        
                                                        
                                                        225,000
                                                        
                                                        
                                                        
                                                        2,100,000
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        19,632
                                                        (19)
                                                        
                                                        
                                                        2,613,395Operations
                                                        
                                                        2007
                                                        
                                                        
                                                        260,662
                                                        
                                                        
                                                        
                                                        175,000
                                                        
                                                        
                                                        
                                                        825,000
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        16,831
                                                        (20)
                                                        
                                                        
                                                        1,277,493
 (1)
              The
      amounts reflected in the ‘Non-Equity Incentive Plan Compensation’ column
      represent the contractual amounts earned by the named executive officers
      based upon the terms of the 2008 Employment Agreements and achievement of
      100% of the Company’s 2009 bonus target. The amounts reflected in the
      ‘Bonus’ column for 2009 represent discretionary amounts approved by the
      Compensation Committee. In 2008 and 2007, all bonuses paid to the names
      executive officers were discretionary except for $225,000 per year paid to
      Mr. Jacquay, pursuant to his employment contract, based upon the
      achievement of applicable Company bonus
targets.
 
 (2)
              The
      amounts in this column reflect the aggregate grant date fair value of
      restricted stock units granted to the named executive officers computed in
      accordance with FASB ASC Topic 718. See Note 12 to our consolidated
      financial statements included elsewhere in this Annual Report on Form 10-K
      for a discussion of the assumptions made in the valuation of the
      restricted stock unit awards. In 2009, the SEC changed the method by
      which stock-based compensation is to be reported for our named executive
      officers and directors. The amounts reflected for 2007 and 2008 have
      been modified to conform to this
change.
 
 (3)
              Represents
      the fair value of the 2009 tranche (14,000) of 42,000 performance-based
      restricted stock units granted to Mr. LaPerch on September 8, 2008, which
      were subject to the attainment of certain performance metrics established
      March 11, 2009 with respect to fiscal 2009. On March 1, 2010, the
      Compensation Committee determined that Mr. LaPerch met these performance
      metrics. Such amount excludes the fair value of the balance of the grant
      for which performance metrics were established on March 9, 2010 for fiscal
      2010 and for which performance metrics have not been established for
      fiscal 2011.
  115
 
 (4)
              Includes
      health and welfare benefits of $13,317, life insurance premiums of $2,766,
      disability premiums of $742, and 401(k) match of
  $2,750.
 
 (5)
              Includes
      health and welfare benefits of $12,755, life insurance premiums of $2,474,
      disability premiums of $948, 401(k) match of $2,750 and other of
      $3,034.
 
 (6)
              Includes
      health and welfare benefits of $12,539, life insurance premiums of $2,891,
      disability premiums of $1,014, 401(k) match of $2,250 and other of
      $1,023.
 
 (7)
              Includes
      health and welfare benefits of $13,348, life insurance premiums of $2,562,
      disability premiums of $742, and 401(k) match of
  $2,750.
 
 (8)
              Includes
      consulting fees of $574,524, health and welfare benefits of $2,155, life
      insurance premiums of $567 and disability premiums of $125. In 2007, Mr.
      Ciavarella received $244,693 for his services as a financial consultant
      but was not a named executive officer during that
  year.
 
 (9)
              Includes
      health and welfare benefits of $13,102, life insurance premiums of $1,309,
      disability premiums of $180, and 401(k) match of
  $2,750.
 
 (10)
              Includes
      health and welfare benefits of $12,518, life insurance premiums of $1,366,
      disability premiums of $270, 401(k) match of $2,750 and other of
      $303.
 
 (11)
              Includes
      health and welfare benefits of $12,295 life insurance premiums of $1,185,
      disability premiums of $300, 401(k) match of $2,250 and other of
      $993.
 
 (12)
              Includes
      health and welfare benefits of $9,399, life insurance premiums of $3,397,
      and disability premiums of $742.
 
 (13)
              Includes
      health and welfare benefits of $10,474, life insurance premiums of $3,946,
      disability premiums of $935, and other of
  $1,950.
 
 (14)
              Includes
      health and welfare benefits of $12,539, life insurance premiums of $3,448,
      disability premiums of $997, and other of
  $1,153.
 
 (15)
              Includes
      health and welfare benefits of $13,347, life insurance premiums of $993,
      disability premiums of $730, and 401(k) match of
  $2,750.
 
 (16)
              Includes
      health and welfare benefits of $12,763, life insurance premiums of $1,020,
      disability premiums of $922, 401(k) match of $2,750 and other of
      $303.
 
 (17)
              Includes
      health and welfare benefits of $12,546, life insurance premiums of $1,015,
      disability premiums of $951, 401(k) match of $2,250 and other of
      $150.
 
 (18)
              Includes
      health and welfare benefits of $13,275, life insurance premiums of $1,096,
      disability premiums of $716, and 401(k) match of
  $2,750.
 
 (19)
              Includes
      health and welfare benefits of $13,237, life insurance premiums of $1,156,
      disability premiums of $894, 401(k) match of $2,688 and other of
      $1,657.
 
 (20)
              Includes
      health and welfare benefits of $12,450, life insurance premiums of $1,049,
      disability premiums of $932, 401(k) match of $2,250 and other of
      $150.
  116
  Grants
of Plan-Based Awards
  We did
not make any grants of restricted stock units or our equity-based compensation
under our 2008 Plan to our named executive officers during the year ended
December 31, 2009.  We made three year grants to our named executive
officers in 2008, which were designed to compensate them for contributions over
the three year vesting period and to provide incentives to these individuals and
to encourage continued service.
 
 The
following table presents information concerning non-equity incentive plan awards
granted to each of our named executive officers during the year ended December
31, 2009.
 
 2009 Grants of Plan-Based AwardsEstimated Possible Payouts
                                    Under Non-Equity
                                    Incentive Plan AwardsNamed Executive Officer
                                  
                                  Target ($)(*)William
      G. LaPerch
                                  
                                  $192,500Joseph
      P. Ciavarella
                                  
                                  $110,250Robert
      Sokota
                                  
                                  $110,250John
      Jacquay
                                  
                                  $250,000Rajiv
      Datta
                                  
                                  $101,500Douglas
      Jendras
                                  
                                  $98,000
 
 (*)
              The
      amounts reported were paid to the named executive officers based on the
      terms of the 2008 Employment Agreements and the Company's achievement of
      the 2009 bonus target.  The 2008 Employment Agreements did not
      provide for thresholds or maximum payments.  Accordingly, only
      target amounts are listed.  See "Incentive Cash Bonus Program,"
      above for further information on these
payments.
  117
  Outstanding
Equity Awards at Fiscal Year End
  The
following table sets forth information concerning stock options and stock awards
held by the named executive officers at December 31, 2009.  With
respect to Mr. LaPerch, this table includes 42,000 restricted stock units
granted to him, which vest ratably in 2010, 2011 and 2012 based upon the
achievement of certain performance targets for fiscal years 2009, 2010 and
2011.  All of the options to purchase common shares and restricted
stock units described below were granted pursuant to either the 2003 Plan or the
2008 Plan.
   Option Awards
                          
                          
                          Stock AwardsName
                          
                          Number
      of
                            Securities
                            Underlying
                            Unexercised
      Options
                            or
      Undelivered
                            Restricted
      Stock
                            Units
                            (#)
      Exercisable
                          
                          
                          Number
      of
                            Securities
                            Underlying
                            Unexercised
                            Options
                            (#)
                            Unexercisable
                          
                          
                          Equity
      Incentive
                            Plan
      Awards:
                            Number
      of
                            Securities
                            Underlying
                            Unexercised
                            Unearned
                            Options
                            (#)
                          
                          
                          Option
                            Exercise
                            Price
                            ($)
                          
                          
                          Option
                            Expiration
                            Date
                          
                          
                          Number
      of
                            Options
      or
                            Restricted
                            Stock
      Units
                            That
      Have
                            Not
      Vested
                            (#)
                          
                          
                          Market
      Value
                            of
      Shares or
                            Stock
      Units
                            That
      Have Not
                            Vested
                            ($)
      (1)
                          
                          
                          Equity
      Incentive
                            Plan
      Awards:
                            Number
      of
                            Unearned
      Shares,
                            Units
      or Other
                            Rights
      That Have
                            Not
      Vested (#)
                          
                          
                          Equity
      Incentive
                            Plan
      Awards:
                            Market
      or Payout
                            Value
                            of
      Unearned Shares,
                            Units
                            or
      Other Rights
                            That
      Have Not
                            Vested
      ($)William
      G. LaPerch
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          112,000
                          (2)
                          
                          $
                          7,284,480
                          
                          
                          
                          —
                          
                          
                          $
                          —Joseph
      P. Ciavarella
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          49,000
                          (3)
                          
                          $
                          3,186,960
                          
                          
                          
                          —
                          
                          
                          
                          —Robert
      Sokota
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          49,000
                          (4)
                          
                          $
                          3,186,960
                          
                          
                          
                          —
                          
                          
                          
                          —John
      Jacquay
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          49,000
                          (4)
                          
                          $
                          3,186,960
                          
                          
                          
                          —
                          
                          
                          
                          —Rajiv
      Datta
                          
                          
                          1,275
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          49,000
                          (4)
                          
                          $
                          3,186,960
                          
                          
                          
                          —
                          
                          
                          
                          —Douglas
      Jendras
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          49,000
                          (4)
                          
                          $
                          3,186,960
                          
                          
                          
                          —
                          
                          
                          
                          —
  (1)
              The
      corresponding market values are based on the closing price ($65.04) of our
      common stock on December 31,
2009.
 
 (2)
              Represents
      the unvested restricted stock units associated with an original grant of
      100,000 restricted stock units on September 8, 2008. 30% vested on
      November 16, 2009, 10% are scheduled to vest on November 15, 2010 and 60%
      are scheduled to vest on November 15, 2011 and 42,000 restricted stock
      units which vest ratably in 2010, 2011 and 2012 based upon the achievement
      of certain performance targets for fiscal years 2009, 2010 and 2011. On
      March 1, 2010, the Compensation Committee approved the vesting of 14,000
      of Mr. LaPerch’s performance stock units. The underlying shares will be
      delivered on March 15, 2010.
 
 (3)
              Represent
      the unvested restricted stock units associated with an original grant of
      70,000 restricted stock units on October 27, 2008. 30% vested on November
      16, 2009, 10% are scheduled to vest on November 15, 2010 and 60% are
      scheduled to vest on November 15,
2011.
 
 (4)
              Represents
      the unvested restricted stock units associated with an original grant of
      70,000 restricted stock units on September 8, 2008. 30% vested on November
      16, 2009, 10% are scheduled to vest on November 15, 2010 and 60% are
      schedule to vest on November 15,
2011.
  118
  Option
Exercises and Stock Vested In Fiscal 2009
  The
following table provides information for the named executive officers with
respect to the delivery of shares underlying restricted stock units in 2009 and
stock option exercises during 2009, including the number of shares acquired upon
exercise and the value realized, before payment of any applicable withholding
tax and broker commissions:
 
 Option Awards
                                                                    
                                                                    Stock AwardsNamed Executive Officer
                                                                    
                                                                    Number of Shares
                                                                      Acquired on Exercise
                                                                    
                                                                    Value Realized
                                                                      on Exercise
                                                                    
                                                                    Number of Shares
                                                                      Acquired on Delivery
                                                                    
                                                                    Value Realized
                                                                      on DeliveryWilliam
      G. LaPerch
                                                                    
                                                                    40,000
                                                                    
                                                                    $
      1,026,790
                                                                    
                                                                    70,000
                                                                    
                                                                    $
      3,566,300Joseph
      P. Ciavarella
                                                                    
                                                                    —
                                                                    
                                                                    $
      —
                                                                    
                                                                    21,000
                                                                    
                                                                    $
      1,195,110Robert
      Sokota
                                                                    
                                                                    33,000
                                                                    
                                                                    $
      1,317,843
                                                                    
                                                                    41,000
                                                                    
                                                                    $
      2,124,610John
      Jacquay
                                                                    
                                                                    64,000
                                                                    
                                                                    $
      1,791,534
                                                                    
                                                                    41,000
                                                                    
                                                                    $
      2,124,610Rajiv
      Datta
                                                                    
                                                                    26,885
                                                                    
                                                                    $
        944,575
                                                                    
                                                                    41,000
                                                                    
                                                                    $
      2,124,610Douglas
      Jendras
                                                                    
                                                                    28,160
                                                                    
                                                                    $
      1,060,902
                                                                    
                                                                    41,000
                                                                    
                                                                    $
      2,124,610
 
 (1)
              The
      value realized on exercise is calculated as the difference between the
      actual sales price of the shares underlying the options exercised and the
      applicable exercise price of those
options.
 
 (2)
              The
      value realized on delivery is calculated based on the closing price of the
      underlying stock on the New York Stock Exchange on the delivery
      date.
 
 Pension
Benefits - Fiscal 2009
  There
were no pension benefits earned by the Company's named executive officers in the
year ended December 31, 2009.
 
 Nonqualified
Defined Contribution and Other Nonqualified Deferred Compensation
Plans
  The
Company does not have any nonqualified defined contribution or other
nonqualified deferred compensation plans covering its named executive
officers.
  119
  Potential
Payments Upon Termination or Change-in-Control
  The below
tables reflect payments to be made upon termination or change in control based
upon the September 2008 Employment Agreements and the October 2008 Employment
Agreement.  Such amounts exclude potential payments pursuant to stock
options and restricted stock units vested prior to December 31,
2009.
 
 William
G. LaPerch
  The
following table shows the potential payments upon termination or a
change-in-control of the Company for William G. LaPerch, the Company’s
President, Chief Executive Officer, and member of the Company’s Board of
Directors, as if such termination took place on December 31, 2009.
 
 Executive Benefits and
                                                                  Payments Upon
                                                                  Separation
                                                                
                                                                Expiration of
                                                                  Employment
                                                                  Agreement
                                                                  ($)
                                                                
                                                                
                                                                
                                                                Voluntary
                                                                  Termination
                                                                  on 12/31/09
                                                                  ($)
                                                                
                                                                
                                                                
                                                                For Cause
                                                                  Termination on
                                                                  12/31/09
                                                                  ($)
                                                                
                                                                
                                                                
                                                                Without Cause
                                                                  Termination on
                                                                  12/31/09
                                                                  ($)
                                                                
                                                                
                                                                
                                                                Change-in-Control and
                                                                  Termination on
                                                                  12/31/09
                                                                  ($)
                                                                
                                                                
                                                                
                                                                Disability on
                                                                  12/31/09
                                                                  ($)
                                                                
                                                                
                                                                
                                                                Death on
                                                                  12/31/09
                                                                  ($)Compensation:Cash
      Severance – Salary and Bonus
                                                                
                                                                $
                                                                —
                                                                
                                                                
                                                                
                                                                $
                                                                —
                                                                
                                                                
                                                                
                                                                $
                                                                —
                                                                
                                                                
                                                                
                                                                $
                                                                742,500
                                                                (1)
                                                                
                                                                
                                                                $
                                                                742,500
                                                                (1)
                                                                
                                                                
                                                                $
                                                                192,500
                                                                
                                                                
                                                                
                                                                $
                                                                192,500Stock
      Options
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —Restricted Stock
      (2)
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                7,284,480
                                                                
                                                                
                                                                
                                                                
                                                                7,284,480
                                                                
                                                                
                                                                
                                                                
                                                                7,284,480
                                                                
                                                                
                                                                
                                                                
                                                                7,284,480Benefits
      and Perquisites
                                                                
                                                                
                                                                43,364
                                                                (4)
                                                                
                                                                
                                                                
                                                                43,364
                                                                (4)
                                                                
                                                                
                                                                
                                                                43,364
                                                                (4)
                                                                
                                                                
                                                                
                                                                57,423
                                                                (3)
                                                                
                                                                
                                                                
                                                                57,423
                                                                (3)
                                                                
                                                                
                                                                
                                                                43,364
                                                                (4)
                                                                
                                                                
                                                                
                                                                43,364
                                                                (4)Life
      Insurance
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                2,766
                                                                (5)
                                                                
                                                                
                                                                
                                                                2,766
                                                                (5)
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                1,000,000
                                                                (6)Total
                                                                
                                                                $
                                                                43,364
                                                                
                                                                
                                                                
                                                                $
                                                                43,364
                                                                
                                                                
                                                                
                                                                $
                                                                43,364
                                                                
                                                                
                                                                
                                                                $
                                                                8,087,169
                                                                
                                                                
                                                                
                                                                $
                                                                8,087,169
                                                                
                                                                
                                                                
                                                                $
                                                                7,520,344
                                                                
                                                                
                                                                
                                                                $
                                                                8,520,344
 
 (1)
              Represents
      one year of severance at Mr. LaPerch’s annual base salary pursuant to the
      September 2008 Employment Agreements, plus his 2009 bonus at the bonus
      rate (35% of base salary or $192,500) assuming 100% of the annual bonus
      target was satisfied.
 
 (2)
              Pursuant
      to the terms of both the September 8, 2008 stock unit agreement and the
      performance-based stock unit agreement, Mr. LaPerch’s unvested restricted
      stock units would become 100% vested if he was terminated without cause or
      for disability or death or upon a change-in-control. The shares underlying
      the restricted stock units have been valued in the above table using the
      December 31, 2009 closing market price of our common stock of $65.04 per
      share ($65.04 x 112,000 shares = $7,284,480 at 100%
    vesting).
 
 (3)
              Represents
      health and welfare benefits for 12 months and accrued paid time
      off.
 
 (4)
              Represents
      accrued paid time off.
 
 (5)
              Represents
      payment of life insurance premium.
 
 (6)
              Upon
      his death, Mr. LaPerch’s beneficiary would receive the proceeds of a
      $1,000,000 life insurance
policy.
  120
  Joseph
P. Ciavarella
  The
following table shows the potential payments upon termination or a
change-in-control of the Company for Joseph P. Ciavarella the Company’s Senior
Vice President and Chief Financial Officer, as if such termination had taken
place on December 31, 2009.
 
 Executive Benefits and
                                                                  Payments Upon
                                                                  Separation
                                                                
                                                                Expiration of
                                                                  Employment
                                                                  Agreement
                                                                  ($)
                                                                
                                                                
                                                                
                                                                Voluntary
                                                                  Termination
                                                                  on 12/31/09
                                                                  ($)
                                                                
                                                                
                                                                
                                                                For Cause
                                                                  Termination on
                                                                  12/31/09
                                                                  ($)
                                                                
                                                                
                                                                
                                                                Without Cause
                                                                  Termination on
                                                                  12/31/09
                                                                  ($)
                                                                
                                                                
                                                                
                                                                Change-in-Control and
                                                                  Termination on
                                                                  12/31/09
                                                                  ($)
                                                                
                                                                
                                                                
                                                                Disability on
                                                                  12/31/09
                                                                  ($)
                                                                
                                                                
                                                                
                                                                Death on
                                                                  12/31/09
                                                                  ($)Compensation:Cash
      Severance – Salary and Bonus
                                                                
                                                                $
                                                                —
                                                                
                                                                
                                                                
                                                                $
                                                                —
                                                                
                                                                
                                                                
                                                                $
                                                                —
                                                                
                                                                
                                                                
                                                                $
                                                                425,250
                                                                (1)
                                                                
                                                                
                                                                $
                                                                425,250
                                                                (1)
                                                                
                                                                
                                                                $
                                                                110,250
                                                                
                                                                
                                                                
                                                                $
                                                                110,250Stock
      Options
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —Restricted Stock (2)
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                3,186,960
                                                                
                                                                
                                                                
                                                                
                                                                3,186,960
                                                                
                                                                
                                                                
                                                                
                                                                3,186,960
                                                                
                                                                
                                                                
                                                                
                                                                3,186,960Benefits
      and Perquisites
                                                                
                                                                
                                                                20,595
                                                                (4)
                                                                
                                                                
                                                                
                                                                20,595
                                                                (4)
                                                                
                                                                
                                                                
                                                                20,595
                                                                (4)
                                                                
                                                                
                                                                
                                                                34,685
                                                                (3)
                                                                
                                                                
                                                                
                                                                34,685
                                                                (3)
                                                                
                                                                
                                                                
                                                                20,595
                                                                (4)
                                                                
                                                                
                                                                
                                                                20,595
                                                                (4)Life
      Insurance
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                2,562
                                                                (5)
                                                                
                                                                
                                                                
                                                                2,562
                                                                (5)
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                1,000,000
                                                                (6)Total
                                                                
                                                                $
                                                                20,595
                                                                
                                                                
                                                                
                                                                $
                                                                20,595
                                                                
                                                                
                                                                
                                                                $
                                                                20,595
                                                                
                                                                
                                                                
                                                                $
                                                                3,649,457
                                                                
                                                                
                                                                
                                                                $
                                                                3,649,457
                                                                
                                                                
                                                                
                                                                $
                                                                3,317,805
                                                                
                                                                
                                                                
                                                                $
                                                                4,317,805
 
 (1)
              Represents
      one year of severance at Mr. Ciavarella’s annual base salary pursuant to
      his October 2008 Employment Agreement, plus his 2009 bonus at the bonus
      rate (35% of base salary or $110,250) assuming 100% of the annual bonus
      target was satisfied.
 
 (2)
              Pursuant
      to the terms of the stock unit agreement, Mr. Ciavarella’s unvested
      restricted stock units would become 100% vested if he was terminated
      without cause or for disability or death or upon a change-in-control. The
      shares underlying the restricted stock units have been valued in the above
      table using the December 31, 2009 closing market price of our common stock
      of $65.04 per share ($65.04 x 49,000 shares = $3,186,960 at 100%
      vesting).
 
 (3)
              Represents
      health and welfare benefits for 12 months and accrued paid time
      off.
 
 (4)
              Represents
      accrued paid time off.
 
 (5)
              Represents
      payment of life insurance premium.
 
 (6)
              Upon
      his death, Mr. Ciavarella’s beneficiary would receive the proceeds of a
      $1,000,000 life insurance policy.
  121
  Robert
Sokota
  The
following table shows the potential payments upon termination or a
change-in-control of the Company for Robert Sokota, the Company’s Senior Vice
President, General Counsel and Chief Administrative Officer, as if such
termination had taken place on December 31, 2009.
  Executive Benefits and
                                                                  Payments Upon
                                                                  Separation
                                                                
                                                                Expiration of
                                                                  Employment
                                                                  Agreement
                                                                  ($)
                                                                
                                                                
                                                                
                                                                Voluntary
                                                                  Termination
                                                                  on 12/31/09
                                                                  ($)
                                                                
                                                                
                                                                
                                                                For Cause
                                                                  Termination on
                                                                  12/31/09
                                                                  ($)
                                                                
                                                                
                                                                
                                                                Without Cause
                                                                  Termination on
                                                                  12/31/09
                                                                  ($)
                                                                
                                                                
                                                                
                                                                Change-in-Control and
                                                                  Termination on
                                                                  12/31/09
                                                                  ($)
                                                                
                                                                
                                                                
                                                                Disability on
                                                                  12/31/09
                                                                  ($)
                                                                
                                                                
                                                                
                                                                Death on
                                                                  12/31/09
                                                                  ($)Compensation:Cash
      Severance – Salary and Bonus
                                                                
                                                                $
                                                                —
                                                                
                                                                
                                                                
                                                                $
                                                                —
                                                                
                                                                
                                                                
                                                                $
                                                                —
                                                                
                                                                
                                                                
                                                                $
                                                                425,250
                                                                (1)
                                                                
                                                                
                                                                $
                                                                425,250
                                                                (1)
                                                                
                                                                
                                                                $
                                                                110,250
                                                                
                                                                
                                                                
                                                                $
                                                                110,250Stock
      Options
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —Restricted Stock (2)
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                3,186,960
                                                                
                                                                
                                                                
                                                                
                                                                3,186,960
                                                                
                                                                
                                                                
                                                                
                                                                3,186,960
                                                                
                                                                
                                                                
                                                                
                                                                3,186,960Benefits
      and Perquisites
                                                                
                                                                
                                                                8,481
                                                                (4)
                                                                
                                                                
                                                                
                                                                8,481
                                                                (4)
                                                                
                                                                
                                                                
                                                                8,481
                                                                (4)
                                                                
                                                                
                                                                
                                                                21,763
                                                                (3)
                                                                
                                                                
                                                                
                                                                21,763
                                                                (3)
                                                                
                                                                
                                                                
                                                                8,481
                                                                (4)
                                                                
                                                                
                                                                
                                                                8,481
                                                                (4)Life
      Insurance
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                1,309
                                                                (5)
                                                                
                                                                
                                                                
                                                                1,309
                                                                (5)
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                1,000,000
                                                                (6)Total
                                                                
                                                                $
                                                                8,481
                                                                
                                                                
                                                                
                                                                $
                                                                8,481
                                                                
                                                                
                                                                
                                                                $
                                                                8,481
                                                                
                                                                
                                                                
                                                                $
                                                                3,635,282
                                                                
                                                                
                                                                
                                                                $
                                                                3,635,282
                                                                
                                                                
                                                                
                                                                $
                                                                3,305,691
                                                                
                                                                
                                                                
                                                                $
                                                                4,305,691
 
 (1)
              Represents
      one year of severance at Mr. Sokota’s annual base salary pursuant to the
      September 2008 Employment Agreements, plus his 2009 bonus at the bonus
      rate (35% of base salary or $110,250) assuming 100% of the annual bonus
      target was satisfied.
 
 (2)
              Pursuant
      to the terms of the stock unit agreement, Mr. Sokota’s unvested restricted
      stock units would become 100% vested if he was terminated without cause or
      for disability or death or upon a change-in-control. The shares underlying
      the restricted stock units have been valued in the above table using the
      December 31, 2009 closing market price of our common stock of $65.04 per
      share (65.04 x 49,000 shares = $3,186,960 at 100%
  vesting).
 
 (3)
              Represents
      health and welfare benefits for 12 months and accrued paid time
      off.
 
 (4)
              Represents
      accrued paid time off.
 
 (5)
              Represents
      payment of life insurance premium.
 
 (6)
              Upon
      his death, Mr. Sokota’s beneficiary would receive the proceeds of a
      $1,000,000 life insurance
policy.
  122
  John
Jacquay
  The
following table shows the potential payments upon termination or a
change-in-control of the Company for John Jacquay, the Company’s Senior Vice
President, Sales and Marketing, as if such termination had taken place on
December 31, 2009.
  Executive Benefits and
                                                                  Payments Upon
                                                                  Separation
                                                                
                                                                Expiration of
                                                                  Employment
                                                                  Agreement
                                                                  ($)
                                                                
                                                                
                                                                
                                                                Voluntary
                                                                  Termination
                                                                  on 12/31/09
                                                                  ($)
                                                                
                                                                
                                                                
                                                                For Cause
                                                                  Termination on
                                                                  12/31/09
                                                                  ($)
                                                                
                                                                
                                                                
                                                                Without Cause
                                                                  Termination on
                                                                  12/31/09
                                                                  ($)
                                                                
                                                                
                                                                
                                                                Change-in-Control and
                                                                  Termination on
                                                                  12/31/09
                                                                  ($)
                                                                
                                                                
                                                                
                                                                Disability on
                                                                  12/31/09
                                                                  ($)
                                                                
                                                                
                                                                
                                                                Death on
                                                                  12/31/09
                                                                  ($)Compensation:Cash
      Severance – Salary and Bonus
                                                                
                                                                $
                                                                —
                                                                
                                                                
                                                                
                                                                $
                                                                —
                                                                
                                                                
                                                                
                                                                $
                                                                —
                                                                
                                                                
                                                                
                                                                $
                                                                550,000
                                                                (1)
                                                                
                                                                
                                                                $
                                                                550,000
                                                                (1)
                                                                
                                                                
                                                                $
                                                                250,000
                                                                
                                                                
                                                                
                                                                $
                                                                250,000Stock
      Options
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —Restricted Stock (2)
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                3,186,960
                                                                
                                                                
                                                                
                                                                
                                                                3,186,960
                                                                
                                                                
                                                                
                                                                
                                                                3,186,960
                                                                
                                                                
                                                                
                                                                
                                                                3,186,960Benefits
      and Perquisites
                                                                
                                                                
                                                                9,230
                                                                (4)
                                                                
                                                                
                                                                
                                                                9,230
                                                                (4)
                                                                
                                                                
                                                                
                                                                9,230
                                                                (4)
                                                                
                                                                
                                                                
                                                                19,371
                                                                (3)
                                                                
                                                                
                                                                
                                                                19,371
                                                                (3)
                                                                
                                                                
                                                                
                                                                9,230
                                                                (4)
                                                                
                                                                
                                                                
                                                                9,230
                                                                (4)Life
      Insurance
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                3,397
                                                                (5)
                                                                
                                                                
                                                                
                                                                3,397
                                                                (5)
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                1,000,000
                                                                (6)Total
                                                                
                                                                $
                                                                9,230
                                                                
                                                                
                                                                
                                                                $
                                                                9,230
                                                                
                                                                
                                                                
                                                                $
                                                                9,230
                                                                
                                                                
                                                                
                                                                $
                                                                3,759,728
                                                                
                                                                
                                                                
                                                                $
                                                                3,759,728
                                                                
                                                                
                                                                
                                                                $
                                                                3,446,190
                                                                
                                                                
                                                                
                                                                $
                                                                4,446,190
 
 (1)
              Represents
      one year of severance at Mr. Jacquay’s annual base salary pursuant to the
      September 2008 Employment Agreements, plus his 2009 bonus at the annual
      cash bonus target of $250,000 assuming 100% of the annual bonus target was
      satisfied.
 
 (2)
              Pursuant
      to the terms of the stock unit agreement, Mr. Jacquay’s unvested
      restricted stock units would become 100% vested if he was terminated
      without cause or for disability or death or upon a change-in-control. The
      shares underlying the restricted stock units have been valued in the above
      table using the December 31, 2009 closing market price of our common stock
      of $65.04 per share ($65.04 x 49,000 shares = $3,186,960 at 100%
      vesting).
 
 (3)
              Represents
      health and welfare benefits for 12 months and accrued paid time
      off.
 
 (4)
              Represents
      accrued paid time off.
 
 (5)
              Represents
      payment of life insurance premium.
 
 (6)
              Upon
      his death, Mr. Jacquay’s beneficiary would receive the proceeds of a
      $1,000,000 life insurance
policy.
  123
  Rajiv
Datta
  The
following table shows the potential payments upon termination or a
change-in-control of the Company for Rajiv Datta, the Company’s Senior Vice
President and Chief Technology Officer, as if such termination had taken place
on December 31, 2009.
  Executive Benefits and
                                                                  Payments Upon
                                                                  Separation
                                                                
                                                                Expiration of
                                                                  Employment
                                                                  Agreement
                                                                  ($)
                                                                
                                                                
                                                                
                                                                Voluntary
                                                                  Termination
                                                                  on 12/31/09
                                                                  ($)
                                                                
                                                                
                                                                
                                                                For Cause
                                                                  Termination on
                                                                  12/31/09
                                                                  ($)
                                                                
                                                                
                                                                
                                                                Without Cause
                                                                  Termination on
                                                                  12/31/09
                                                                  ($)
                                                                
                                                                
                                                                
                                                                Change-in-Control and
                                                                  Termination on
                                                                  12/31/09
                                                                  ($)
                                                                
                                                                
                                                                
                                                                Disability on
                                                                  12/31/09
                                                                  ($)
                                                                
                                                                
                                                                
                                                                Death on
                                                                  12/31/09
                                                                  ($)Compensation:Cash
      Severance – Salary and Bonus
                                                                
                                                                $
                                                                —
                                                                
                                                                
                                                                
                                                                $
                                                                —
                                                                
                                                                
                                                                
                                                                $
                                                                —
                                                                
                                                                
                                                                
                                                                $
                                                                391,500
                                                                (1)
                                                                
                                                                
                                                                $
                                                                391,500
                                                                (1)
                                                                
                                                                
                                                                $
                                                                101,500
                                                                
                                                                
                                                                
                                                                $
                                                                101,500Stock
      Options
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —Restricted Stock (2)
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                3,186,960
                                                                
                                                                
                                                                
                                                                
                                                                3,186,960
                                                                
                                                                
                                                                
                                                                
                                                                3,186,960
                                                                
                                                                
                                                                
                                                                
                                                                3,186,960Benefits
      and Perquisites
                                                                
                                                                
                                                                10,038
                                                                (4)
                                                                
                                                                
                                                                
                                                                10,038
                                                                (4)
                                                                
                                                                
                                                                
                                                                10,038
                                                                (4)
                                                                
                                                                
                                                                
                                                                24,115
                                                                (3)
                                                                
                                                                
                                                                
                                                                24,115
                                                                (3)
                                                                
                                                                
                                                                
                                                                10,038
                                                                (4)
                                                                
                                                                
                                                                
                                                                10,038
                                                                (4)Life
      Insurance
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                993
                                                                (5)
                                                                
                                                                
                                                                
                                                                993
                                                                (5)
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                1,000,000
                                                                (6)Total
                                                                
                                                                $
                                                                10,038
                                                                
                                                                
                                                                
                                                                $
                                                                10,038
                                                                
                                                                
                                                                
                                                                $
                                                                10,038
                                                                
                                                                
                                                                
                                                                $
                                                                3,603,568
                                                                
                                                                
                                                                
                                                                $
                                                                3,603,568
                                                                
                                                                
                                                                
                                                                $
                                                                3,298,498
                                                                
                                                                
                                                                
                                                                $
                                                                4,298,498
 
 (1)
              Represents
      one year of severance at Mr. Datta’s annual base salary pursuant to the
      September 2008 Employment Agreement, plus his 2009 bonus at the bonus rate
      (35% of base salary or $101,500) assuming 100% of the annual bonus target
      was satisfied.
 
 (2)
              Pursuant
      to the terms of the stock unit agreement, Mr. Datta’s unvested restricted
      stock units would become 100% vested if he was terminated without cause or
      for disability or death or upon a change-in-control. The shares underlying
      the restricted stock units have been valued in the above table using the
      December 31, 2009 closing market price of our common stock of $65.04 per
      share ($65.04 x 49,000 shares = $3,186,960 at 100%
    vesting).
 
 (3)
              Represents
      health and welfare benefits for 12 months and accrued paid time
      off.
 
 (4)
              Represents
      accrued paid time off.
 
 (5)
              Represents
      payment of life insurance premium.
 
 (6)
              Upon
      his death, Mr. Datta’s beneficiary would receive the proceeds of a
      $1,000,000 life insurance policy.
 
  124
  Douglas
Jendras
  The
following table shows the potential payments upon termination or a
change-in-control of the Company for Douglas Jendras, the Company’s Senior Vice
President, Operations, as if such termination had taken place on December 31,
2009.
  Executive Benefits and
                                          Payments Upon
                                          Separation
                                        
                                        Expiration of
                                          Employment
                                          Agreement
                                          ($)
                                        
                                        
                                        Voluntary
                                          Termination
                                          on 12/31/09
                                          ($)
                                        
                                        
                                        For Cause
                                          Termination on
                                          12/31/09
                                          ($)
                                        
                                        
                                        Without Cause
                                          Termination on
                                          12/31/09
                                          ($)
                                        
                                        
                                        
                                        Change-in-Control and
                                          Termination on
                                          12/31/09
                                          ($)
                                        
                                        
                                        
                                        Disability on
                                          12/31/09
                                          ($)
                                        
                                        
                                        Death on
                                          12/31/09
                                          ($)Compensation:Cash
      Severance – Salary and Bonus
                                        
                                        $
                                        —
                                        
                                        
                                        $
                                        —
                                        
                                        
                                        $
                                        —
                                        
                                        
                                        $
                                        378,000
                                        (1)
                                        
                                        
                                        $
                                        378,000
                                        (1)
                                        
                                        
                                        $
                                        98,000
                                        
                                        
                                        $
                                        98,000Stock
      Options
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Restricted Stock (2)
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        3,186,960
                                        
                                        
                                        
                                        
                                        3,186,960
                                        
                                        
                                        
                                        
                                        3,186,960
                                        
                                        
                                        
                                        3,186,960Benefits
      and Perquisites
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        13,991
                                        (3)
                                        
                                        
                                        
                                        13,991
                                        (3)
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Life
      Insurance
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        1,096
                                        (4)
                                        
                                        
                                        
                                        1,096
                                        (4)
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        1,000,000
                                        (5)Total
                                        
                                        $
                                        —
                                        
                                        
                                        $
                                        —
                                        
                                        
                                        $
                                        —
                                        
                                        
                                        $
                                        3,580,047
                                        
                                        
                                        
                                        $
                                        3,580,047
                                        
                                        
                                        
                                        $
                                        3,284,960
                                        
                                        
                                        $
                                        4,284,960
 
 (1)
              Represents
      one year of severance at Mr. Jendras’ annual base salary pursuant to the
      September 2008 Employment Agreement, plus his 2009 bonus at the bonus rate
      (35% of base salary or $98,000) assuming 100% of the annual bonus target
      was satisfied.
 
 (2)
              Pursuant
      to the terms of the stock unit agreement, Mr. Jendras’ unvested restricted
      stock units would become 100% vested if he was terminated without cause or
      for disability or death or upon a change-in-control. The shares underlying
      the restricted stock units have been valued in the above table using the
      December 31, 2009 closing market price of our common stock of $65.04 per
      share ($65.04 x 49,000 shares = $3,186,960 at 100%
    vesting).
 
 (3)
              Represents
      health and welfare benefits for 12
months.
 
 (4)
              Represents
      payment of life insurance premium.
 
 (5)
              Upon
      his death, Mr. Jendras’ beneficiary would receive the proceeds of a
      $1,000,000 life insurance policy.
 
 Director
Compensation
  The
Company uses a combination of cash and stock-based incentive compensation to
retain qualified candidates to serve on the Board.  In setting
director compensation, the Company considers the significant amount of time that
directors expend in fulfilling their duties to the Company, as well as the
skill-level required by the Company of members of the Board.
 
 Non-employee
members of the Board are entitled to receive an annual retainer fee of $60,000,
payable quarterly in arrears.  In addition, the Chairman of the
Board receives an additional annual retainer of $30,000 and the Chairman of the
Audit Committee receives an additional annual retainer of $10,000, both payable
quarterly in arrears.  Non-employee members of the Board are entitled to a
$2,500 meeting fee for every Board or committee meeting attended in person and
for every telephonic meeting exceeding one hour.  Additionally,
members receive a meeting fee of $500 for every telephonic Board or committee
meeting that is less than one hour.  The Chairman of the Strategy
Committee is entitled to an annual retainer of $80,000 payable quarterly in
arrears.
 
 Directors
are also reimbursed for reasonable expenses incurred in their service as
directors.  Directors who are employees of the Company receive no
additional compensation for their service as directors of the
Company.
 
 Until his
departure from FMA on April 30, 2009, Mr. Embler contributed all of his
director’s fees received to the funds managed by FMA holding Company
securities.
  125
  Director
Summary Compensation Table
  The
following table summarizes the compensation paid to our non-employee directors
for the fiscal year ended December 31, 2009:
  Name
                                                                                            
                                                                                            Fees Earned or
                                                                                              Paid in Cash
                                                                                              ($) (1)
                                                                                            
                                                                                            
                                                                                            Stock Awards
                                                                                              ($)(2)
                                                                                            
                                                                                            
                                                                                            Option
                                                                                              Awards
                                                                                              ($)
                                                                                            
                                                                                            
                                                                                            Non-Equity
                                                                                              Incentive Plan
                                                                                              Compensation
                                                                                              ($)
                                                                                            
                                                                                            
                                                                                            Change in
                                                                                              Pension Value and
                                                                                              Nonqualified Deferred
                                                                                              Compensation
                                                                                              Earnings ($)
                                                                                            
                                                                                            
                                                                                            All Other
                                                                                              Compensation
                                                                                              ($)
                                                                                            
                                                                                            
                                                                                            Total
                                                                                              ($)Jeffrey
      A. Brodsky
                                                                                            
                                                                                            $
                                                                                            132,500
                                                                                            (3)
                                                                                            
                                                                                            $
                                                                                            161,700
                                                                                            
                                                                                            
                                                                                            $
                                                                                            —
                                                                                            
                                                                                            
                                                                                            $
                                                                                            —
                                                                                            
                                                                                            
                                                                                            $
                                                                                            —
                                                                                            
                                                                                            
                                                                                            $
                                                                                            —
                                                                                            
                                                                                            
                                                                                            $
                                                                                            294,200Michael
      J. Embler
                                                                                            
                                                                                            
                                                                                            82,500
                                                                                            (4)
                                                                                            
                                                                                            
                                                                                            161,700
                                                                                            
                                                                                            
                                                                                            
                                                                                            —
                                                                                            
                                                                                            
                                                                                            
                                                                                            —
                                                                                            
                                                                                            
                                                                                            
                                                                                            —
                                                                                            
                                                                                            
                                                                                            
                                                                                            —
                                                                                            
                                                                                            
                                                                                            
                                                                                            244,200Richard
      Postma
                                                                                            
                                                                                            
                                                                                            96,000
                                                                                            
                                                                                            
                                                                                            
                                                                                            161,700
                                                                                            
                                                                                            
                                                                                            
                                                                                            —
                                                                                            
                                                                                            
                                                                                            
                                                                                            —
                                                                                            
                                                                                            
                                                                                            
                                                                                            —
                                                                                            
                                                                                            
                                                                                            
                                                                                            —
                                                                                            
                                                                                            
                                                                                            
                                                                                            257,700Richard
      Shorten, Jr.
                                                                                            
                                                                                            
                                                                                            175,500
                                                                                            (5)
                                                                                            
                                                                                            
                                                                                            161,700
                                                                                            
                                                                                            
                                                                                            
                                                                                            —
                                                                                            
                                                                                            
                                                                                            
                                                                                            —
                                                                                            
                                                                                            
                                                                                            
                                                                                            —
                                                                                            
                                                                                            
                                                                                            
                                                                                            —
                                                                                            
                                                                                            
                                                                                            
                                                                                            337,200Stuart
      Subotnick
                                                                                            
                                                                                            
                                                                                            86,000
                                                                                            
                                                                                            
                                                                                            
                                                                                            161,700
                                                                                            
                                                                                            
                                                                                            
                                                                                            —
                                                                                            
                                                                                            
                                                                                            
                                                                                            —
                                                                                            
                                                                                            
                                                                                            
                                                                                            —
                                                                                            
                                                                                            
                                                                                            
                                                                                            —
                                                                                            
                                                                                            
                                                                                            
                                                                                            247,700$
                                                                                            572,500
                                                                                            
                                                                                            
                                                                                            $
                                                                                            808,500
                                                                                            
                                                                                            
                                                                                            $
                                                                                            —
                                                                                            
                                                                                            
                                                                                            $
                                                                                            —
                                                                                            
                                                                                            
                                                                                            $
                                                                                            —
                                                                                            
                                                                                            
                                                                                            $
                                                                                            —
                                                                                            
                                                                                            
                                                                                            $
                                                                                            1,381,000
 
 (1)
              Includes
      $60,000 annual service retainer plus meeting attendance
    fees.
 
 (2)
              The
      amounts in this column reflect the aggregate grant date fair value of
      restricted stock units granted to the directors on December 3, 2009,
      computed in accordance with FASB ASC Topic 718. See Note 12 to our
      consolidated financial statements included elsewhere in this Annual Report
      on Form 10-K for a discussion of the assumptions made in the valuation of
      the restricted stock unit awards. Excludes the compensation associated
      with 14,000 restricted stock units granted August 7, 2007, which vested on
      August 7, 2008 and were delivered on August 17, 2009 and 1,000 restricted
      stock units, which were granted September 8, 2008, which vested on
      September 8, 2009 and were delivered November 16, 2009 and 2,000 options
      to purchase shares of common stock, which were granted September 8, 2008
      and vested on September 8, 2009.
 
 (3)
              Includes
      $30,000 for services performed as Chairman of the Board and $10,000 for
      services performed as Chairman of the Audit
  Committee.
 
 (4)
              In
      accordance with FMA’s internal policy, prior to the termination of Mr.
      Embler’s employment with FMA, Mr. Embler was required to distribute to the
      funds managed by FMA that held our securities all cash and non-cash
      compensation paid to Mr. Embler in connection with his service as a
      director when such cash and non-cash compensation (including any cash
      proceeds from non-cash compensation) became available. Of the amount
      reflected in the table, $26,000 was paid to these funds and $56,500 was
      retained by Mr. Embler.
 
 (5)
              Includes
      $80,000 for services performed as Chairman of the Strategy
      Committee.
 
 The above
table excludes reimbursements for Board-related expenses totaling
$4,073.
 
 Compensation
Committee Interlocks and Insider Participation
  During
2009, except as discussed below, none of the members of our Compensation
Committee (Messrs. Subotnick, Postma and Shorten), (i) served as an officer
or employee of the Company or its subsidiaries, (ii) was formerly an
officer of the Company or its subsidiaries or (iii) entered into any
transactions with the Company or its subsidiaries, other than stock option
agreements and restricted stock unit agreements.  During 2009, none of
our executive officers (i) served as a member of the compensation committee
(or other board committee performing equivalent functions or, in the absence of
any such committee, the board of directors) of another entity, one of whose
executive officers served on our Compensation Committee, (ii) served as
director of another entity, one of whose executive officers served on our
Compensation Committee, or (iii) served as member of the compensation
committee (or other board committee performing equivalent functions or, in the
absence of any such committee, the board of directors) of another entity, one of
whose executive officers served as a director of the Company.
  In 2009,
we invoiced US Signal, LLC, a company principally owned by Mr. Postma, for
certain fiber services sold to US Signal, LLC totaling $347,760.  See
Item 12, “Certain Relationships and Related Transactions, and Director
Independence,” for further detail.
  126
  ITEM 12.  SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
 
 The
following table sets forth, as of February 28, 2010, certain information
regarding beneficial ownership of our common stock by (a) each person or
entity who is known by us to own beneficially 5% or more of our common stock,
(b) each of our directors, (c) each of our named executive officers
and (d) all executive officers and directors as a group.  Unless
otherwise indicated, each of the stockholders shown in the table below has sole
voting and investment power with respect to the shares beneficially
owned.  Unless otherwise indicated, the address of each person named
in the table below is c/o AboveNet, Inc., 360 Hamilton Avenue, White Plains, New
York 10601.  As used in this table, a beneficial owner of a security
includes any person who, directly or indirectly, through contract, arrangement,
understanding, relationship or otherwise has or shares (i) the power to
vote, or direct the voting of, such security or (ii) investment power which
includes the power to dispose, or to direct the disposition of, such
security.  In addition, a person is deemed to be the beneficial owner
of a security if that person has the right to acquire beneficial ownership of
such security within 60 days of February 28, 2010.
  Name of Beneficial Owner
                                                          
                                                          Common Stock
                                                            Beneficially Owned
                                                          
                                                          
                                                          Percentage of
                                                            Common Stock (1)Franklin
      Mutual Advisers, LLC
                                                            101
      John F. Kennedy Parkway
                                                            Short
      Hills, NJ  07078
                                                          
                                                          
                                                          4,899,970
                                                          (2)
                                                          
                                                          
                                                          19.4
                                                          %JGD
      Management Corp. and affiliated person
                                                            c/o
      York Capital Management
                                                            767
      Fifth Avenue, 17th
      Floor
                                                            New
      York, NY  10153
                                                          
                                                          
                                                          2,606,680
                                                          (3)
                                                          
                                                          
                                                          10.4
                                                          %JWK
      Enterprises, LLC
                                                            c/o
      Metromedia Company
                                                            810
      7th
      Avenue, 29th
      Floor
                                                            New
      York, NY  10019
                                                          
                                                          
                                                          2,440,608
                                                          (4)
                                                          
                                                          
                                                          9.7
                                                          %FMR
      LLC
                                                            82
      Devonshire Street
                                                            Boston,
      MA  02109
                                                          
                                                          
                                                          2,300,493
                                                          (5)
                                                          
                                                          
                                                          9.2
                                                          %Fiber
      LLC
                                                            2300
      Carillow Point
                                                            Kirkland,
      WA  98033
                                                          
                                                          
                                                          2,321,638
                                                          (6)
                                                          
                                                          
                                                          9.3
                                                          %Jeffrey
      A. Brodsky
                                                          
                                                          
                                                          23,000
                                                          (7)
                                                          
                                                          
                                                          *Richard
      Shorten, Jr.
                                                          
                                                          
                                                          12,000
                                                          (8)
                                                          
                                                          
                                                          *Richard
      Postma
                                                          
                                                          
                                                          9,400
                                                          (9)
                                                          
                                                          
                                                          *Stuart
      Subotnick
                                                          
                                                          
                                                          8,000
                                                          (10)
                                                          
                                                          
                                                          *Michael
      Embler
                                                          
                                                          
                                                          5,068
                                                          (11)
                                                          
                                                          
                                                          *William
      G. LaPerch
                                                          
                                                          
                                                          89,650
                                                          (12)
                                                          
                                                          
                                                          *Robert
      Sokota
                                                          
                                                          
                                                          59,682
                                                          (14)
                                                          
                                                          
                                                          *Rajiv
      Datta
                                                          
                                                          
                                                          43,553
                                                          (16)
                                                          
                                                          
                                                          *Joseph
      P. Ciavarella
                                                          
                                                          
                                                          4,000
                                                          (13)
                                                          
                                                          
                                                          *John
      Jacquay
                                                          
                                                          
                                                          —
                                                          (15)
                                                          
                                                          
                                                          *Douglas
      Jendras
                                                          
                                                          
                                                          —
                                                          (15)
                                                          
                                                          
                                                          *All
      directors and executive officers as a group (eleven
    persons)
                                                          
                                                          
                                                          254,353
                                                          (17)
                                                          
                                                          
                                                          1.0
                                                          %
 * Less than
1%
  127
 
 (1)
              The
      applicable percentage of beneficial ownership is based on 25,050,849
      shares of common stock outstanding as of February 28, 2010, and with
      respect to each person, any shares of common stock that may be acquired by
      exercise of stock options, or other rights to acquire common stock, within
      60 days of February 28, 2010.
 
 (2)
              Based
      on information contained in Amendment No. 1 to Schedule 13G filed with the
      Securities and Exchange Commission on January 21, 2010 by Franklin Mutual
      Advisors, LLC (“FMA”). Includes 4,703,150 shares of common stock and seven
      year warrants to purchase 189,532 shares of common stock at $12 per
      share.  FMA has sole voting and investment discretion over these
      securities pursuant to investment management contracts.  FMA
      disclaims beneficial ownership of the shares owned by its investment
      management clients.  Also includes options to purchase 7,288
      shares of common stock granted to Mr. Embler, which he holds as a nominee
      of FMA and disclaims any beneficial
ownership.
 
 (3)
              Based
      on information contained in the Schedule 13G (Amendment No. 8) filed by
      JGD Management Corp. (“JGD”) with the Securities and Exchange Commission
      on January 11, 2010.  Includes (i) 271,865 shares of common stock and
      warrants to purchase 20,000 shares of common stock directly owned by York
      Capital Management, L.P. (“York Capital”); (ii) 236,241  shares of
      common stock and warrants to purchase 5,850 shares of common stock
      directly owned by York Select, L.P. (“York Select”); (iii) 371,206 shares
      of common stock and warrants to purchase 5,622 shares of common stock
      directly owned by York Credit Opportunities Fund, L.P. (“York Credit
      Opportunities”); (iv) 270,477  shares of common stock and warrants to
      purchase 44,320 shares of common stock directly owned by York Select
      Master Fund, L.P., a Cayman Islands exempted limited partnership (“York
      Select Master”); (v) 62,444 shares of common stock and warrants to
      purchase 11,124 shares of common stock directly owned by York Global Value
      Master Fund, L.P., a Cayman Islands exempted limited partnership (“York
      Global Value”); (vi) 454,814 shares of common stock directly owned by York
      Investment Master Fund, L.P., a Cayman Islands exempted limited
      partnership (“York Investment”); (vii) 1,083 shares of common stock
      directly owned by York Long Enhanced Fund, L.P. (“York Long Enhanced”);
      (viii) 759,560 shares of common stock and warrants to purchase 12,060
      shares of common stock directly owned by York Credit Opportunities Master
      Fund, L.P., a Cayman Islands exempted limited partnership (“York Credit
      Opportunities Master”) and (ix) 76,138 shares of common stock and warrants
      to purchase 3,876 shares of common stock directly owned by certain managed
      accounts (the “Managed Accounts”). The general partners of York Capital,
      York Select, York Credit Opportunities, York Select Master, York Global
      Value, York Investment, York Long Enhanced and York Credit Opportunities
      Master have delegated certain management and administrative duties of such
      funds to JGD. In addition, JGD manages the Managed
    Accounts.
 
 (4)
              Includes
      2,388,364 shares of common stock and seven year warrants to purchase
      52,244 shares of common stock at $12 per
share.
 
 (5)
              Based
      on information contained in the Schedule 13G filed by FMR LLC on behalf of
      itself and Edward C. Johnson 3d with the Securities and Exchange
      Commission on February 16, 2010. FMR LLC has sole power to vote or direct
      the vote of 103,830 shares and sole power to dispose or to direct the
      disposition of 2,300,493 shares.
 
 (6)
              Based
      on information contained in a Amendment No. 1 to Schedule 13D filed with
      the Securities and Exchange Commission on November 24, 2009 by Fiber LLC,
      Craig McCaw, Eagle River Holdings, LLC and Eagle River,
    Inc.
 
 (7)
              Includes
      15,000 shares of common stock and fully vested and exercisable options to
      purchase 8,000 shares of common stock.  Excludes 3,000 shares
      underlying restricted stock units granted on December 3, 2009, which vest
      40% on November 16, 2010 and 60% on November 16,
  2011.
 
 (8)
              Includes
      10,000 shares of common stock, and fully vested and exercisable options to
      purchase 2,000 shares of common stock.  Excludes 3,000 shares
      underlying restricted stock units granted on December 3, 2009, which vest
      40% on November 16, 2010 and 60% on November 16,
  2011.
 
 (9)
              Excludes
      3,000 shares underlying restricted stock units granted on December 3,
      2009, which vest 40% on November 16, 2010 and 60% on November 16,
      2011.
 
 (10)
              Includes
      fully vested and exercisable options to purchase 8,000 shares of common
      stock. Excludes 3,000 shares underlying restricted stock units granted
      December 3, 2009, which vest 40% on November 16, 2010 and 60% on November
      16, 2011.
  128
 
 (11)
              Includes
      4,356 shares of common stock and fully vested and exercisable options to
      purchase the 712 shares of common stock. Excludes 3,000 shares underlying
      restricted stock units granted on December 3, 2009, which vest 40% on
      November 16, 2010 and 60% on November 16,
2011.
 
 (12)
              Includes
      14,000 restricted stock units that are scheduled to vest on March 15, 2010
      pursuant to the September 8, 2008 performance-based grant. Excludes 70,000
      restricted stock units granted September 8, 2008, 10,000 of which are
      scheduled to vest on the second anniversary of the date of grant and
      60,000 are scheduled to vest on the third anniversary of the date of
      grant.  Also excludes 28,000 restricted stock units that vest in
      2011 and 2012 based upon the achievement of certain performance targets in
      2010 and 2011 that have been established for 2010 but not for
      2011.
 
 (13)
              Includes
      4,000 shares of common stock. Excludes 49,000 restricted stock units
      granted October 27, 2008, 7,000 of which are scheduled to vest on
      November 15, 2010 and 42,000 are scheduled to vest on November 15,
      2011.
 
 (14)
              Excludes
      49,000 restricted stock units granted September 8, 2008, 7,000 of which
      are scheduled to vest on the second anniversary of the date of grant and
      42,000 are scheduled to vest on the third anniversary of the date of
      grant.
 
 (15)
              Excludes
      49,000 restricted stock units granted on September 8, 2008, 7,000
      of which are scheduled to vest on the second anniversary of the date
      of grant and 42,000 are scheduled to vest on the third anniversary of the
      date of grant.
 
 (16)
              Includes
      42,278 shares of common stock, and fully vested and exercisable option to
      purchase 1,275 shares of common stock.  Excludes 3,000 shares
      underlying restricted stock units granted on December 3, 2009, which vest
      40% on November 16, 2010 and 60% on November 16,
  2011.
 
 (17)
              Includes
      220,366 shares of common stock, 14,000 restricted stock units that are
      scheduled to vest on March 15, 2010 pursuant to the September 8, 2008
      performance-based grant and fully vested and exercisable options to
      purchase 19,987 shares of common stock.  Excludes 266,000
      restricted stock units granted on September 8, 2008, of which 38,000 are
      scheduled to vest on the second anniversary of the date of grant and
      228,000 are scheduled to vest on the third anniversary of the date of
      grant.  Also excludes 15,000 restricted stock units granted on
      December 3, 2009, 40% of which are scheduled to vest on November 16,
      2010 and 60% are scheduled to vest on November 16,
  2011.
 
 Equity Compensation Plan
Information
  Table
of Securities Authorized for Issuance under Equity Compensation
Plan
  The
following table sets forth the indicated information regarding our equity
compensation plan and arrangements as of December 31, 2009.
  Plan category
                                    
                                    Number of Securities to be Issued
                                      Upon Exercise / Delivery of
                                      Outstanding Options and
                                      Restricted Stock Units
                                    
                                    
                                    Weighted Average
                                      Exercise Price of
                                      Outstanding Options(1)
                                    
                                    
                                    Number of Securities Remaining
                                      Available for Future Issuance
                                      Under Equity Compensation Plan
                                      (Excluding Securities Reflected in
                                      the First Column)Equity
      compensation plan approved by security holders
                                    
                                    
                                    —
                                    
                                    
                                    $—
                                    
                                    
                                    
                                    —2003
      Plan not approved by security holders
                                    
                                    
                                    185,976
                                    
                                    
                                    $14.28
                                    
                                    
                                    
                                    —
                                    (2)2008
      Plan not approved by security holders (3)
                                    
                                    
                                    662,372
                                    (4)
                                    
                                    $30.00
                                    
                                    
                                    
                                    541,766Total
                                    
                                    
                                    848,348
                                    
                                    
                                    $14.93
                                    
                                    
                                    
                                    541,766
  129
  (1)
                Only
      applicable to outstanding options to purchase common stock.(2)
                No
      unused shares (shares that were not committed pursuant to restricted stock
      units or outstanding options to purchase common shares) in this plan will
      be issued in the future.(3)
                During
      2009, 293,862 shares underlying vested restricted stock units and 2,000
      shares underlying options to purchase shares of common stock were issued
      to recipients.(4)
                Includes
      8,000 outstanding options to purchase shares of common
  stock.
 
 The table
above does not include warrants granted to creditors as part of settled
bankruptcy claims, which is as follows:
 
 Weighted
                    Average
                    Exercise
                    Price
                  
                  
                  Total
                    Warrants
                    Originally
                    Issued
                  
                  
                  Warrants
                    Cancelledasof
                    December31,2009
                  
                  
                  Warrants
                    Exercisedasof
                    December31,2009
                  
                  
                  UnexercisedWarrants
                    Outstandingat
                    December31,2009Seven
      year stock purchase warrants
                  
                  $
                  12.00
                  
                  
                  
                  1,669,316
                  
                  
                  
                  26
                  
                  
                  
                  810,760
                  
                  
                  
                  858,530
 
 Under the terms of the five
year and seven year warrant agreements (collectively, the “Warrant Agreements”),
as described in Note 10, “Shareholders’ Equity – Stock Warrants,” to the
accompanying consolidated financial statements included elsewhere in this Annual
Report on Form 10-K, if the market price of our common stock, as defined in the
respective Warrant Agreements, 60 days prior to the expiration date of the
respective warrants, is greater than the warrant exercise price, we are 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 are 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, are paid in cash.  Prior to the expiration of
the five year warrants, five year warrants to purchase 778 shares of common
stock were exercised on a Net Exercise basis, resulting in 520 common shares
being issued and 258 common shares being returned to treasury.  At
September 8, 2008, the expiration date of the five year warrants, the required
conditions were met for the Net Exercise.  Five year warrants to
purchase 50 shares of common stock were cancelled in accordance with
instructions from warrant holders.  The remaining unexercised five
year warrants to purchase 317,748 shares of common stock were deemed exercised
on a Net Exercise basis, of which 212,912 shares were issued to the warrant
holders, 104,836 shares were returned to treasury and $4,295 was paid to
recipients for fractional shares.
 
 Equity
Incentive Plans
  On August
29, 2008, the Board of Directors of the Company approved the Company’s 2008
Plan.  The 2008 Plan will be administered by the Company’s
Compensation Committee unless otherwise determined by the Board of
Directors.  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 were
initially reserved for issuance pursuant to awards granted under the 2008 Plan
in accordance with its terms.  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 as provided in the 2008
Plan.  For a description of the material features of the Company’s 2003
Plan and further discussion on the 2008 Plan, see Item 8, “Financial Statements
and Supplementary Data,” Note 12, “Stock-Based Compensation,” and Item 11,
“Executive Compensation-Compensation Discussion and Analysis - 2008
Plan.”
  130
  ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
 Independence
of the Board of Directors
  The New
York Stock Exchange listing standards require that a majority of the members of
a listed company’s directors must qualify as “independent,” as affirmatively
determined by the Board.
 
 After
review of all relevant transactions or relationships between each director, or
any of his or her family members, and the Company, its senior management and its
independent registered public accountants, the Board of Directors has
affirmatively determined that the following directors are independent directors
within the meaning of the applicable New York Stock Exchange listing standards:
Jeffrey A. Brodsky, Michael Embler, Richard Postma, Richard Shorten and Stuart
Subotnick.  In making this determination, the Board found that none of
these directors had a material or other disqualifying relationship with the
Company.  William LaPerch is notanindependent director by
virtue of his employment with the Company.
 
 In
determining the independence of Mr. Brodsky, the Board took into account that
the Company made a payment of $1.5 million to Comdisco Holding, Inc. in March
2004 at a time when Mr. Brodsky served as a member of the Board of Directors of
Comdisco.  Mr. Brodsky resigned from the Board of Directors of
Comdisco in July 2004.  The payment to Comdisco was made pursuant to a
settlement agreement between Comdisco and us that related to a dispute that
arose prior to our bankruptcy filing.  Mr. Brodsky had no involvement
in the settlement of such dispute, the settlement agreement of which was
approved by the United States Bankruptcy Court for the Southern District of New
York.  The payment by the Company to Comdisco represented less than 2%
of Comdisco’s fiscal 2004 revenue.
 
 In
determining the independence of Mr. Embler, the Board took into account that in
December 2009, Mr. Embler was appointed to the board of directors of CIT Group,
Inc., the parent company of CIT Lending Services Corporation, one of our lenders
under the Secured Credit Facility.
 
 In
determining the independence of Mr. Postma, the Board took into account that we
sell certain fiber services to US Signal, LLC, a company principally owned by
Mr. Postma and for which he serves as Chairman of the Board and Chief Executive
Officer.  We invoiced US Signal for fiber services totaling $104,150
in 2005, $111,360 in 2006, $274,557 in 2007, $329,964 in 2008 and $347,760 in
2009.  Our transactions with US Signal have been approved or ratified
by the Board of Directors (without Mr. Postma participating) and are priced
consistently with our pricing for other customers.  Mr. Postma had no
involvement in the negotiation of these fiber services agreements.
 
 In
determining the independence of Mr. Subotnick, the Board took into account that
we provided co-location services to Metromedia Connections, Inc., a company with
which Mr. Subotnick has an indirect ownership interest and management
role.  In connection with providing those services, Metromedia
Connections, Inc. paid us $65,877 in 2005.
 
 In
determining the independence of Mr. Shorten, the Board took into account that we
provided network planning services to First Avenue Networks, Inc., a company for
which Mr. Shorten served as non-executive Chairman of the Board and a member of
the Board of Directors.  In connection with the provision of those
services, First Avenue Networks, Inc. paid us $24,349 and we paid First Avenue
Networks $42,646 in connection with the partial reimbursement for a consultant
jointly retained by us and First Avenue Networks, both payments occurring in
2005.
  131
  ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND
SERVICES
 
 Aggregate
fees billed for professional services rendered for the Company by BDO Seidman,
LLP including amounts billed by its affiliate, BDO Stoy Hayward LLP, through
February 28, 2010 for each of the years ended December 31, 2009 and 2008
were:
 
 2009
                    
                    
                    2008Audit
      Fees
                    
                    $
                    1,215,972
                    
                    
                    $
                    1,907,017Audit
      Related Fees
                    
                    
                    40,775
                    
                    
                    
                    —Tax
      Fees
                    
                    
                    30,000
                    
                    
                    
                    30,000Total
                    
                    $
                    1,286,747
                    
                    
                    $
                    1,937,017
 
 The table
below represents fees incurred by service year (when the service was provided)
for each relevant audit period.  We recognize audit fees in our
operating results as the services are provided.  The information for
2009 is for services rendered through February 28, 2010.
  Year Incurred2010
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    TotalAudit
      Fees 2006
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    1,688,584
                    
                    
                    $
                    1,688,584Audit
      Fees 2007
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1,404,266
                    
                    
                    
                    1,404,266Audit
      Fees 2008
                    
                    
                    —
                    
                    
                    
                    1,037,017
                    
                    
                    
                    870,000
                    
                    
                    
                    1,907,017Audit
      Fees 2009
                    
                    
                    663,507
                    
                    
                    
                    552,465
                    
                    
                    
                    —
                    
                    
                    
                    1,215,972Tax
      Fees
                    
                    
                    —
                    
                    
                    
                    30,000
                    
                    
                    
                    618,189
                    *
                    
                    
                    648,189Audit
      Related Fees
                    
                    
                    —
                    
                    
                    
                    40,775
                    
                    
                    
                    —
                    
                    
                    
                    40,775Total
                    
                    $
                    663,507
                    
                    
                    $
                    1,660,257
                    
                    
                    $
                    4,581,039
                    
                    
                    $
                    6,904,803
 
 *      Substantially, all of the work was
performed for the year ended December 31, 2006.
 
 Audit
Fees.  In June 2009, BDO was engaged to audit the Company’s
financial statements as of and for the year ended December 31,
2009.  In November 2008, BDO was engaged to audit the Company’s
financial statements for the year ended December 31, 2008.  The Audit
Fees for the years ended December 31, 2009 and 2008, respectively, were for
professional services rendered for the audit of our consolidated financial
statements as described above.
 
 Audit Related
Fees.  Audit Related Fees are typically for due diligence
related to mergers and acquisitions.  There were no such fees for the
year ended December 31, 2008.
 
 Tax
Fees.  Tax Fees for the years ended December 31, 2009 and 2008
were for services related to tax compliance, including the preparation of tax
returns and claims for refund, tax planning and advice, including assistance
with and representation in tax audits and appeals, and advice related to mergers
and acquisitions.
  Auditor
Independence. The Audit Committee has
considered the non-audit services provided by BDO Seidman, LLP and determined
that the provision of such services had no effect on BDO Seidman, LLP's
independence from the Company.
 
 Audit Committee
Pre-Approval Policy and Procedures. The Audit Committee
must review and pre-approve all audits and, except as provided below, non-audit
services provided by BDO Seidman, LLP, our independent registered public
accounting firm.  In conducting reviews of audit and non-audit
services, the Audit Committee will determine whether the provision of such
services would impair BDO Seidman’s independence.  The Audit Committee
will only pre-approve services that it believes will not impair BDO Seidman’s
independence.  The Audit Committee has delegated to its Chairman
authority to pre-approve all non-audit related services.  All services
are subsequently communicated to the Audit Committee for 2009 and
2008.  All services were pre-approved in 2008 and 2009 pursuant to
this process.
  132
  PART
IV
 
 ITEM 15.  EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
 
 (a)       The following documents are filed as
part of thisAnnual
Reporton Form 10-K:
 
 1.       Financial
Statements
 
 For a
list of the financial statements of the Company included in this Annual Report
on Form 10-K, please see Index to Consolidated Financial Statements appearing at
the beginning of Item 8, “Financial Statements and Supplementary
Data.”
 
 2.       Financial Statement
Schedules
 
 The
following Financial Statement Schedule is filed as part of this Annual Report on
Form 10-K:
 
 Report
of Independent Registered Public Accounting Firm
 
 The
Board of Directors and Shareholders of
 AboveNet, Inc.
 White
Plains, New York
 
 The
audits referred to in our report dated March 16, 2010, relating to the
consolidated financial statements of AboveNet, Inc., which is contained in Item
8 of this Form 10-K, also included the audit of the financial statement Schedule
II – Valuation and Qualifying Accounts listed in the accompanying
index.  This financial statement schedule is the responsibility of the
Company’s management.  Our responsibility is to express an opinion on
this financial statement schedule based on our audits.
 
 In our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
 
 /s/  BDO
Seidman, LLP
  New York,
NY
 March 16,
2010
  133
  Schedule
II - Valuation and Qualifying Accounts
 
 ABOVENET,
INC. AND SUBSIDIARIES
  SCHEDULE
II
 VALUATION
AND QUALIFYING ACCOUNTS
 (in
millions)
 Column A
                                  
                                  
                                  Column B
                                  
                                  
                                  Column C
                                  
                                  
                                  Column D
                                  
                                  
                                  Column EBalance at
                                    beginning
                                    of period
                                  
                                  
                                  Additions
                                    charged to
                                    costs and
                                    expenses
                                  
                                  
                                  Additions
                                    charged to
                                    other accounts
                                  
                                  
                                  Deductions
                                  
                                  
                                  Balance at
                                    end of
                                    period2009Reserve
      for uncollectible accounts and sales credits
                                  
                                  $
                                  1.3
                                  
                                  
                                  $
                                  0.9
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  (0.2
                                  )
                                  
                                  $
                                  2.0Deferred
      tax valuation allowance
                                  
                                  $
                                  718.1
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  (652.2
                                  )
                                  
                                  $
                                  65.92008Reserve
      for uncollectible accounts and sales credits
                                  
                                  $
                                  0.7
                                  
                                  
                                  $
                                  0.7
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  (0.1
                                  )
                                  
                                  $
                                  1.3Deferred
      tax valuation allowance
                                  
                                  $
                                  800.9
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  (82.8
                                  )
                                  
                                  $
                                  718.12007Reserve
      for uncollectible accounts and sales credits
                                  
                                  $
                                  1.2
                                  
                                  
                                  $
                                  0.5
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  (1.0
                                  )
                                  
                                  $
                                  0.7Deferred
      tax valuation allowance
                                  
                                  $
                                  809.6
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  (8.7
                                  )
                                  
                                  $
                                  800.9
 
 All other
schedules have been omitted because they are not applicable, not required or the
information is disclosed in the consolidated financial statements, including the
notes thereto.
 
 3.
              Exhibits
 
 The
information required by this Item is set forth on the exhibit index that follows
the signature page of this Annual Report on Form 10-K.
  134
  SIGNATURES
  Pursuant
to the requirements of Section 13 or 15(d) 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:  March
      16, 2010
                        By:
                        /s/ William G. LaPerchWilliam
      G. LaPerch
                          President
      and Chief Executive
Officer
 
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
 
 Date:  March
      16, 2010
                By:
                /s/ William G. LaPerchWilliam
      G. LaPerchPresident,
      Chief Executive Officer and Director(Principal
      Executive Officer)
 
 Date:  March
      16, 2010
                By:
                /s/ Joseph P. CiavarellaJoseph
      P. CiavarellaSenior
      Vice President and Chief Financial Officer(Principal
      Financial and Accounting
Officer)
 
 Date:  March
      16, 2010
                By:
                /s/ Jeffrey A. BrodskyJeffrey
      A. BrodskyDirector
 
 Date:  March
      16, 2010
                By:
                /s/ Michael J. EmblerMichael
      J. EmblerDirector
 
 Date:  March
      16, 2010
                By:
                /s/ Richard PostmaRichard
      PostmaDirector
 
 Date:  March
      16, 2010
                By:
                /s/ Richard Shorten, Jr.Richard
      Shorten, Jr.
                  Director
 
 Date:  March
      16, 2010
                By:
                /s/ Stuart SubotnickStuart
      SubotnickDirector
  135
 EXHIBIT INDEX
 
 Exhibit No.
                    
                    
                    Description of Exhibit3.1
                    
                    
                    Amended
      and Restated Certificate of Incorporation filed with the Secretary of
      State of the State of Delaware on August 29, 2003 and effective as of
      August 29, 2003 (incorporated herein by reference to Form 8-A filed with
      the Securities and Exchange Commission on September 8,
    2003).3.2
                    
                    
                    Amended
      and Restated Bylaws adopted as of September 8, 2003 (incorporated herein
      by reference to Form 8-A filed with the Securities and Exchange Commission
      on September 8, 2003).3.3
                    
                    
                    Certificate
      of Designation of Series A Junior Participating Preferred Stock
      (incorporated herein by reference to Form 8-K filed with the Securities
      and Exchange Commission on August 4, 2006).4.1
                    
                    
                    Form
      of Specimen Common Stock Certificate (incorporated herein by reference to
      Form 10-K filed with the Securities and Exchange Commission on May 13,
      2008).4.2
                    
                    
                    Standstill
      Agreement dated as of August 2003, by and between Metromedia Fiber
      Network, Inc., John W. Kluge, the trust established pursuant to that
      certain Trust Agreement, dated May 30, 1984, as amended and restated and
      supplemented, between John W. Kluge, as Grantor and Stuart Subotnick, John
      W. Kluge and Chase Manhattan Bank, as Trustees and Stuart Subotnick
      (incorporated herein by reference to Form 10-K filed with the Securities
      and Exchange Commission on May 13, 2008).4.3
                    
                    
                    Warrant
      Agreement dated as of December 3, 2003, by and among the Registrant and
      American Stock Transfer & Trust Company, as Warrant Agent (with a form
      of Five Year Warrant Certificate attached thereto) (incorporated herein by
      reference to Form 8-A filed with the Securities and Exchange Commission on
      January 29, 2004).4.4
                    
                    
                    Warrant
      Agreement dated as of December 3, 2003, by and among the Registrant and
      American Stock Transfer & Trust Company, as Warrant Agent (with a form
      of Seven Year Warrant Certificate attached thereto) (incorporated herein
      by reference to Form 8-A filed with the Securities and Exchange Commission
      on January 29, 2004).4.5
                    
                    
                    Registration
      Rights Agreement dated as of March 1, 2004, by and among AboveNet, Inc.
      and Fiber LLC, Franklin Mutual Advisers, LLC and the Trust established
      pursuant to that certain Trust Agreement, dated May 30, 1984, as amended
      and restated and supplemented, between John W. Kluge, as Grantor and
      Stuart Subotnick, John W. Kluge and Chase Manhattan Bank, as Trustees
      (incorporated herein by reference to Form 10-K filed with the Securities
      and Exchange Commission on May 13, 2008).4.6
                    
                    
                    Rights
      Agreement dated as of August 3, 2006, between AboveNet, Inc. and American
      Stock Transfer & Trust Company, including Form of Right Certificate
      (incorporated herein by reference to Form 8-K filed with the Securities
      and Exchange Commission on August 4, 2006).4.7
                    
                    
                    Amendment
      to Rights Agreement dated as of August 7, 2008, between
      AboveNet, Inc. and American Stock Transfer & Trust Company
      (incorporated herein by reference to Form 8-K filed with the Securities
      and Exchange Commission on August 12, 2008).4.8
                    
                    
                    Standstill
      Agreement dated as of August 7, 2008, by and among
      AboveNet, Inc., JGD Management Corp., HFR ED Select Fund IV Master
      Trust, Lyxor/York Fund Limited, Permal York Limited, York Capital
      Management, L.P., York Credit Opportunities Fund, L.P., York Credit
      Opportunities Unit Trust, York Enhanced Strategies Fund, LLC, York Global
      Value Partners, L.P., York Investment Limited, York Long Enhanced Fund,
      L.P., York Select, L.P., York Select Unit Trust and certain accounts
      managed by JGD Management Corp. that hold securities of
      AboveNet, Inc. (incorporated herein by reference to Form 8-K filed
      with the Securities and Exchange Commission on August 12,
      2008).
  136
  4.9
                    
                    
                    Amendment
      No. 1 to the Standstill Agreement dated as of April 25, 2008, by and among
      AboveNet, Inc., John W. Kluge, that certain Fourteenth Restatement of
      Trust Agreement, dated May 30, 1984, between John W. Kluge, as Grantor,
      and John W. Kluge and JP Morgan Chase Bank, N.A. of New York, as original
      trustees, dated April 4, 2008, Stuart Subotnick and JWK Enterprises LLC
      (incorporated herein by reference to Form 10-K filed with the Securities
      and Exchange Commission on September 30, 2008).4.10
                    
                    
                    Amended
      and Restated Rights Agreement, dated as of August 3, 2009, between
      AboveNet, Inc. and American Stock Transfer & Trust Company, LLC
      (incorporated herein by reference to Form 8-K filed with the Securities
      and Exchange Commission on August 3, 2009).4.11
                    
                    
                    Form
      of Right Certificate (incorporated herein by reference to Form 8-K filed
      with the Securities and Exchange Commission on August 3,
      2009).4.12
                    
                    
                    Amendment
      to Amended and Restated Rights Agreement, signed as of January 27, 2010,
      between AboveNet, Inc. and American Stock Transfer & Trust
      Company, LLC (incorporated herein by reference to Form 8-K filed with the
      Securities and Exchange Commission on January 28,
2010).10.1
                    
                    
                    Agreement
      of Lease dated as of December 30, 1994, by and between Hudson Telegraph
      Associates L.P., as Landlord and F. Garofalo Electric Co., Inc. and
      National Fiber Network, Inc., as Tenant, and Letter dated as of July 1,
      2005 regarding transfer of property ownership from Hudson Telegraph
      Associates, L.P. to Hudson Owner LLC (incorporated herein by reference to
      Form 10-K filed with the Securities and Exchange Commission on May 13,
      2008).10.2
                    
                    
                    Agreement
      of Lease dated as of April 23, 1999, by and between 111 Eighth Avenue LLC,
      as Landlord and Metromedia Fiber Network Services, Inc., as Tenant,
      including amendments dated as of October 18, 2000, March 13, 2003 and
      March 1, 2004 (incorporated herein by reference to Form 8-K filed with the
      Securities and Exchange Commission on May 13, 2008).10.3
                    
                    
                    Agreement
      of Lease dated as of October 1, 1999, by and between Newport Office Center
      I Co., as Landlord and Metromedia Fiber Network Services, Inc., as Tenant,
      and related Right-of-Entry License Agreement and Facilities Management
      License Agreement (incorporated herein by reference to Form 8-K filed with
      the Securities and Exchange Commission on May 13,
2008).10.4
                    
                    
                    Amended
      and Restated Franchise Agreement dated as of February 28, 2000, by and
      between The City of New York and Metromedia Fiber Network NYC, Inc. and
      Stipulation, Agreement and Order by and among the Reorganized Debtors and
      The New York City Department of Information Technology and
      Telecommunications Concerning Franchise Agreement, effective January 1,
      2004 and approved by the United States Bankruptcy Court on July 12, 2004
      (incorporated herein by reference to Form 8-K filed with the Securities
      and Exchange Commission on May 13, 2008).10.5
                    **
                    
                    Fiber
      Lease Agreement dated as of April 26, 2002, by and between Williams
      Communications, LLC and Metromedia Fiber National Network, Inc., including
      amendments dated as of October 10, 2002, February 14, 2003 and October 8,
      2007 (incorporated herein by reference to Form 10-K filed with the
      Securities and Exchange Commission on May 13, 2008).10.6
                    **
                    
                    Collocation
      and Maintenance Agreement dated as of April 26, 2002, by and between
      Williams Communications, LLC and Metromedia Fiber National Network, Inc.,
      including amendments dated as of October 10, 2002 and February 14, 2003
      (incorporated herein by reference to Form 10-K filed with the Securities
      and Exchange Commission on May 13, 2008).10.7
                    *
                    
                    2003
      Incentive Stock Option and Stock Unit Grant Plan (incorporated herein by
      reference to Form 10-K filed with the Securities and Exchange Commission
      on May 13, 2008).10.8
                    *
                    
                    Employment
      Agreement made on August 29, 2003, and effective as of the effective
      date of the Second Amended Plan of Reorganization of Metromedia Fiber
      Network, Inc., dated July 1, 2003, by and between AboveNet, Inc.
      and William G. LaPerch, including amendments dated as of January 1, 2004
      and December 30, 2005 (incorporated herein by reference to Form 10-K filed
      with the Securities and Exchange Commission on May 13,
    2008).
  137
 
 10.9
                    *
                    
                    Employment
      Agreement made on August 31, 2003, and effective as of the effective
      date of the Second Amended Plan of Reorganization of Metromedia Fiber
      Network, Inc., dated July 1, 2003, by and between AboveNet, Inc.
      and Robert J. Sokota, including amendment dated as of December 30, 2005
      (incorporated herein by reference to Form 10-K filed with the Securities
      and Exchange Commission on May 13, 2008).10.10
                    *
                    
                    Employment
      Agreement made on August 31, 2003, and effective as of the effective
      date of the Second Amended Plan of Reorganization of Metromedia Fiber
      Network, Inc., dated July 1, 2003, by and between
      AboveNet, Inc. and Michael A. Doris, including amendments dated as of
      December 30, 2005 and March 4, 2008 (incorporated herein by reference to
      Form 8-K filed with the Securities and Exchange Commission on March 10,
      2008).10.11
                    *
                    
                    Stock
      Option Agreement dated as of September 10, 2003, by and between AboveNet,
      Inc. and William G. LaPerch (incorporated herein by reference to Form 10-K
      filed with the Securities and Exchange Commission on May 13,
      2008).10.12
                    *
                    
                    Stock
      Option Agreement dated as of September 10, 2003, by and between AboveNet,
      Inc. and Robert J. Sokota (incorporated herein by reference to Form 10-K
      filed with the Securities and Exchange Commission on May 13,
      2008).10.13
                    *
                    
                    Stock
      Option Agreement dated as of September 10, 2003, by and between AboveNet,
      Inc. and Michael A. Doris, including amendment dated as of March 4, 2008
      (incorporated herein by reference to Form 8-K filed with the Securities
      and Exchange Commission on March 10, 2008).10.14
                    *
                    
                    Stock
      Unit Agreement dated as of September 10, 2003, by and between AboveNet,
      Inc. and William G. LaPerch, including amendments dated as of December 30,
      2005 and December 30, 2006 (incorporated herein by reference to Form 10-K
      filed with the Securities and Exchange Commission on May 13,
      2008).10.15
                    *
                    
                    Stock
      Unit Agreement dated as of September 10, 2003, by and between AboveNet,
      Inc. and Robert J. Sokota, including amendments dated as of December 30,
      2005 and December 30, 2006 (incorporated herein by reference to Form 10-K
      filed with the Securities and Exchange Commission on May 13,
      2008).10.16
                    *
                    
                    Stock
      Unit Agreement dated as of September 10, 2003, by and between AboveNet,
      Inc. and Michael A. Doris, including amendments dated as of December 30,
      2005 and December 30, 2006 (incorporated herein by reference to Form 10-K
      filed with the Securities and Exchange Commission on May 13,
      2008).10.17
                    *
                    
                    Employment
      Agreement dated as of September 12, 2003, by and between AboveNet, Inc.
      and Rajiv Datta, including amendment dated as of December 30, 2005
      (incorporated herein by reference to Form 10-K filed with the Securities
      and Exchange Commission on May 13, 2008).10.18
                    *
                    
                    Employment
      Agreement dated as of September 12, 2003, by and between AboveNet, Inc.
      and Douglas Jendras, including amendment dated as of December 30, 2005
      (incorporated herein by reference to Form 10-K filed with the Securities
      and Exchange Commission on May 13, 2008).10.19
                    *
                    
                    Stock
      Option Agreement dated as of September 12, 2003, by and between AboveNet,
      Inc. and Rajiv Datta (incorporated herein by reference to Form 10-K filed
      with the Securities and Exchange Commission on May 13,
    2008).10.20
                    *
                    
                    Stock
      Option Agreement dated as of September 12, 2003, by and between AboveNet,
      Inc. and Douglas M. Jendras (incorporated herein by reference to Form 10-K
      filed with the Securities and Exchange Commission on May 13,
      2008).10.21
                    *
                    
                    Stock
      Unit Agreement dated as of September 12, 2003, by and between AboveNet,
      Inc. and Rajiv Datta, including amendments dated as of December 30, 2005
      and December 30, 2006 (incorporated herein by reference to Form 10-K filed
      with the Securities and Exchange Commission on May 13,
    2008).10.22
                    *
                    
                    Stock
      Unit Agreement dated as of September 12, 2003, by and between AboveNet,
      Inc. and Douglas M. Jendras, including amendments dated as of December 30,
      2005 and December 30, 2006 (incorporated herein by reference to Form 10-K
      filed with the Securities and Exchange Commission on May 13,
      2008).
  138
 
 10.23
                    *
                    
                    Stock
      Unit Agreement dated as of December 19, 2003, by and between AboveNet,
      Inc. and Rajiv Datta, including amendments dated as of December 30, 2005
      and December 30, 2006 (incorporated herein by reference to Form 10-K filed
      with the Securities and Exchange Commission on May 13,
    2008).10.24
                    *
                    
                    Stock
      Option Agreement dated as of May 13, 2004, by and between AboveNet, Inc.
      and Rajiv Datta (incorporated herein by reference to Form 10-K filed with
      the Securities and Exchange Commission on May 13,
2008).10.25
                    *
                    
                    Stock
      Option Agreement dated as of May 13, 2004, by and between AboveNet, Inc.
      and Douglas Jendras (incorporated herein by reference to Form 10-K filed
      with the Securities and Exchange Commission on May 13,
    2008).10.26
                    *
                    
                    Stock
      Unit Agreement dated as of May 13, 2004, by and between AboveNet, Inc. and
      Rajiv Datta, including amendments dated as of December 30, 2005 and
      December 30, 2006 (incorporated herein by reference to Form 10-K filed
      with the Securities and Exchange Commission on May 13,
    2008).10.27
                    *
                    
                    Stock
      Unit Agreement dated as of May 13, 2004, by and between AboveNet, Inc. and
      Douglas M. Jendras, including amendments dated as of December 30, 2005 and
      December 30, 2006 (incorporated herein by reference to Form 10-K filed
      with the Securities and Exchange Commission on May 13,
    2008).10.28
                    *
                    
                    Employment
      Agreement dated as of June 1, 2004, by and between AboveNet, Inc. and John
      Jacquay, including amendments dated as of December 30, 2005 and August 27,
      2007 (incorporated herein by reference to Form 10-K filed with the
      Securities and Exchange Commission on May 13, 2008).10.29
                    *
                    
                    Stock
      Option Agreement dated as of June 1, 2004, by and between AboveNet, Inc.
      and John Jacquay (incorporated herein by reference to Form 10-K filed with
      the Securities and Exchange Commission on May 13,
2008).10.30
                    *
                    
                    Stock
      Unit Agreement dated as of June 1, 2004, by and between AboveNet, Inc. and
      John Jacquay, including amendments dated as of December 30, 2005 and
      December 30, 2006 (incorporated herein by reference to Form 10-K filed
      with the Securities and Exchange Commission on May 13,
    2008).10.31
                    *
                    
                    Stock
      Option Agreement dated as of December 19, 2005, by and between AboveNet,
      Inc. and John Jacquay (incorporated herein by reference to Form 10-K filed
      with the Securities and Exchange Commission on May 13,
    2008).10.32
                    *
                    
                    Stock
      Option Agreement dated as of December 19, 2005, by and between AboveNet,
      Inc. and Rajiv Datta (incorporated herein by reference to Form 10-K filed
      with the Securities and Exchange Commission on May 13,
    2008).10.33
                    *
                    
                    Stock
      Option Agreement dated as of December 19, 2005, by and between AboveNet,
      Inc. and Douglas Jendras (incorporated herein by reference to Form 10-K
      filed with the Securities and Exchange Commission on May 13,
      2008).10.34
                    
                    
                    Asset
      Purchase Agreement dated as of September 27, 2006, by and between AboveNet
      Communications, Inc. and Digital Above, LLC (incorporated by reference to
      Form 8-K filed with the Securities and Exchange Commission on October 4,
      2006).10.35
                    *
                    
                    Stock
      Unit Agreement dated as of August 7, 2007, by and between AboveNet, Inc.
      and William LaPerch (incorporated herein by reference to Form 10-K filed
      with the Securities and Exchange Commission on May 13,
    2008).10.36
                    *
                    
                    Stock
      Unit Agreement dated as of August 7, 2007, by and between AboveNet, Inc.
      and Robert Sokota (incorporated herein by reference to Form 10-K filed
      with the Securities and Exchange Commission on May 13,
    2008).
  139
 
 10.37
                    *
                    
                    Stock
      Unit Agreement dated as of August 7, 2007, by and between AboveNet, Inc.
      and Michael A. Doris, including amendment dated as of March 4, 2008
      (incorporated herein by reference to Form 8-K filed with the Securities
      and Exchange Commission on March 10, 2008).10.38
                    *
                    
                    Stock
      Unit Agreement dated as of August 7, 2007, by and between AboveNet, Inc.
      and John Jacquay (incorporated herein by reference to Form 10-K filed with
      the Securities and Exchange Commission on May 13,
2008).10.39
                    *
                    
                    Stock
      Unit Agreement dated as of August 7, 2007, by and between AboveNet, Inc.
      and Rajiv Datta (incorporated herein by reference to Form 10-K filed with
      the Securities and Exchange Commission on May 13,
2008).10.40
                    *
                    
                    Stock
      Unit Agreement dated as of August 7, 2007, by and between AboveNet, Inc.
      and Douglas Jendras (incorporated herein by reference to Form 10-K filed
      with the Securities and Exchange Commission on May 13,
    2008).10.41
                    
                    
                    Credit
      and Guaranty Agreement dated as of February 29, 2008, among
      AboveNet, Inc., AboveNet Communications, Inc., AboveNet of Utah,
      LLC, AboveNet of VA, LLC, AboveNet International, Inc., the Lenders
      party thereto, Societe Generale, as Administrative Agent, and CIT Lending
      Services Corporation, as Documentation Agent (incorporated herein by
      reference to Form 8-K filed with the Securities and Exchange Commission on
      March 5, 2008).10.42
                    
                    
                    Security
      and Pledge Agreement dated as of February 29, 2008, among
      AboveNet, Inc., AboveNet Communications, Inc., AboveNet of Utah,
      LLC, AboveNet of VA, LLC, AboveNet International, Inc., and Societe
      Generale, as Administrative Agent (incorporated herein by reference to
      Form 8-K filed with the Securities and Exchange Commission on March 5,
      2008).10.43
                    *
                    
                    Separation
      of Employment and General Release Agreement dated as of March 4,
      2008, by and between AboveNet Communications, Inc. and Michael A.
      Doris (incorporated herein by reference to Form 8-K filed with the
      Securities and Exchange Commission on March 10, 2008).10.44
                    *
                    
                    Consulting
      Agreement dated as of March 4, 2008, between AboveNet
      Communications, Inc. and Michael A. Doris (incorporated herein by
      reference to Form 8-K filed with the Securities and Exchange Commission on
      March 10, 2008).10.45
                    *
                    
                    AboveNet,
      Inc. 2008 Equity Incentive Plan (incorporated herein by reference to Form
      8-K filed with the Securities and Exchange Commission on September 5,
      2008).10.46
                    *
                    
                    Employment
      Agreement effective as of September 2, 2008, by and between AboveNet, Inc.
      and William LaPerch (incorporated herein by reference to Form 8-K
      filed with the Securities and Exchange Commission on September 11,
      2008).10.47
                    *
                    
                    Employment
      Agreement effective as of September 2, 2008, by and between AboveNet, Inc.
      and Robert Sokota (incorporated herein by reference to Form 8-K filed
      with the Securities and Exchange Commission on September 11,
      2008).10.48
                    *
                    
                    Employment
      Agreement effective as of September 2, 2008, by and between AboveNet, Inc.
      and John Jacquay (incorporated herein by reference to Form 8-K filed
      with the Securities and Exchange Commission on September 11,
      2008).10.49
                    *
                    
                    Employment
      Agreement effective as of September 2, 2008, by and between AboveNet, Inc.
      and Rajiv Datta (incorporated herein by reference to Form 8-K filed
      with the Securities and Exchange Commission on September 11,
      2008).
  140
 
 10.50
                    *
                    
                    Employment
      Agreement effective as of September 2, 2008, by and between AboveNet, Inc.
      and Douglas Jendras (incorporated herein by reference to Form 8-K
      filed with the Securities and Exchange Commission on September 11,
      2008).10.51
                    *
                    
                    Stock
      Unit Agreement dated as of September 8, 2008, by and between AboveNet,
      Inc. and William LaPerch (incorporated herein by reference to Form 10-K
      filed with the Securities and Exchange Commission on September 30,
      2008).10.52
                    *
                    
                    Stock
      Unit Agreement dated as of September 8, 2008, by and between AboveNet,
      Inc. and William LaPerch (incorporated herein by reference to Form 10-K
      filed with the Securities and Exchange Commission on September 30,
      2008).10.53
                    *
                    
                    Stock
      Unit Agreement dated as of September 8, 2008, by and between AboveNet,
      Inc. and Robert Sokota (incorporated herein by reference to Form 10-K
      filed with the Securities and Exchange Commission on September 30,
      2008).10.54
                    *
                    
                    Stock
      Unit Agreement dated as of September 8, 2008, by and between AboveNet,
      Inc. and John Jacquay (incorporated herein by reference to Form 10-K filed
      with the Securities and Exchange Commission on September 30,
      2008).10.55
                    *
                    
                    Stock
      Unit Agreement dated as of September 8, 2008, by and between AboveNet,
      Inc. and Rajiv Datta (incorporated herein by reference to Form 10-K filed
      with the Securities and Exchange Commission on September 30,
      2008).10.56
                    *
                    
                    Stock
      Unit Agreement dated as of September 8, 2008, by and between AboveNet,
      Inc. and Doug Jendras (incorporated herein by reference to Form 10-K filed
      with the Securities and Exchange Commission on September 30,
      2008).10.57
                    *
                    
                    Stock
      Unit Agreement dated as of September 8, 2008, by and between AboveNet,
      Inc. and Jeffrey A. Brodsky (incorporated herein by reference to Form 10-K
      filed with the Securities and Exchange Commission on September 30,
      2008).10.58
                    *
                    
                    Stock
      Unit Agreement dated as of September 8, 2008, by and between AboveNet,
      Inc. and Michael Embler (incorporated herein by reference to Form 10-K
      filed with the Securities and Exchange Commission on September 30,
      2008).10.59
                    *
                    
                    Stock
      Unit Agreement dated as of September 8, 2008, by and between AboveNet,
      Inc. and Richard Postma (incorporated herein by reference to Form 10-K
      filed with the Securities and Exchange Commission on September 30,
      2008).10.60
                    *
                    
                    Stock
      Unit Agreement dated as of September 8, 2008, by and between AboveNet,
      Inc. and Richard Shorten, Jr. (incorporated herein by reference to Form
      10-K filed with the Securities and Exchange Commission on September 30,
      2008).10.61
                    *
                    
                    Stock
      Unit Agreement dated as of September 8, 2008, by and between AboveNet,
      Inc. and Stuart Subotnick (incorporated herein by reference to Form 10-K
      filed with the Securities and Exchange Commission on September 30,
      2008).10.62
                    *
                    
                    Stock
      Option Agreement dated as of September 8, 2008, by and between AboveNet,
      Inc. and Jeffrey Brodsky (incorporated herein by reference to Form 10-K
      filed with the Securities and Exchange Commission on September 30,
      2008).
  141
 
 10.63
                    *
                    
                    Stock
      Option Agreement dated as of September 8, 2008, by and between AboveNet,
      Inc. and Michael Embler (incorporated herein by reference to Form 10-K
      filed with the Securities and Exchange Commission on September 30,
      2008).10.64
                    *
                    
                    Stock
      Option Agreement dated as of September 8, 2008, by and between AboveNet,
      Inc. and Richard Postma (incorporated herein by reference to Form 10-K
      filed with the Securities and Exchange Commission on September 30,
      2008).10.65
                    *
                    
                    Stock
      Option Agreement dated as of September 8, 2008, by and between AboveNet,
      Inc. and Richard Shorten, Jr. (incorporated herein by reference to Form
      10-K filed with the Securities and Exchange Commission on September 30,
      2008).10.66
                    *
                    
                    Stock
      Option Agreement dated as of September 8, 2008, by and between AboveNet,
      Inc. and Stuart Subotnick (incorporated herein by reference to Form 10-K
      filed with the Securities and Exchange Commission on September 30,
      2008).10.67
                    
                    
                    Waiver
      and Amendment No. 1 to Credit and Guaranty Agreement dated as of September
      22, 2008, among AboveNet, Inc., AboveNet Communications, Inc.,
      AboveNet of Utah, LLC, AboveNet of VA, LLC, AboveNet
      International, Inc., the Lenders party thereto, Societe Generale, as
      Administrative Agent, and CIT Lending Services Corporation, as
      Documentation Agent (incorporated herein by reference to Form 10-K filed
      with the Securities and Exchange Commission on September 30,
      2008).10.68
                    
                    
                    Joinder
      Agreement dated as of October 1, 2008 by and between SunTrust Bank, the
      New Lender, and Societe Generale, as Administrative Agent for the Lenders
      under the Credit Agreement (incorporated herein by reference to Form 10-K
      filed with the Securities and Exchange Commission on September 30,
      2008).10.69
                    *
                    
                    Employment
      Agreement, dated as of October 27, 2008, between AboveNet, Inc. and Joseph
      P. Ciavarella (incorporated herein by reference to Form 8-K filed with the
      Securities and Exchange Commission on October 29,
2008).10.70
                    
                    
                    Consulting
      Agreement, dated as of February 15, 2007, between AboveNet Communications,
      Inc. and Joseph Ciavarella (incorporated herein by reference to Form 8-K
      filed with the Securities and Exchange Commission on October 29,
      2008).10.71
                    *
                    
                    Stock
      Unit Agreement, dated as of October 27, 2008, between AboveNet, Inc. and
      Joseph Ciavarella (incorporated herein by reference to Form 8-K filed with
      the Securities and Exchange Commission on October 29,
    2008).10.72
                    
                    
                    Stock
      Purchase Agreement, dated as of October 28, 2008, between AboveNet, Inc.
      and William G. LaPerch (incorporated herein by reference to Form 8-K filed
      with the Securities and Exchange Commission on October 31,
      2008).10.73
                    
                    
                    Stock
      Purchase Agreement, dated as of October 28, 2008, between AboveNet, Inc.
      and Robert J. Sokota (incorporated herein by reference to Form 8-K filed
      with the Securities and Exchange Commission on October 31,
      2008).10.74
                    
                    
                    Stock
      Purchase Agreement, dated as of October 28, 2008, between AboveNet, Inc.
      and Rajiv Datta (incorporated herein by reference to Form 8-K filed with
      the Securities and Exchange Commission on October 31,
    2008).10.75
                    
                    
                    Stock
      Purchase Agreement, dated as of October 28, 2008, between AboveNet, Inc.
      and Douglas Jendras (incorporated herein by reference to Form 8-K filed
      with the Securities and Exchange Commission on October 31,
      2008).10.76
                    *
                    
                    Summary
      of 2009 Bonus Plan, dated February 12, 2009 (incorporated herein by
      reference to Form 10-K filed with the Securities and Exchange Commission
      on March 16,
2009).
  142
 
 10.77
                  
                  
                  Amendment
      No. 2, dated as of June 29, 2009, to Credit and Guaranty Agreement among
      AboveNet, Inc., AboveNet Communications, Inc., AboveNet of Utah,
      LLC, AboveNet of VA, LLC, AboveNet International, Inc., the Lenders
      party thereto, Societe Generale, as Administrative Agent, and CIT Lending
      Services Corporation, as Documentation Agent, dated as of
      February 29, 2008 (incorporated herein by reference to Form 8-K
      filed with the Securities and Exchange Commission on July 2,
      2009).10.78
                  *
                  
                  Summary
      of 2010 Bonus Plan dated March 1, 2010 (incorporated herein by reference
      to Form 8-K filed with the Securities and Exchange Commission on March 5,
      2010).16.1
                  
                  
                  Letter
      from KPMG LLP to the Securities and Exchange Commission dated August 18,
      2006 (incorporated herein by reference to Form 8-K filed with the
      Securities and Exchange Commission on August 23, 2006).21.1
                  
                  
                  Subsidiaries.23.1
                  
                  
                  Consent
      of BDO Seidman, LLP.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 Acting Chief Financial Officer of 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 Acting Chief Financial Officer of Registrant, pursuant to 18 U.S.C.
      Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002.
 
 *
              This exhibit represents a
      management contract or compensatory plan or
      arrangement.
 
 **
              Confidential treatment granted
      for certain portions of this
exhibit.
  143