**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE 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, 2007**




**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  ̈ No x





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  ̈ No x





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





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  ̈ No x





The
      aggregate market value of the common stock of the registrant held by
      non-affiliates of the registrant as of June 30, 2007 was approximately
      $427.8 million.





**APPLICABLE
      ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING
      FIVE
      YEARS:**





Indicate
      by check mark whether the registrant has filed all documents and reports
      required to be filed by Section 12, 13 or 15(d) of the Securities Exchange
      Act of 1934 subsequent to the distribution of securities under a plan confirmed
      by a court.  Yes  ̈ No x





The
      number of shares of the registrant’s common stock, par value $0.01 per share,
      outstanding as of August 31, 2008, was **10,974,760** .





**DOCUMENTS
      INCORPORATED BY REFERENCE:** NOT
      APPLICABLE







**Table
        of Contents**
 **ABOVENET,
        INC.**
  **For
        The Year Ended December 31, 2007**
  **INDEX**
 
 **Page****Part
                  I.**Item
                  1.
              
              Business
              
              1Item
                  1A.
              
              Risk
                  Factors
              
              10Item
                  1B.
              
              Unresolved
                  Staff Comments
              
              14Item
                  2.
              
              Properties
              
              14Item
                  3.
              
              Legal
                  Proceedings
              
              14Item
                  4.
              
              Submission
                  of Matters to a Vote of Security Holders
              
              15**Part
                  II.**Item
                  5.
              
              Market
                  for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                  Purchases of Equity Securities
              
              16Item
                  6.
              
              Selected
                  Financial Data
              
              19Item
                  7.
              
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              
              20Item 7A.
              
              Quantitative
                  and Qualitative Disclosures about Market Risk
              
              32Item
                  8.
              
              Financial
                  Statements and Supplementary Data
              
              33Item
                  9.
              
              Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure
              
              60Item
                  9A.
              
              Controls
                  and Procedures
              
              61Item
                  9B.
              
              Other
                  Information
              
              62**Part
                  III.**Item
                  10.
              
              Directors,
                  Executive Officers and Corporate Governance
              
              63Item
                  11.
              
              Executive
                  Compensation
              
              66Item
                  12.
              
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              
              78Item
                  13.
              
              Certain
                  Relationships and Related Transactions, and Director
                  Independence
              
              80Item
                  14.
              
              Principal
                  Accountant Fees and Services
              
              81**Part
                  IV.**Item
                  15.
              
              Exhibits
                  and Financial Statement Schedules
              
              82Signatures
              
              87








**PART
      I**





**EXPLANATORY
      NOTE**




This
      Annual Report on Form 10-K is for the fiscal year ended December 31, 2007.
      The information included in this Annual Report on Form 10-K is as of the
      applicable date or period described. Where no date or period is specified,
      the
      information speaks as of the date of this filing. Although we are required
      by
      the rules of the Securities and Exchange Commission to include selected
      financial information in Item 6 below for the period from January 1 to September
      7, 2003, we are unable to do so because of a lack of historical records. As
      discussed further in this report, we emerged from protection under
      Chapter 11 of the U.S. Bankruptcy Code effective September 8,
      2003.





**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. We have
      included a Glossary of Terms beginning on page 8 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 14 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 approximately 1.8 million fiber miles across approximately 4,500
      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 across approximately 230 cable route miles.





*Long
      haul network* .
      Through
      construction, acquisition and leasing activities, we have created a nationwide
      fiber-optic communications network spanning 10,000 cable route miles that
      connects each of our 14 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. The combined entity
      was focused on providing a range of services for the growing Internet market.
      Customers could use our metro networks, data centers and IP network with our
      professional services to satisfy their demand for Internet
      connectivity.





Along
      with a number of other telecommunications providers, in 2001 we experienced
      significant liquidity and other financial problems. As a result, substantially
      all of our U.S. entities filed for bankruptcy protection under Chapter 11 of
      the
      U.S. Bankruptcy Code on May 20, 2002. During the bankruptcy period, we sold
      or
      disposed of certain assets including most of our European operations and a
      number of our data centers (including those operated by PAIX.net, Inc.) and
      also
      significantly reduced our managed services operations. We changed the name
      of
      our parent company to AboveNet, Inc. on August 29, 2003 and emerged from
      bankruptcy on September 8, 2003.





Since
      emerging from bankruptcy, our management team has transformed us from a
      carrier-centric provider of dark fiber, Internet connectivity and co-location
      facilities to a company focused on taking advantage of our extensive fiber-optic
      assets to sell high bandwidth solutions, primarily to enterprise customers.
      As a
      result, we have sold or disposed of businesses and assets not deemed central
      to
      this focus, including our managed web-hosting services business and data center
      business. We also terminated our participation in non-core alliances.





In
      April 2002, MFN announced that it would need to restate its financial
      statements for the first three quarters of 2001. At the same time, MFN suspended
      the filing of annual and quarterly reports with the Securities and Exchange
      Commission (the “SEC”). Following such announcement, in June 2002, the SEC
      initiated a formal investigation of MFN. On December 15, 2006, we 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 us alleging that we had violated various
      provisions of the federal securities laws. In response to the Wells notice,
      we made a
      written submission to the SEC staff setting forth reasons why a civil injunctive
      action should not be authorized by the SEC. On
      March
      19, 2007, we received a notice from the SEC staff stating that the investigation
      of MFN had been terminated and that no enforcement action against us had been
      recommended to the SEC. Such notice was provided to us 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.” While there have been no
      further actions to date, we cannot assure you that there will not be any further
      action on this or other matters by the SEC.




1





In
      July
      2006, we determined that as a result of a lack of certain accounting records,
      we
      did not expect to be able to produce or have management provide the required
      certifications for the financial statements for the year ended December 31,
      2002
      and the period from January 1, 2003 to September 7, 2003 (the last day prior
      to our
      emergence from bankruptcy) that could be prepared in accordance with generally
      accepted accounting principles or audited in accordance with generally accepted
      auditing standards as promulgated by the Public Company Accounting Oversight
      Board. We had previously reported that as a result of a lack of certain
      accounting records necessary for the preparation of the 2001 consolidated
      financial statements, we could not complete our financial statements for the
      year ended December 31, 2001. We made these determinations only after spending
      considerable time and resources attempting to produce financial statements
      for
      these periods. As a result, we focused our resources on completing the
      consolidated financial statements for the period from September 8, 2003 through
      December 31, 2003, and for each of the years ended December 31, 2004, 2005,
      2006
      and 2007.





In
      August
      2006, following our dismissal of KPMG LLP, BDO Seidman, LLP (“BDO Seidman”) was
      engaged as our independent registered public accountants to audit our financial
      statements as of September 8, 2003 and for the period from September 8, 2003
      to
      December 31, 2003, and as of and for each of the years ended December 31, 2006,
      2005 and 2004. BDO Seidman delivered its audit report on our financial
      statements as of December 31, 2003, 2004 and 2005, and for the period from
      September 8, 2003 to December 31, 2003 and for the years ended December 31,
      2004
      and 2005 (collectively, the “Audited Historical Financial Statements”) in August
      2007. On February 29, 2008, BDO Seidman delivered its audit report on our
      financial statements as of December 31, 2006 and 2005 and for the years ended
      December 31, 2006, 2005 and 2004, which was included in our Annual Report on
      Form 10-K, for the year ended December 31, 2006, filed May 13,
      2008.





**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:





·
            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.


·
            Capitalize
                on our strength in the financial services sector to focus on meeting
                the
                ever increasing needs of this bandwidth intensive customer
                group.


·
            Intensify
                our focus on sales to media companies with high bandwidth requirements.


·
            Fulfill
                the needs of customers that are required to comply with recent 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, among other
                measures.


·
            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.





**Our
      Networks and Technology**




***Metro
      Networks***




The
      foundation of our business is our metro fiber optic networks. These networks
      currently consist of approximately 1.8 million fiber miles across over 4,500
      cable route miles primarily in the following U.S. metropolitan areas and also
      in
      London in the U.K.





·
            Boston


·
            New
                York City metro


·
            Philadelphia


·
            Baltimore


·
            Washington,
                D.C./Northern Virginia corridor


·
            Atlanta


·
            Houston


·
            Dallas


·
            Phoenix


·
            Los
                Angeles


·
            San
                Francisco Bay area


·
            Portland


·
            Seattle


·
            Chicago





Our
      network has access to over 3,000 buildings in the U.S. and London. 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 15 metro networks, our infrastructure provides ample
      opportunity to access many additional buildings by virtue of its extensive
      footprint coverage and over 4,000 network access points that can be utilized
      to
      build laterals or connect to other networks, thereby providing access to
      additional locations.




2




***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
      (NZDSF) that is optimized for longer distance applications operating in the
      1550
      nm range. Our network is well positioned to support the more stringent
      requirements of transport at rates faster than 10 Gbps.





·  **High
      Performance Architecture –** We are
      able to design customer networks with a minimum number of POP locations and
      direct, optimum routing between key areas 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 15
      active metro markets typically have significant footprints and cover a wide
      geography. For example, the New York market includes a significant Manhattan
      presence and extends from Stamford, CT in the north through Delaware in the
      south, covering a large part of New Jersey. Similarly, the San Francisco market
      extends through to San Jose and the Dallas network incorporates the Fort Worth
      area.





***On-Net
      Buildings***




Our
      metro
      networks extend to a large number of buildings. In addition to the large scale
      of our core network, we have over 1,800 lateral cables in the U.S. that connect
      key locations in our metro networks covering over 750 route miles and over
      100,000 fiber miles.





·  **Enterprise
      Buildings -** Our
      network extends to over 1,000 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 & 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 over 1,400 on-net buildings that we connect to with our own
      fiber laterals, we have access to over 1,000 additional buildings through other
      network providers with which we have agreements to provide fiber connectivity
      to
      our customers.





***Long
      Haul Network***




We
      operate a nationwide long haul network interconnecting each of our metro
      networks that spans over 10,000 route miles. With the exception of the route
      between New York and Washington, D.C. network, 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 dense wavelength-division multiplexing
      (DWDM) equipment along this network that provides it with significant capacity.
      In 2007, we upgraded the equipment used along substantially all of our long
      haul
      routes to next-generation technology that has dramatically improved the long
      haul network’s capabilities. This new platform is optimized for 10 Gbps circuit
      speeds, supporting a large number of wavelengths and positioning us to support
      future transmission speed increases.





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 14 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 and Switch & Data. 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, Frankfurt and Vienna, 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 OC-48 and OC-192 long
      haul links and utilizes advanced Juniper and Cisco routers and switches to
      direct traffic to appropriate destinations. In 2007, we completed an upgrade
      of
      our core router network at major hubs to Juniper’s flagship T-Series platform,
      and we are currently upgrading our edge network to a next generation, high
      density ethernet services router architecture.





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. This extensive peering fabric combined with
      our advanced network results in a positive customer experience.




3


***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
      have
      obtained the necessary 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***




Historically,
      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. Over the past several years, we have been focused
      on evolving our business by leveraging our extensive fiber footprint and
      deploying incremental capital in order to increase our lit metro transport
      services product line. With the completion of the upgrade of our long haul
      network and
      our
      core IP upgrade, we also intend to take advantage of the significant increase
      in
      WAN and Internet connectivity demand.





***Fiber
      Services***




Our
      fiber
      services offering involves 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 the leasing and maintenance of dark fiber
      networks, the fiber services product line also includes the provisioning of
      network co-location and in-building interconnection services, typically at
      our
      POP locations.





Fiber
      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.





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, Internet, technology, media, retail, energy and healthcare
      comprise the core customer base for our fiber services.





***Metro
      Transport Services***




We
      offer
      a number of high bandwidth metro transport service offerings in our active
      metro
      markets ranging from 100 Mbps to 10 Gbps connectivity. These services range
      from
      simple point-to-point ethernet connectivity to complex multi-node WDM solutions.
      Our metro transport services have a number of important features that
      differentiate us from many of our competitors:





·  A
      substantial portion of our metro transport 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 demands;


·  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; and


·  The
      absence of a shared network eliminates many of the equipment interfaces of
      most
      other networks that can impact performance and cause service
      interruptions.





The
      most
      established product within our metro transport services is our custom WDM
      solutions. We offer private, customized optical network deployments that we
      build for our largest customers with very specific needs. These solutions often
      involve extensive network construction to specific critical customer locations
      such as private data centers and trading platforms. Customers for custom metro
      transport services are typically large enterprise companies that have
      significant bandwidth requirements.




In
      the
      past several years, we have made an effort to extend our metro transport
      services capabilities beyond customers with very high bandwidth requirements
      by
      offering a number of WDM and ethernet offerings aimed to serve more modest
      initial bandwidth/circuit requirements. These offerings include Basic and
      Enhanced Wave services, which are based on a dedicated, private fiber
      infrastructure from end-to-end and provide lower cost and lower capacity
      solutions to customers. We also offered a range of Metro Ethernet services
      including private Metro Ethernet (which utilizes customer dedicated equipment
      and fiber), dedicated Metro Ethernet (which utilizes shared equipment and
      dedicated fiber, but provides guaranteed capacity) and standard Metro Ethernet
      (which utilizes shared equipment and dedicated fiber on a shared capacity
      basis).





We
      also
      provide metro transport services on a shared platform basis (not using fibers
      dedicated to the customer) on a limited basis through our dcXchange service.
      dcXchange provides high capacity connections (such as 10 Gbps, 2.5 Gbps, 1
      Gbps,
      OC-12) between key carrier hotels and data centers in certain markets in the
      U.S.  This service is engineered for rapid installation over a shared
      rather than a private network infrastructure and is appealing to customers
      that
      value speed of installation and low prices more than the additional security
      and
      flexibility of dedicated fiber.





***Long
      Haul Services***




Our
      long
      haul services provide inter-city connectivity between our 15 metro markets
      and
      provides for connectivity at a variety of speeds ranging from 1 Gbps to 10
      Gbps.
      We have deployed a next ****** generation
      ultra long haul network that takes advantage of significant capacity and
      distance improvements available in next generation networks. As a result, 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. Moreover, having fewer regeneration sites and equipment interfaces
      results in an improved speed and service for our customers.




4





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
      highly differentiated basis.





***IP
      Services***




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. In addition, we offer IP connectivity
      in Amsterdam, Frankfurt, Paris and Vienna through resale partners. While we
      have
      seen significant increases in IP volume over the last several years, IP
      connectivity pricing has declined significantly during this period, largely
      offsetting the growth in volume. 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 has been a significant contributor to the
      bandwidth growth experienced on our IP network.





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.
      This capability is a direct result of the significant technological investment
      we have made in our IP infrastructure.





**Sales
      and Marketing**




Our
      sales
      force is based across most of our 14 U.S. metro markets and London. Our U.S.
      sales force is comprised of approximately 50 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 high 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 HIPAA and
      exponential growth in data transmissions due to new modalities for
      communications, media distribution and commerce.





**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 table presents revenue and long-lived asset information for geographic
      areas:




**Years
                Ended December 31,****2007**
            
            **2006**
            
            **2005**RevenueUnited
                States
            
            $
            227.8
            
            $
            217.6
            
            $
            204.1United
                Kingdom
            
            
            29.4
            
            
            20.3
            
            
            16.4Other
            
            
            —
            
            
            0.5
            
            
            0.7Eliminations
            
            
            (3.6
            )
            
            (1.7
            )
            
            (1.5
            )Consolidated
                Worldwide
            
            $
            253.6
            
            $
            236.7
            
            $
            219.7





**December 31,****2007**
            
            **2006**Long-lived
                assetsUnited
                States
            
            $
            317.3
            
            $
            272.0United
                Kingdom
            
            
            30.3
            
            
            27.0Other
            
            
            0.1
            
            
            0.2Consolidated
                Worldwide
            
            $
            347.7
            
            $
            299.2




See
      Item
      7, “Management’s Discussion and Analysis of Financial Condition and Results of
      Operations - Segment Results,” and Note 15, “Segment Reporting,” to the
      accompanying consolidated financial statements included elsewhere in this Annual
      Report on Form 10-K.




**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.




5





**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 has been
      responsible for most of the consolidation by acquiring a large number of
      facilities-based telecommunications providers. At the same time, recent
      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 local exchange carriers (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.





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.





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 been relatively constant over the last three years with
      an
      increase to our optical solutions staff, offsetting the reductions related
      to
      business lines we have sold or eliminated. As of December 31, 2007, we had
      a
      total of 549 employees, 482 of which were employed in the U.S., 65 in the U.K.,
      one in the Netherlands and one in Japan. As of December 31, 2006, we had a
      total
      of 502 employees, 441 of which were employed in the U.S., 59 in the U.K., one
      in
      the Netherlands and one in Japan. As of December 31, 2005, we had a total of
      519
      employees, 454 of which were employed in the U.S., 63 in the U.K., one in the
      Netherlands and one in Japan. We consider our relations with our workforce
      to be
      good. None of our employees is represented by a union.





**Sale
      of Data Center Businesses**




Our
      data
      centers provided customers with web-centric services. While our U.S.
      subsidiaries were operating under bankruptcy protection, we sold or disposed
      of
      certain data center assets, and upon emergence from bankruptcy protection,
      we
      continued to operate data centers in New York City, San Jose, Seattle, Northern
      Virginia ,
      London
      (U.K.), Frankfurt (Germany) and Vienna (Austria). Our Frankfurt and Vienna
      data
      centers were sold in 2003 and 2004, respectively. We vacated one of the Northern
      Virginia facilities in 2004 and our Seattle facility in 2005 and sold one of
      our
      San Jose facilities in 2005.





In
      October 2006, we sold our data centers located at facilities in New York City
      and Northern Virginia to a wholly-owned subsidiary of Digital Realty Trust,
      Inc.
      In November 2006, we sold our two remaining data centers in San Jose and London,
      to DataPipe, Inc. and BIS Limited, respectively. While each of Digital Realty,
      DataPipe and BIS took over the provision of co-location services at their
      respective acquired facilities, including space, power, cabinets, and
      cross-connects, we continue to offer and provide customers in these facilities
      with metro transport, long haul and IP services.





The
      2006
      sales of the domestic data centers generated proceeds of $43.1 million, which
      resulted in a net gain of $48.2 million, of which $28.0 million and $6.0 million
      represented the reversal of deferred fair value rent liability established
      in
      accordance with Statement of Position 90-7, “Financial Reporting by Entity in
      Reorganization Under the Bankruptcy Code,” (“SOP 90-7”), and the deferred rent
      liability established in accordance with Statement of Financial Accounting
      Standards (“SFAS”) No. 13, “Accounting for Leases,” respectively.





Additionally,
      in 2006, as described above, we sold all of the issued and outstanding stock
      of
      AboveNet (UK) Limited, which operated the data centers in London, to an
      unaffiliated third party for £1.35 million ($2.6 million based upon the exchange
      rate at the time of sale), of which £0.675 million ($1.3 million based upon the
      exchange rate at the time of sale) was received at closing and £0.675 million
      ($1.3 million based upon the exchange rate at the time of sale) was received
      in
      January 2007. The operating results of AboveNet (UK) through November 15, 2006,
      the date of sale, were included in discontinued operations in our consolidated
      statements of operations.





**Discontinued
      Operations**




Upon
      our
      emergence from bankruptcy in September 2003, we decided to sell or dispose
      of
      certain European entities. In addition, as described above, AboveNet (UK) was
      sold on November 15, 2006. The assets and liabilities of these entities, and
      their operating results and cash flows were reported as discontinued operations
      as of and for the years ended December 31, 2006 and 2005. See Note 7,
“Discontinued Operations and Dispositions,” to the accompanying consolidated
      financial statements included elsewhere in this Annual Report on Form
      10-K.





**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 regulations 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.




6





*Telecommunication
      services.* 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, are 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). Being
      regulated 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 at any technically feasible point and provide service equal
      in
      quality to that provided to others, and (2) provide access to their poles,
      ducts, conduits and other rights-of-way.





The
      FCC
      exercises jurisdiction over the rates that many power utilities and ILECs charge
      to other companies to lease space on their telephone poles or electrical towers
      in order to string fiber optic cable. While the FCC shares this jurisdiction
      with some state regulatory commissions, in the majority of the country, the
      FCC
      either directly regulates these “pole attachment” rates, or has established
      regulations that have been adopted by the states. The pole attachment law was
      first promulgated in Section 224 of the Federal Communications Act of 1978,
      and
      was later expanded in the 1996 Communications Act. 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. 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.





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 recently 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 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,
      and must pay 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 regulatory fees
      required to be paid by us related to such services.





***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.





Each
      state (and the District of Columbia) has its own statutory scheme 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
      that is used more than 10% of the time for the purpose of interstate or foreign
      communication 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 and transmission services, we are required to pay into the
      state funds.





States
      also regulate the leasing of poles and conduits owned by incumbent utilities,
      including telecom and electric and gas utilities. The rates are calculated
      based
      on FCC formulas implemented by the states and generally are more advantageous
      than market-based rates. The leasing of these facilities is determined by a
      commercially negotiated contract.




7





***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 retain the ability to manage public rights-of-way subject
      to the limitation that local governments may not prohibit persons from providing
      telecommunications services and local governments may not treat
      telecommunications service providers in a discriminatory manner. Because of
      the
      need to obtain approvals, local authorities can affect the timing and costs
      associated with our use of public rights-of-way.





***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 February 2002, the European
      Commission adopted a package of five new directives which set out a new
      framework for the regulation of electronic communications networks and services
      throughout the EU. These five directives were incorporated into U.K. national
      law by the Communications Act 2003, which came into effect on July 25,
      2003, and Privacy and Electronic Communications (EC Directive) Regulations
      2003,
      which came into effect on December 11, 2003.





The
      Communications Act 2003 introduced a number of changes to the previous
      regulatory and licensing framework that existed in the U.K. under the
      Telecommunications Act 1984, 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 these 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.





During
      2006, the European Commission began conducting a review of these five directives
      and their associated regulatory framework (the “2006 Review”) to assess their
      continuing suitability and efficacy, and whether any amendments are necessary.
      The European Commission completed and published the 2006 Review in November
      2007. The proposals are being debated in the European Parliament and by member
      state governments in the European Union Council. Once adopted at the European
      Union Council level, the rules have to be incorporated into national law before
      taking effect. The European Commission expects any changes to be in effect
      by
      2010. It is not possible, at this stage, to assess the impact of the 2006 Review
      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 “Ratings
      Authority,” a U.K. Government Department.





**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
      in along the same path, the length of both cables would count in assessing
      “cable route miles.”





*Carrier
      hotel (or Telehouse)* –
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.




8





*Data
      Center* –
a
      facility 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* –
in
      fiber-optic communications, wavelength-division multiplexing (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. DWDM 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.





*Edge
      network*– the
      routers, switches and facilities that provide entry points into and exit points
      out from a service provider’s core network (also referred to as its
      backbone).





*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.





*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 has the most members of
      any
      technical professional organization in the world, with more than 360,000 members
      in approximately 175 countries and 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 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 for MultiProtocol 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 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.


*SONET* – this
      is
      an acronym for Synchronous
      Optical Network, an electronics and network architecture for variable bandwidth
      products that enable transmission of voice, data and video (multimedia) at
      very
      high speeds. SONET ring architecture provides the ability for automatic
      restoration of service in the event of a fiber cut or equipment failure by
      automatically rerouting traffic in the opposite direction around the
      ring.





*TAT-14* –
this
      is
      an acronym for a trans-Atlantic undersea telecommunications cable system running
      between U.S. and a number of points in Europe.




*Telehouse
      (or 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.




9





*Tier
      1* –
a
      network generally operated by an Internet service provider that connects to
      the
      entire Internet solely via peering connections.





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.





*VPN* –
this
      is
      an acronym for virtual private network, a private communications network used
      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.





**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, 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. 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 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.





**Available
      Information**




Since
      emerging from bankruptcy, in addition to this Annual Report on Form 10-K for
      the
      year ended December 31, 2007 and our Annual Report on Form 10-K for the year
      ended December 31, 2006, we have filed certain Current Reports on Form 8-K
      with
      the SEC. 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, by going to our website at http://www.above.net at the
      About / Investors tabs.





**ITEM 1A.
      RISK FACTORS**




***We
      have a limited history of financial reporting*** ***.***




We
      have
      provided only limited historical financial information upon which you may base
      your evaluation of our performance. We were formed in April 1993, filed for
      bankruptcy protection in May 2002 and emerged from bankruptcy in September
      2003.
      As noted below, as a result of a lack of available records, we have not provided
      financial information for periods prior to our emergence from bankruptcy in
      September 2003. Further, our financial results since September 2003 have been
      affected by a number of non-recurring revenue and expense events, which makes
      it
      more difficult to forecast our future financial performance. Accordingly, you
      must consider our prospects in light of the risks, expenses and difficulties
      frequently encountered by companies with limited financial history of financial
      reporting.





***We
      are not in compliance with our reporting obligations under the Securities
      Exchange Act of 1934.***




We
      have
      not made any timely periodic filings with the SEC required by the Securities
      Exchange Act of 1934, as amended (the “Exchange Act”), for any period since
      prior to our filing for bankruptcy in May 2002. The filing of this Annual Report
      on Form 10-K or future periodic filings will not cure these past violations.
      Because of our failure to make timely periodic filings with the SEC, we could
      be
      subject to civil penalties and other administrative proceedings by the SEC.
      We
      do not anticipate being able to list our common stock on any national exchange
      until, at a minimum, we have become current with our periodic SEC filings.
      However, even if we become current with our SEC filings, we cannot provide
      any
      assurances that we will be able to meet other applicable listing standards
      or
      that if listed, a public trading
      market will develop in our securities.




***This
      Annual Report on Form 10-K is not compliant with our reporting
      obligations.***




The
      Annual Report on Form 10-K requires five years of selected financial data,
      which
      for 2007 would include selected financial information for the full year of
      2003.
      Because of a lack of historical records, we have not provided selected financial
      information for the period from January 1 to September 7, 2003. Due to our
      failure to provide the selected financial information for these periods, this
      Annual Report on Form 10-K does not comply with the requirements of the SEC
      rules.




10





***Our
      prior SEC Investigation may negatively affect us.***




As
      previously discussed in “Corporate History,” the SEC initiated a formal
      investigation of MFN in June 2002. On December 15, 2006, we 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 us alleging that we violated various provisions of the federal
      securities laws. In
      connection with the contemplated action, the staff could have sought a permanent
      injunction, disgorgement, and civil penalties. In response to the Wells notice,
      we made a written submission to the SEC staff setting forth reasons why a civil
      injunctive action should not be authorized by the SEC .
      On
      March 19, 2007, we received a notice from the SEC staff stating that the
      investigation of MFN had been terminated and that no enforcement action against
      us had been recommended to the SEC. Such notice was provided to us 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.” While there
      have been no further actions to date, we cannot assure you that there will
      not
      be any further action on this or other matters 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 $8.5 million, $8.3 million and $12.1
      million in 2007, 2006 and 2005, respectively. This revenue is not predictable
      and may not be sustainable.





***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
      have
      incurred net losses since our inception other than in 2006 and 2007. In 2006,
      we
      generated net income, principally from the sale of our remaining data centers
      and in 2007, we generated operating income and net income. The net income
      reported for 2007 includes the non-cash gain of $10.3 million on the reversal
      of
      foreign currency translation adjustments from the liquidation of certain
      subsidiaries.





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. Financial services
      companies, including some of our customers, have recently reported significant
      losses caused by the write down and re-evaluation of some of their investments
      and portfolio positions, which has created significant liquidity problems within
      the financial services industry. These problems may affect our customers’
ability to pay for our 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***




On
      February 29, 2008, we closed a $60 million senior secured credit facility with
      two unaffiliated third party lenders, which is comprised of a revolving working
      capital line and two term loans (collectively, the “Credit Facility”). The
      Credit Facility is secured by substantially all of our assets. On
      September 26, 2008, we executed a joinder agreement to the Credit Facility
      that
      adds an additional lender and increases the amount of the Credit Facility to
      $90
      million effective October 1, 2008, subject to the terms of the joinder
      agreement, including the payment of a $0.45 million fee at closing and a $0.1
      million advisory fee. 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. See
      Item
      7, “ Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations -
      Liquidity and Capital Resources,” and Note 16, “Subsequent Events - Bank
      Financing,” to the accompanying consolidated financial statements included
      elsewhere in this Annual Report on Form 10-K. Amounts borrowed under this
      facility bear interest at short-term LIBOR or at the administrative agent’s base
      rate at our discretion, plus the applicable margins, as defined. Effective
      August 4, 2008,
      we
      entered into a three year swap arrangement, fixing our interest on the $24
      million outstanding under the Credit Facility at 3.65%, plus the applicable
      margin of 3.25%. This Credit Facility imposes restrictions on our operations,
      including the requirement that we maintain a cash balance of $20 million during
      the term of this facility. Further, if we are unable to meet any of the
      reporting or financial covenants under this facility, the lenders may demand
      that we repay the full amount borrowed under this facility or may limit our
      access to any available amounts.





***If
      our operations do not produce sufficient cash flow to fund our operating
      expenses and capital requirements, we may be required to raise additional
      capital through a debt or equity financing.***




Until
      we
      can generate positive free cash flow, we will continue to rely on our existing
      cash, cash from operating activities and funds available under our 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, 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 Credit Facility imposes limitations on the amount of
      additional indebtedness we may incur.


***The
      concerns of our customers or prospective customers regarding our long-term
      financial status may discourage some of them from purchasing services from
      us in
      the future.***




Customers
      purchasing high bandwidth communications services and leasing dark fiber often
      require a high degree of reliability and long-term stability from their vendors
      because significant portions of their business may rely upon these services.
      The
      impact of our bankruptcy reorganization, our failure to comply with our SEC
      reporting obligations for several years and the prior SEC investigation, cannot
      be accurately quantified and may impact our business. These factors could cause
      customers and prospective customers to question our financial soundness and
      may
      also affect the contractual terms that are available to us. To the extent that
      our customers believe that we may not remain financially viable in the long
      run,
      they may choose not to purchase services from us. These perceptions, if
      widespread, could materially adversely affect our business, financial condition
      and results of operations.





***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.




11





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 have increased 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, 2007, we have identified the material weaknesses described
      in
      Item 9A, “Controls and Procedures.” These weaknesses mean that there is more
      than a remote likelihood that we will not prevent or detect a material
      misstatement in our financial statements. Although we are developing and have
      already begun implementing plans to remediate these weaknesses and have
      undertaken additional procedures to produce our financial statements, we cannot
      assure you that we will be successful in this regard. Further, as a result
      of
      these material weaknesses, our management has concluded that we do not have
      effective internal control over financial reporting and that our disclosure
      controls and procedures were not effective. We remain delinquent in our
      financial reporting to the SEC. In the event that we are unable to develop
      and
      maintain appropriate systems and controls, it could materially adversely affect
      our business, financial condition and results of operations. We believe,
      however, that the financial statements included in Item 8 of this Form 10-K
      fairly present, in all material respects, our financial condition and results
      of
      operations for the periods presented.





***Our
      common stock is not listed and it may be difficult for our stockholders to
      sell
      their shares.***




Our
      common stock is currently not listed on any stock exchange. Although we are
      aware that trades in our common stock occur through the over the counter market,
      the stock is very thinly traded. As a result, prices may be volatile and it
      may
      be difficult to find a purchaser for shares of our common stock. Although we
      plan to list our common stock with NASDAQ, we cannot assure you that NASDAQ
      will
      accept our listing. Further, we cannot predict the extent to which investor
      interest in our shares will lead to the development of an active trading market
      or how liquid that market may become.





***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 -
      including shifting from carrier to enterprise customers and from leasing dark
      fiber to providing lit services - 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.





***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.





***Reliance
      on consultants.***




We
      currently rely on certain consultants to provide senior financial and accounting
      services, including one that is our acting Chief Financial Officer. To the
      extent that the consultants were to terminate their services agreements before
      we have hired permanent replacements, our ability to regain compliance with
      our
      Exchange Act filing obligations could be further delayed. Further, if any of
      these consultants do not provide a high quality level of service, it could
      further delay the production
      of, or result in a misstatement in, our financial statements.





***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 settlement or payment-free basis. 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.




12





***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.





***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 periodic expenditure of capital. 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 of 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 customer service. Our
      failure to provide proper customer 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 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, 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.





***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 Stated and in London 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 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 has prevented us from filing
      our federal and state income taxes in a timely
      manner.***




Because
      we have been unable to produce auditable financial statements on a timely basis,
      we delayed the filing of federal and state income tax returns for 2003 to
      2006.
      While we have made progress in filing past returns, we are still beyond the
      filing deadlines, including all applicable extensions, for a number of federal
      and state returns. In January 2008, we filed our federal and state income tax
      returns for the years ended December 31, 2003 through December 31, 2005. We
      are
      still subject to tax audits in these jurisdictions. While we believe that we
      will not owe any material amount of income taxes in these jurisdictions due
      to
      the significant losses incurred by us, we could be subject to various fines
      or
      penalties as a result of our non-timely filings.





***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 substantial lease payments to these landowners for the lease
      of these rights-of-way or to indemnify the right-of-way holder for its
      losses.




13





In
      the
      past, we have had franchises and rights-of-way expire prior to executinga renewal and in the interim until such renewal was executed, operated
      without an agreement. We expect that this will continue to occur in the future.
      These expirations have not caused any material adverseeffect
      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 effect our business,
      financial condition and results ofoperations.





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.





***Stockholders
      affiliated with certain of our directors own a significant percentage of our
      shares, which will limit your ability to influence corporate
      matters.***




As
      of
      August 31, 2008, two stockholders affiliated with certain of our directors
      beneficially owned in the aggregate approximately 33.19% of our outstanding
      common stock and our executive officers and directors, as a group, beneficially
      owned approximately 3.19% of our common stock. Accordingly, these stockholders
      could have significant influence over the outcome of any corporate transaction
      or other matter submitted to our stockholders for approval, including mergers,
      consolidations or a sale of all or substantially all of our assets. The
      interests of these stockholders may differ from the interests of our other
      stockholders. In addition, third parties may be discouraged from making a tender
      offer or bid to acquire the Company because of this concentration of
      ownership.





***Our
      charter documents, our Shareholders’ 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 Shareholders’ 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 Shareholders’ 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
      change 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.





**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 2010.
      Office and POP space is leased in the markets where we maintain our network
      and
      generally ranges from 1,000 to 33,000 square feet under agreements that expire
      over the next 16 years (as of December 31, 2007), with the majority of leases
      expiring over the next five years.




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, 2007, we conducted our business in
      the
      U.S. through 115 operating leases totaling approximately 579,000 rentable square
      feet.





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.





**ITEM 3.
      LEGAL PROCEEDINGS**




Under
      our
      plan of reorganization, which became effective on September 8, 2003 (“Plan
      of Reorganization”) or (“Plan”), essentially all claims against our U.S.
      entities that arose prior to their emergence from bankruptcy on September 8,
      2003 were discharged in accordance with the Plan of Reorganization. A summary
      of
      the treatment of claims in the bankruptcy proceeding is provided in Note 1,
      “Background and Organization,” to the accompanying consolidated financial
      statements. For additional information regarding our bankruptcy filing, see
      “Business - Corporate History.”


Our
      significant legal proceedings are as follows.





The
      SEC
      initiated a formal investigation of Metromedia Fiber Network, Inc. (the
      pre-bankruptcy emergence predecessor to AboveNet, Inc.) in June 2002. The
      investigation was initiated after Metromedia Fiber Network, Inc. announced
      that
      it would need to restate previously issued financial statements from 2001.
      On
      December 15, 2006, we 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 us alleging
      that the Company violated various provisions of the federal securities laws. In
      connection with the contemplated action, the staff could have sought a permanent
      injunction, disgorgement, and civil penalties. In response to the Wells notice,
      we made a written submission to the SEC staff setting forth reasons why a civil
      injunctive action should not be authorized by the SEC .
      On
      March 19, 2007, we received a notice from the SEC staff stating that the
      investigation of Metromedia Fiber Network, Inc. has been terminated and that
      no
      enforcement action against us had been recommended to the SEC. Such notice
      was
      provided to us 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 Commission.” While there have been no further actions to date, we cannot
      assure you that there will not be any future investigations.




14


We
      are 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 has not appealed.
      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 contract, SBC has paid us 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, we recorded
      revenue based on the lower amount per fiber mile for the fiber miles accepted
      by
      SBC.





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), will be recorded as settlement revenue in the third quarter
      of 2008.





Our
      U.K.
      operating subsidiary, ACUK, is 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
      is included in accrued expenses on the consolidated balance sheet at December
      31, 2007.





In
      May
      2008, Telekenex, Inc. (“Telekenex”), a customer, filed a complaint against us in
      the San Francisco County Superior Court alleging that we failed to deliver
      to
      Telekenex fiber optic capacity under a certain ten year contract between
      Telekenex and us. Telekenex asserts in the complaint that it is entitled to
      such
      fiber optic capacity and unspecified damages. On September 29, 2008, we signed
      a
      settlement agreement with Telekenex pursuant to which we agreed to pay $0.35
      million and provide Telekenex additional fiber access in order to resolve the
      dispute. Pursuant to the settlement agreement, the parties released each other
      from any claims related to the dispute and Telekenex is required to dismiss
      the
      complaint.





**ITEM 4.
      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**




There
      were no matters submitted to a vote of security holders during the year covered
      by this Annual Report on Form 10-K.




15


**PART
      II**





**ITEM 5.
      MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES**




***Market
      Information***




Our
      securities are not listed on any exchange. However, we are aware that shares
      of
      our common stock are traded on the over-the-counter market. We plan to apply
      for
      listing on the NASDAQ Market at such point as we are current on our filings
      under the Exchange Act.




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 2007 and 2006.





**High**
            
            **Low****Year
                ended December 31, 2007**First
                Quarter Ended March 31, 2007
            
            $
            60.00
            
            $
            41.00Second
                Quarter Ended June 30, 2007
            
            $
            65.00
            
            $
            55.00Third
                Quarter Ended September 30, 2007
            
            $
            100.00
            
            $
            61.00Fourth
                Quarter Ended December 31, 2007
            
            $
            91.00
            
            $
            55.00**Year
                ended December 31, 2006**First
                Quarter Ended March 31, 2006
            
            $
            41.00
            
            $
            28.35Second
                Quarter Ended June 30, 2006
            
            $
            50.00
            
            $
            35.00Third
                Quarter Ended September 30, 2006
            
            $
            54.00
            
            $
            45.50Fourth
                Quarter Ended December 31, 2006
            
            $
            64.00
            
            $
            40.00




There
      were 1,018 stockholders of record of AboveNet’s common stock as of August 31,
      2008.




***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***




Pursuant
      to our Plan of Reorganization ,
      upon our emergence from bankruptcy, we issued 8,750,000 shares of common stock
      to our pre-petition creditors and the right to purchase 1,699,210 shares of
      common stock at a price of $29.9543 per share, under a rights offering, of
      which
      the rights to purchase 1,668,992 shares of common stock have been exercised.
      In
      connection with the conclusion of our bankruptcy case in July 2008, 862 shares
      were determined to be unclaimed and were cancelled. In addition, 1,064,956
      shares of common stock were reserved for issuance under our 2003 Stock Incentive
      Stock Option and Stock Unit Grant Plan, also referred to herein as our 2003
      Stock Incentive Plan, Equity Incentive Plan or Equity Compensation Plan, 709,459
      shares of common stock were reserved for issuance upon the exercise of the
      five
      year warrants, exercisable at a price of $20.00 per share, of which warrants
      to
      purchase 33,119 shares of common stock had been exercised as of December 31,
      2007. 834,658 shares of common stock were reserved for issuance upon the
      exercise of the seven year warrants, exercisable at a price of $24.00 per share,
      of which warrants to purchase 29,097 shares of common stock had been exercised
      as of December 31, 2007.





In
      July 2008, our bankruptcy case was concluded upon the settlement of all
      remaining claims. In connection with the conclusion of the case, 862 common
      shares (as described above), five year warrants to purchase 10 shares of common
      stock and seven year warrants to purchase 12 shares of common stock went
      unclaimed. Accordingly, these warrants were cancelled and common shares issued
      and outstanding will be reduced on our balance sheet by 862 shares.





Under
      the terms of the five year and seven year warrant agreements (collectively,
      the
“Warrant Agreements”), as described in Note 9, “Stock-Based Compensation,” 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, was greater than the warrant exercise price, we were
      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 elected, by written notice, to not exercise its warrants. Under
      the Net Exercise, shares issued to 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.
      The expiration date for the five year warrants was September 8, 2008.
      Accordingly, five year warrants to purchase 158,874 shares of common stock
      were
      deemed exercised pursuant to Net Exercise, of which 106,456 shares were issued
      to the warrant holders, 52,418 shares were returned to treasury and $4,295
      was
      paid to recipients for fractional shares. In addition, five year warrants to
      purchase 25 shares of common stock were cancelled in accordance with
      instructions from the warrant holder.





***AboveNet’s
      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 Shareholders’ Rights
      Plan.




16


***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, 2007.




Plan
                category(1)
            
            Number of Securities to be
              Issued Upon Exercise of
              Outstanding Options and
              Restricted Stock Units(2)
            
            Weighted Average
              Exercise Price of
              Outstanding Options and
              Restricted Stock Units(2)
            
            Number of Securities Remaining
              Available for Future Issuance Under
              Equity Compensation Plan
              (Excluding Securities Reflected in
              the First Column)(3)Equity
                compensation plan approved by security holders
            
            
            —
            
            $
            —
            
            
            —Equity
                compensation plan not approved by security holders
            
            
            701,822
            
            
            27.48
            
            
            11,293Total
            
            
            701,822
            
            $
            27.48
            
            
            11,293





(1)
            Excludes
                shares availableunder the 2008 Equity Incentive Plan, described below.(2)
            Includes
                229,875 shares of common stock underlying restricted stock units.
                The
                weighted average exercise price does not take into account the shares
                to
                be delivered in connection with these outstanding restricted stock
                units,
                which have no exercise price.(3)
            Excludes
                warrants granted to creditors as part of settled bankruptcy claims,
                as
                follows:





Weighted Average
              Exercise Price
            
            Total Warrants
              Originally Issued
            
            Warrants Exercised as of
              December 31, 2007
            
            Unexercised Warrants
              Outstanding
              at December 31, 2007Five
                year stock purchase warrants
            
            $
            20.00
            
            
            709,459
            
            
            33,119
            
            
            676,340Seven
                year stock purchase warrants
            
            $
            24.00
            
            
            834,658
            
            
            29,097
            
            
            805,561





The
      above
      table does not take into consideration five year warrants to purchase 10 shares
      of common stock and seven year warrants to purchase 12 shares of common stock
      that were unclaimed and were cancelled at the conclusion of our bankruptcy
      case
      and five year warrants to purchase 25 shares of common stock that were cancelled
      in accordance with instructions from the warrant holder.





***Adoption
      of 2008 Equity Incentive Plan***




On
      August
      29, 2008, the Board of Directors of the Company approved the Company’s 2008
      Equity Incentive Plan (the “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. 750,000
      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. See “Adoption of 2008 Equity Incentive Plan,” included in Item 11,
“Executive Compensation.”





***Share
      Repurchases***




In
      December, 2007, we delivered 310,719 shares of common stock to certain employees
      (including the named executive officers) and former employees, which represented
      shares underlying all vested restricted stock units at such date, of which
      303,369 shares were delivered on December 28, 2007. We purchased an aggregate
      129,816 shares back from the employees at $75.00 per share, the closing market
      price of our common stock on such date, in order to provide them with funds
      sufficient to satisfy minimum tax withholding obligations and provide the
      employees sufficient funds to meet our estimates (at their highest marginal
      tax
      rates) of their residual income tax obligations. The aggregate value of the
      shares purchased by us of $9.7 million was charged to treasury stock. We decided
      to purchase these shares because the delivery of the shares underlying the
      stock
      units triggered significant tax obligations for these individuals. 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
                ProgramsDecember
                1 to 31, 2007 **(*)**
            
            129,816
            
            $75.00
            
            0
            
            0


___________________




**(*)** There
      were no other stock repurchases during Fiscal 2007.




17


***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 3, 2003 through December 31, 2007. We filed for
      bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code in May 2002
      and emerged from bankruptcy on September 8, 2003. Shares that were issued
      pursuant to the Plan of Reorganization first traded on December 3, 2003 at
      $35.00 per common share, which is the starting point for the graph below. Our
      stock has not been listed on any national exchange since our emergence from
      bankruptcy as we are not compliant with the periodic filing requirements of
      the
      Exchange Act. However, our shares of common stock are traded on the
      over-the-counter market (pink sheets). The stock price performance shown on
      the
      graph is not necessarily indicative of future price performance. The comparisons
      in the chart below are based upon historical data and are not indicative of,
      nor
      intended to forecast, future performance of the Company’s common
      stock.








**12/03/2003**
                
                **12/31/2003**
                
                **12/31/2004**
                
                **12/31/2005**
                
                **12/31/2006**
                
                **12/31/2007****AboveNet,
                    Inc.**
                
                $
                100
                
                $
                107
                
                $
                91
                
                $
                81
                
                $
                171
                
                $
                223**NASDAQ
                    (U.S.)**
                
                
                100
                
                
                102
                
                
                111
                
                
                113
                
                
                123
                
                
                135**Russell
                    2000 Index**
                
                
                100
                
                
                102
                
                
                120
                
                
                123
                
                
                144
                
                
                141
  18


**ITEM 6.
        SELECTED FINANCIAL DATA**
  The
        table
        below presents selected consolidated financial data of the Company as of
        and for
        the years ended December 31, 2007, 2006, 2005, 2004 and for the period from
        September 8, 2003 (fresh start date) to December 31, 2003. We have not included
        information for the period from January 1, 2003 to September 7, 2003, which
        period preceded our emergence from bankruptcy, because we lack certain records
        necessary to include the proper information. The historical financial data
        as of
        December 31, 2007 and 2006 and for the years ended December 31, 2007,
        2006 and 2005, 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 accompanying
        notes.
  Upon
        emergence from bankruptcy on September 8, 2003 (the “Effective Date”), we
        adopted fresh start accounting and reporting in accordance with SOP 90-7,
        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)
 **Years Ended December 31,**
                  
                  **Period from**
                    **September 8, 2003**
                    **to December 31,****2007**
                  
                  **2006**
                  
                  **2005**
                  
                  **2004**
                  
                  **2003****Statements
                      of Operations data:**Revenue
                  
                  $
                  253.6
                  
                  $
                  236.7
                  
                  $
                  219.7
                  
                  $
                  189.3
                  
                  $
                  59.6Costs
                      of revenue (including provision for equipment impairment of $2.2 for
                      the year ended December 31, 2007)
                  
                  
                  110.3
                  
                  
                  121.9
                  
                  
                  119.2
                  
                  
                  112.2
                  
                  
                  36.9Selling,
                      general and administrative expenses
                  
                  
                  80.9
                  
                  
                  71.1
                  
                  
                  69.6
                  
                  
                  71.7
                  
                  
                  32.6Depreciation
                      and amortization
                  
                  
                  47.5
                  
                  
                  47.2
                  
                  
                  43.1
                  
                  
                  40.8
                  
                  
                  13.0Loss
                      on litigation
                  
                  
                  11.7
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Operating
                      income (loss)
                  
                  
                  3.2
                  
                  
                  (3.5
                  )
                  
                  (12.2
                  )
                  
                  (35.4
                  )
                  
                  (22.9
                  )Gain
                      on reversal of foreign currency translation adjustments from
                      liquidation
                      of subsidiaries
                  
                  
                  10.3
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Interest
                      income
                  
                  
                  3.3
                  
                  
                  2.4
                  
                  
                  1.3
                  
                  
                  1.1
                  
                  
                  0.5Interest
                      expense
                  
                  
                  (2.3
                  )
                  
                  (5.8
                  )
                  
                  (5.9
                  )
                  
                  (11.1
                  )
                  
                  (4.9
                  )Other
                      income, net
                  
                  
                  3.8
                  
                  
                  2.1
                  
                  
                  10.9
                  
                  
                  9.2
                  
                  
                  1.4Gain
                      (loss) on sales of data centers
                  
                  
                  —
                  
                  
                  48.2
                  
                  
                  (1.3
                  )
                  
                  —
                  
                  
                  —Income
                      (loss) from continuing operations before income taxes
                  
                  
                  18.3
                  
                  
                  43.4
                  
                  
                  (7.2
                  )
                  
                  (36.2
                  )
                  
                  (25.9
                  )Provision
                      for income taxes
                  
                  
                  4.5
                  
                  
                  —
                  
                  
                  0.4
                  
                  
                  0.5
                  
                  
                  0.3Income
                      (loss) from continuing operations
                  
                  
                  13.8
                  
                  
                  43.4
                  
                  
                  (7.6
                  )
                  
                  (36.7
                  )
                  
                  (26.2
                  )Income
                      (loss) from discontinued operations, net of taxes
                  
                  
                  —
                  
                  
                  3.0
                  
                  
                  (0.8
                  )
                  
                  (1.1
                  )
                  
                  (0.3
                  )Net
                      income (loss)
                  
                  $
                  13.8
                  
                  $
                  46.4
                  
                  $
                  (8.4
                  )
                  $
                  (37.8
                  )
                  $
                  (26.5
                  )Income
                      (loss) per share, basic:Income
                      (loss) per share from continuing operations
                  
                  $
                  1.28
                  
                  $
                  4.07
                  
                  $
                  (0.72
                  )
                  $
                  (3.48
                  )
                  $
                  (2.49
                  )Income
                      (loss) per share from discontinued operations
                  
                  
                  —
                  
                  
                  .28
                  
                  
                  (0.07
                  )
                  
                  (0.10
                  )
                  
                  (0.03
                  )Income
                      (loss) per share, basic
                  
                  $
                  1.28
                  
                  $
                  4.35
                  
                  $
                  (0.79
                  )
                  $
                  (3.58
                  )
                  $
                  (2.52
                  )Shares
                      used in computing basic income (loss) per share
                  
                  
                  10,751,921
                  
                  
                  10,669,365
                  
                  
                  10,596,244
                  
                  
                  10,550,249
                  
                  
                  10,499,961Income
                      (loss) per share, diluted:Income
                      (loss) per share from continuing operations
                  
                  $
                  1.13
                  
                  $
                  3.68
                  
                  $
                  (0.72
                  )
                  $
                  (3.48
                  )
                  $
                  (2.49
                  )Income
                      (loss) per share from discontinued operations
                  
                  
                  —
                  
                  
                  .26
                  
                  
                  (0.07
                  )
                  
                  (0.10
                  )
                  
                  (0.03
                  )Income
                      (loss) per share, diluted
                  
                  $
                  1.13
                  
                  $
                  3.94
                  
                  $
                  (0.79
                  )
                  $
                  (3.58
                  )
                  $
                  (2.52
                  )Shares
                      used in computing diluted income (loss) per share
                  
                  
                  12,184,139
                  
                  
                  11,794,279
                  
                  
                  10,596,244
                  
                  
                  10,550,249
                  
                  
                  10,499,961
  **At
                  December 31,****2007**
              
              **2006**
              
              **2005**
              
              **2004**
              
              **2003****Balance
                  Sheet data:**Cash
                  and cash equivalents
              
              $
              45.8
              
              $
              70.7
              
              $
              45.9
              
              $
              45.3
              
              $
              105.1Working
                  capital (deficit)
              
              
              (25.6
              )
              
              17.4
              
              
              (5.8
              )
              
              (4.0
              )
              
              70.8Property
                  and equipment, net
              
              
              347.7
              
              
              299.2
              
              
              305.2
              
              
              312.3
              
              
              328.6Total
                  assets
              
              
              432.3
              
              
              407.7
              
              
              385.0
              
              
              400.2
              
              
              499.0Long-term
                  debt (*)
              
              
              1.6
              
              
              1.5
              
              
              1.6
              
              
              1.8
              
              
              71.9Total
                  shareholders’ equity
              
              
              223.7
              
              
              217.9
              
              
              166.9
              
              
              170.9
              
              
              203.6
  19
  (*)
              At
                  December 31, 2007, 2006, 2005 and 2004, the balance represents
                  the
                  long-term obligation under a capital lease, which was included
                  in other
                  long-term liabilities on the respective consolidated balance sheets.
                  At
                  December 31, 2003, the balance represents the long-term obligation
                  under a
                  capital lease of $1.9 million, which was included in other long-term
                  liabilities on the consolidated balance sheet, and notes payable
                  of $70.0
                  million, which was stated separately on the consolidated balance
                  sheet and
                  which was satisfied in 2004.
  **Years Ended December 31,**
              
              **Period from**
                **September 8, 2003**
                **to December 31,****2007**
              
              **2006**
              
              **2005**
              
              **2004**
              
              **2003****Cash
                  flow data:**Net
                  cash provided by (used in) operating activities
              
              $
              69.7
              
              $
              51.3
              
              $
              43.6
              
              $
              25.8
              
              $
              (8.1
              )Net
                  cash used in investing activities
              
              
              (89.3
              )
              
              (27.2
              )
              
              (42.0
              )
              
              (23.0
              )
              
              (8.5
              )Net
                  cash (used in) provided by financing activities
              
              
              (5.4
              )
              
              (1.0
              )
              
              (1.1
              )
              
              (62.5
              )
              
              41.8
 
 **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 14 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 (loss) are revenue, costs of revenue,
        selling
        and general and administrative expenses and depreciation and amortization.
        Below
        is a description of these components. We are reporting operating income for
        the
        year ended December 31, 2007 and operating losses for the years ended December
        31, 2006 and 2005, 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 constantly shifting, 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, incremental contractual booking of new customer business, new
        customer installations and churn of existing business and capital committed
        and
        expended.
 
 Some
        of
        the most important non-financial performance metrics measure headcount, traffic
        growth and installation intervals. 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 549 as of December 31, 2007,
        482 of
        which were employed in the U.S., 65 in the U.K., one in the Netherlands and
        one
        in Japan.
  ***2007
        Highlights***
  Our
        consolidated revenue increased in 2007 by $16.9 million, or 7.1%, from $236.7
        million in 2006 to $253.6 million in 2007, due principally to the growth
        of our
        domestic metro transport services, which increased by $22.3 million in 2007
        compared to 2006. Additionally, in the U.S., our revenue from dark fiber
        services increased by $11.1 million in 2007 compared to 2006 and our domestic
        IP
        network services increased by $2.6 million in 2007 compared to 2006. Revenue
        from our foreign operations, primarily in the U.K., increased by $7.0 million
        in
        2007 compared to 2006. These comparative increases were partially offset
        by the
        fact that our 2006 results included revenue of $24.5 million from our domestic
        data centers, which were sold in the fourth quarter of 2006.
  During
        2007, we generated net income of $13.8 million and as of December 31, 2007
        we had $45.8 million of unrestricted cash, compared to $70.7 million of
        unrestricted cash at December 31, 2006, a decrease in liquidity of $24.9
        million. This decrease was attributable primarily to cash used in investing
        activities (purchases of property and equipment of $90.8 million), and cash
        used
        in financing activities (primarily the purchase of $9.7 million common stock
        from employees and in certain cases, ex-employees, with respect to vested
        restricted stock units delivered to them), partially offset by cash generated
        from operating activities. See below in this Item 7 under, “Liquidity and
        Capital Resources,” for further discussion.
 In
          2007,
          our cash flow generated by operating activities increased as a result of
          the
          improvement in operating results described above. Our unrestricted cash
          and cash
          equivalents balance declined in 2007 compared to 2006 due to our increased
          capital expenditures, consistent with our growth strategy, which were $90.8
          million in 2007, compared to $71.7 million in 2006, and the $9.7 million
          cash
          used to repurchase common stock in connection with the delivery of shares
          underlying vested restricted stock units. We believe, based on our business
          plan, that our existing cash, cash from our operating activities and funds
          available under our Credit Facility will be sufficient to fund our operations,
          planned capital expenditures and other liquidity requirements (including
          the
          liability arising out of the GVN litigation) at least through the third
          quarter
          of 2009. See below in this Item 7 under, “Liquidity and Capital Resources,” for
          further information relating to the Credit Facility.
  20
 ***2008
          Outlook***
  We
          expect
          our revenue to increase in 2008 compared to 2007. Because a large percentage
          of
          our costs are fixed and we expect our costs will grow at a slower rate
          than our
          revenue, we are anticipating improved operating results in 2008. 2008 will
          be
          favorably impacted by the non-cash settlement of our dispute with SBC of
          $3.5
          million, partially offset by our write-off of our investment in a new
          information technology platform of $2.3 million. See Item 3, “Legal
          Proceedings,” and
          Note
          13, “Litigation” and Note 16, “Subsequent Events - Litigation” and “Subsequent
          Events - Asset Abandonment,” to
          the
          accompanying consolidated financial statements included elsewhere in this
          Annual
          Report on Form 10-K. Additionally,
          in 2008, our capital expenditures are expected to increase in line with
          our
          expected increase in new bookings.
  ***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.
 
 A
        substantial portion of our revenue is derived from multi-year contracts for
        services we provide. We are often required to make an initial outlay of capital
        to extend our network and purchase equipment for the provision of services
        to
        our customers. Under the terms of most contracts, the customer is required
        to
        pay a termination fee (which declines 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.
 
 ***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) taxes (other than income taxes), including property taxes and trust
        fund-related taxes such as gross receipts taxes; (v) restructuring costs;
        and (vi) 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.
 
 ***Misstatements***
  In
        connection with the audit of our financial statements as of and for the year
        ended December 31, 2006, we determined that certain errors primarily related
        to
        income taxes, depreciation, and certain accruals were included in the financial
        statements previously issued as of and for the years ended December 31, 2005
        and
        2004 and as of and for the period ended December 31, 2003 (including the
        fresh
        start balance sheet as of September 8, 2003). Had the adjustments been made
        in
        the applicable period, the effect of the adjustments would have been to increase
        net loss by $0.9 million, or $0.09 per basic and diluted share for the year
        ended December 31, 2005, increase net loss by $0.1 million, or $0.01 per
        basic
        and diluted share for the year ended December 31, 2004 and decrease net loss
        by
        $0.2 million, or $0.02 per basic and diluted share for the period ended December
        31, 2003. Management does not believe, based upon its qualitative and
        quantitative analysis, that such errors are material or require a restatement
        of
        any of the previously issued financial statements. Accordingly, the corrections
        were reflected in the financial statements as of and for the year ended December
        31, 2006 and resulted in a reduction to net income of $0.3 million, or $0.03
        per
        basic and diluted share.
 
 ***2006
        Reclassification***
  On
        February 29, 2008, we filed a Current Report on Form 8-K, which, among other
        things, included a consolidated statement of operations for the year ended
        December 31, 2006. The consolidated statement of operations for the year
        ended
        December 31, 2006, included elsewhere in this Annual Report on Form 10-K,
        and in
        the Annual Report on Form 10-K for the year ended December 31, 2006, reflects
        a
        change in the classification of certain expenses from the amounts recorded
        in
        the consolidated statement of operations included in the Current Report on
        Form
        8-K dated February 29, 2008. The change resulted in costs of revenue decreasing
        by $9.3 million, from $131.2 million to $121.9 million and selling, general
        and
        administrative expenses increasing by $9.3 million, from $61.8 million to
        $71.1
        million for the year ended December 31, 2006. This reclassification did not
        affect our operating loss, net income, earnings per share (basic and diluted),
        assets, liabilities or shareholders’ equity as of or for the year ended December
        31, 2006.
  21
 ***Fresh
        Start Accounting***
  Our
        emergence from bankruptcy resulted in a new reporting entity with no retained
        earnings or accumulated losses, effective as of September 8, 2003. Although
        the Effective Date of the Plan of Reorganization was September 8, 2003, we
        accounted for the consummation of the Plan of Reorganization as if it occurred
        on August 31, 2003 and implemented fresh start accounting as of that date.
        There were no significant transactions during the period from August 31,
        2003 to September 8, 2003. Fresh start accounting requires us to allocate
        the reorganization value of our assets and liabilities based upon their
        estimated fair values, in accordance with Statement of Position 90-7, “Financial
        Reporting by Entities in Reorganization under the Bankruptcy Code” (“SOP 90-7”).
        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 based upon 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***
  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 related service period.
 
 In
        accordance with SEC Staff Accounting Bulletin 101, “Revenue Recognition in
        Financial Statements,” as amended by SEC Staff Accounting Bulletin 104, “Revenue
        Recognition,” we generally amortize revenue related to installation services on
        a straight-line basis over the contracted customer relationship, which generally
        ranges from two to twenty years.
 
 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. 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 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 2007, 2006 and 2005,
        we
        included the receipts of bankruptcy claim settlements from former customers
        as
        termination revenue. Termination revenue is reported in the same manner as
        the
        original service provided, and amounted to $8.5 million, $8.3 million, and
        $12.1
        million in 2007, 2006 and 2005, respectively.
 
 ***Accounts*** ***Receivable
        Reserves***
  ***Sales
        Credit Reserves***
  During
        each reporting period, we must make estimates for potential future sales
        credits
        to be issued in respect of current revenue, related to billing errors, 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 billing errors and 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 estimation and
        assumption.
 
 ***Allowance
        for Doubtful Accounts***
  During
        each reporting period, we must 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 credit
        worthiness 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 are stated at their preliminary estimated fair values as of the
        Effective Date based on our reorganization value. 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, which is included in network infrastructure assets on the
        respective balance sheets. 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 build outs. 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 $8.6 million, $5.1 million
        and $4.7 million for the years ended December 31, 2007, 2006 and 2005,
        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:
  Building (except certain storage huts which are 20 years)
              37.5
                  yearsNetwork
                  infrastructure assets
              20
                  yearsSoftware
                  and computer equipment
              3
                  to 4 yearsTransmission
                  equipment
              3
                  to 7 yearsFurniture,
                  fixtures and equipment
              3
                  to 10 yearsLeasehold
                  improvements
              Lesser of estimated useful life or the lease term
  22
  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 (loss).
 
 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 $2.2 million, $8.9 million and
        $2.0
        million for the years ended December 31, 2007, 2006 and 2005, respectively.
        We fully depreciated the remaining carrying value of the network infrastructure
        rendered unusable amounting to $0.3 million, $1.6 million and $0.4 million,
        on
        an original cost basis, for the years ended December 31, 2007, 2006 and 2005,
        respectively.
 
 In
        accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
        Long-Lived Assets,” 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 asset. Included in costs of revenue for the year ended December 31,
        2007 is
        a provision for equipment impairment of $2.2 million recorded to recognize
        the loss in value of certain equipment held in inventory. There were no
        impairment amounts provided for the years ended December 31, 2006 or
        2005.
 
 ***Asset
        Retirement Obligations***
  In
        accordance with SFAS No. 143, “Accounting for Asset Retirement
        Obligations,” 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 of electronics in leased facilities and the removal of
        leasehold improvements, and 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,”
and 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 $6.1
        million and $5.6 million at December 31, 2007 and 2006, respectively, of
        which $3.3 million and $3.1 million, respectively, were included in “Accrued
        expenses,” and $2.8 million and $2.5 million, respectively, were included in
“Other long-term liabilities.” Accretion expense, which is included in “Interest
        expense,” amounted to $0.2 million for each of the years ended December 31,
        2007, 2006 and 2005.
 
 ***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 (loss). Our foreign exchange transaction
        gains (losses) are generally included in “other income” in the consolidated
        statements of operations.
 
 ***Income
        Taxes***
  The
        Company accounts for income taxes in accordance with SFAS No. 109, “Accounting
        for Income Taxes,” (“SFAS No. 109”). 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 carry-forwards,
        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. The
        Company
        records a valuation allowance against deferred tax assets to the extent that
        it
        is more likely than not that some portion or all of the deferred tax assets
        will
        not be realized.
 
 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,”
(“Interpretation No. 48”) when, despite our belief that our tax return positions
        are appropriate and supportable under appropriate tax law, we believe there
        is
        uncertainty with respect to certain positions and we may not succeed in
        realizing the tax position. We have evaluated our tax positions for items
        of
        uncertainty in accordance with Interpretation No. 48 and have determined
        that
        our tax positions are highly certain within the meaning of Interpretation
        No.
        48. 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 year ended December
        31,
        2007.
 
 ***Deferred
        Taxes***
  Our
        current and deferred income taxes, and associated valuation allowances, are
        impacted by events and transactions arising in the normal course of business
        as
        well as by 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
        weight of available evidence that some portion or the entire deferred tax
        asset
        will not be realized. 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 asset would require the ability to forecast
        future earnings. Based on past performance resulting in net loss positions,
        sufficient evidence exists to require a valuation allowance on our net deferred
        tax asset balance.
  As
        a
        result of our bankruptcy, estimates have been made that impact the deferred
        tax
        balances. The factors resulting in estimation include, but are not limited
        to,
        the fresh start valuation of assets and liabilities, implications of
        cancellation of indebtedness income and various other factors.
 
 ***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”). SFAS No. 148 amended SFAS No. 123,
“Accounting for Stock-Based Compensation,” (“SFAS No. 123”), to provide
        alternative methods of transition to SFAS No. 123’s fair value method of
        accounting for stock-based employee compensation (see Note 9, “Stock-based
        Compensation,” to the
        accompanying consolidated financial statements included elsewhere in this
        Annual
        Report on Form 10-K ).
  23
  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)”), 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
        occur. As we had recognized the impact of forfeitures as they occurred upon
        adoption of 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.
 
 The
        following are the assumptions used by the Company to calculate the weighted
        average fair value of stock options granted:
  **Years Ended December 31,****2007**
              
              **2006**
              
              **2005**Dividend
                  yield
              
              
              —
              
              
              —
              
              
              —Expected
                  volatility
              
              
              80.00
              %
              
              80.00
              %
              
              80.00
              %Risk-free
                  interest rate
              
              
              4.61
              %
              
              4.89
              %
              
              3.99
              %Expected
                  life (years)
              
              
              5.00
              
              
              5.00
              
              
              4.00Weighted
                  average fair value of options granted
              
              
              $41.77
              
              
              $31.16
              
              
              $16.25
 
 For
        a
        description of our stock-based compensation programs, see Note 9, “Stock-Based
        Compensation,” to the accompanying consolidated financial statements included
        elsewhere in this Annual Report on Form 10-K.
 
 **Results
        of Operations for the Year Ended December 31, 2007 Compared to the Year
        Ended December 31, 2006**
  ***Consolidated
        Results (in millions):***
 **Years Ended December 31,****2007**
                
                **2006**
                
                **$ Increase/**
                  **(Decrease)**
                
                **% Increase/**
                  **(Decrease)**Revenue
                
                $
                253.6
                
                $
                236.7
                
                $
                16.9
                
                
                7.1
                    %Costs
                    of revenue (excluding depreciation and amortization, shown separately
                    below, and including provision for equipment impairment of $2.2
                    for the
                    year ended December 31, 2007)
                
                
                110.3
                
                
                121.9
                
                
                (11.6
                )
                
                (9.5)%Selling,
                    general and administrative expenses
                
                
                80.9
                
                
                71.1
                
                
                9.8
                
                
                13.8
                    %Depreciation
                    and amortization
                
                
                47.5
                
                
                47.2
                
                
                0.3
                
                
                0.6
                    %Loss
                    on litigation
                
                
                11.7
                
                
                —
                
                
                11.7
                
                
                NMOperating
                    income (loss)
                
                
                3.2
                
                
                (3.5
                )
                
                6.7
                
                
                191.4
                    %Other
                    income (expense):Gain
                    on reversal of foreign currency translation adjustments from
                    liquidation
                    of subsidiaries
                
                
                10.3
                
                
                —
                
                
                10.3
                
                
                NMInterest
                    income
                
                
                3.3
                
                
                2.4
                
                
                0.9
                
                
                37.5
                    %Interest
                    expense
                
                
                (2.3
                )
                
                (5.8
                )
                
                (3.5
                )
                
                (60.3)%Other
                    income, net
                
                
                3.8
                
                
                2.1
                
                
                1.7
                
                
                81.0
                    %Gain
                    on sales of data centers
                
                
                —
                
                
                48.2
                
                
                (48.2
                )
                
                NMIncome
                    from continuing operations, before income taxes
                
                
                18.3
                
                
                43.4
                
                
                (25.1
                )
                
                (57.8)%Provision
                    for income taxes
                
                
                4.5
                
                
                —
                
                
                4.5
                
                
                NMIncome
                    from continuing operations
                
                
                13.8
                
                
                43.4
                
                
                (29.6
                )
                
                (68.2)%Income
                    from discontinued operations, net of taxes
                
                
                —
                
                
                3.0
                
                
                (3.0
                )
                
                NMNet
                    income
                
                $
                13.8
                
                $
                46.4
                
                $
                (32.6
                )
                
                (70.3)%
  *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.
 
 ***Revenue.*** **** Consolidated revenue in 2007 was $253.6 million, compared to $236.7 million
        in
        2006, an increase of $16.9 million, or 7.1%. Revenue from our U.S. operations
        increased by $9.9 million, or 4.5%, from $217.6 million in 2006 to $227.5
        million in 2007. The principal reason for this increase was due to the continued
        growth in our fiber services and metro transport services. In 2007, U.S.
        revenue
        from fiber services increased by $11.1 million, or 9.2%, from $120.3 million
        in
        2006 to $131.4 million in 2007 and revenue from metro transport services
        increased by $22.3 million, or 79.1%, from $28.2 million in 2006 to $50.5
        million in 2007. These increases were offset by a decrease in data center
        revenue of $23.7 million, or 96.7%, from $24.5 million in 2006 to $0.8 million
        in 2007 due to the sale of our domestic data centers in the fourth quarter
        of
        2006 (four in October 2006 and one in November 2006). Revenue from our foreign
        operations, primarily in the U.K., increased by $7.0 million, or 36.6%, from
        $19.1 million in 2006 to $26.1 million in 2007. The increase was primarily
        due
        to the change in currency translation rates in 2007 compared to 2006 and
        to our
        focus on the core businesses in the U.K.
 
 24
  ***Costs
        of revenue.*** Consolidated costs of revenue in 2007 was $110.3 million, compared to $121.9
        million in 2006, a decrease of $11.6 million, or 9.5%. Consolidated costs
        of
        revenue as a percentage of revenue was 43.5% in 2007, compared to 51.5% in
        2006,
        resulting in consolidated gross profit margin of 56.5% and 48.5% in 2007
        and
        2006, respectively. The costs of revenue for our U.S. operations was $101.9
        million and $113.6 million in 2007 and 2006, respectively, a decrease of
        $11.7
        million, or 10.3%. The decrease in the domestic costs of revenue in 2007
        compared to 2006 was attributable principally to the sale of the domestic
        data
        centers, which resulted in a decrease in costs of revenue of $15.4 million
        in
        2007 compared to 2006. Additionally, costs of revenue was reduced due to
        the
        amount of salaries capitalized; domestic capitalized labor increased from
        $4.0
        million in 2006 to $7.9 million in 2007. These decreases in costs of revenue
        were partially offset by the provision for equipment impairment of $2.2 million,
        an increase of $2.8 million in our long haul fiber lease expense, an increase
        of
        $1.1 million in co-location operating expense and an increase of $1.0 million
        in
        third party network costs. The costs of revenue for our foreign operations
        was
        $8.4 million in 2007, compared to $8.3 million in 2006, an increase of $0.1
        million, or 1.2%.
  ***Selling,
        General and Administrative Expenses (“SG&A”)*** **.** Consolidated SG&A in 2007 was $80.9 million ,
        compared to $71.1 million in
        2006,
        an increase of $9.8 million ,
        or
        13.8%. SG&A as a percentage of revenue was 31.9% in 2007, compared to 30.0%
        in 2006. In the U.S., SG&A was $69.3 million in 2007, compared to $63.4
        million in 2006, an increase of $5.9 million, or 9.3%. SG&A for our U.S.
        operations in 2007 compared to 2006 increased primarily due to an increase
        in
        non-cash stock-based compensation expense (principally related to restricted
        stock units granted in 2007) from $3.4 million in 2006 to $8.0 million in
        2007.
        Additionally, payroll and payroll-related expenses increased by $7.5 million
        from $25.7 million in 2006, to $33.2 million in 2007 due to increases in
        salaries and headcount. These increases were partially offset by a reduction
        in
        professional fees of $4.6 million and a reduction in transaction-based taxes
        of
        $1.4 million. SG&A for our foreign operations in 2007 was $11.6
        million, compared to $7.7 million in 2006, an increase of $3.9
        million, or 50.6%, which was due primarily to (i) an increase in payroll
        and
        payroll-related expenses of $3.1 million; (ii) an increase in occupancy costs
        of
        $1.0 million due to the lease of new office space in the UK in 2007; and
        (iii)
        an increase in other operating costs of $1.3 million. These increases were
        partially offset by decreases in (i) professional fees of $1.2 million, due
        to
        the decline in audit-related fees; and (ii) stock-based compensation expense
        of
        $0.3 million.
 
 ***Depreciation
        and amortization.*** **** Consolidated depreciation and amortization in 2007 was $47.5 million ,
        compared to $47.2 million in
        2006,
        an increase of $0.3 million ,
        or
        0.6%. Consolidated depreciation and amortization as a percentage of revenue
        was
        18.7% in 2007, compared to 19.9% in 2006. Depreciation and amortization
        increased as a result of additions to property and equipment in 2007 and
        the
        full year effect of depreciation on property and equipment acquired throughout
        2006. This increase was partially offset by the elimination of depreciation
        expense associated with property and equipment sold or disposed of during
        2007
        and 2006, primarily the data centers in late 2006 and property and equipment,
        which became fully depreciated during 2007.
  ***Loss
        on litigation.*** In
        2007,
        we recorded a loss on litigation of $11.7 million with respect to the GVN
        litigation. Of this amount, $0.8 million was paid during 2007 and $10.9 million
        was accrued at December 31, 2007. See Item 3, “Legal Proceedings” and Item 8,
        Financial Statements, Note 13 to the Consolidated Financial Statements,
“Litigation.”
 
 ***Gain
        on reversal of foreign currency translation adjustments from liquidation
        of
        subsidiaries.*** We
        recognized a non-cash gain on the reversal of foreign currency translation
        adjustments of $10.3 million, previously included in other comprehensive
        income
        on our statements of shareholders’ equity, in connection with the liquidation of Metromedia
        Fiber Network B.V. ,
        Metromedia Fiber Network Services Ltd. and SiteSmith Ltd., each of which
        was a
        wholly-owned subsidiary, in the fourth quarter of 2007.
 
 ***Interest
        income*** **.** Interest
        income, substantially all of which was earned in the U.S., increased from
        $2.4 million in
        2006
        to $3.3 million in
        2007.
        The increase of $0.9 million ,
        or
        37.5%, was primarily due to the additional funds that we had available for
        investment following the sales of our domestic data centers in the fourth
        quarter of
        2006
        and higher short-term interest rates.
 
 ***Interest
        expense.*** **** Interest
        expense, substantially all of which was incurred in the U.S., includes 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
        certain asset retirement obligations. Interest expense decreased from $5.8 million in
        2006
        to $2.3 million in
        2007.
        The decrease of $3.5 million ,
        or
        60.3%, was primarily due to a decrease in interest expense on fair market
        value
        rent liabilities from $3.9 million in 2006 to $0.6 million in 2007 due to
        the
        reduction of such balances, which was primarily due to the sale of our domestic
        data centers in the fourth quarter of 2006.
 
 ***Other
        income, net.*** **** Other
        income, net is composed primarily of income from non-recurring transactions
        and
        is not comparative from a trend perspective.
  Consolidated
        other income, net was $3.8 million in 2007, compared to $2.1 million in 2006,
        an
        increase of $1.7 million. In the U.S., other income, net was $2.7 million
        in
        2007, compared to a net loss of $1.4 million in 2006, an increase of $4.1
        million. For our foreign operations, other income, net was $1.1 million in
        2007,
        compared to $3.5 million in 2006, a decrease of $2.4 million. In 2007,
        consolidated other income, net was comprised primarily of gains arising from
        the
        reversal of certain tax liabilities of $2.2 million, gain on a legal settlement
        of $0.6 million and other gains of $0.4 million, offset by losses on
        dispositions of property and equipment of $0.5 million and a loss on the
        sale of
        certain investments of $0.4 million. In 2006, consolidated other income,
        net was
        comprised primarily of gains arising from the reversal of certain tax
        liabilities of $3.2 million, gain on foreign currency of $2.0 million and
        other
        gains of $1.5 million, offset by losses on disposition of property and equipment
        of $4.6 million.
 
 ***Gain
        on sales of data centers.*** Gain
        on
        the sales of our domestic data centers **** of
        $48.2
        million in 2006 represented the excess of the proceeds received on the sale
        totaling $43.1 million plus the reversal of the deferred fair value rent
        liability and the SFAS No. 13 liability associated with the related parties
        totaling $28.0 million and $6.0 million, respectively, over the carrying
        value
        of the related assets sold. There was no comparable sale in 2007.
  ***Income
        from discontinued operations, net of taxes*** **.** The
        income from discontinued operations, net of taxes, for the year ended December
        31, 2006 includes the loss from discontinued operations of $0.9 million and
        the
        gain on the sale of AboveNet (UK) London of $3.9 million. There were no
        discontinued operations in the year ended December 31, 2007.
  25
  **Results
        of Operations for the Year Ended December 31, 2006 Compared to the Year
        Ended December 31, 2005**
  ***Consolidated
        Results (in millions):***
 **Years Ended December 31,****2006**
                
                **2005**
                
                **$ Increase/**
                  **(Decrease)**
                
                **% Increase/**
                  **(Decrease)**Revenue
                
                $
                236.7
                
                $
                219.7
                
                $
                17.0
                
                
                7.7
                    %Costs
                    of revenue (excluding depreciation and amortization, shown separately
                    below)
                
                
                121.9
                
                
                119.2
                
                
                2.7
                
                
                2.3
                    %Selling,
                    general and administrative expenses
                
                
                71.1
                
                
                69.6
                
                
                1.5
                
                
                2.2
                    %Depreciation
                    and amortization
                
                
                47.2
                
                
                43.1
                
                
                4.1
                
                
                9.5
                    %Operating
                    loss
                
                
                (3.5
                )
                
                (12.2
                )
                
                8.7
                
                
                71.3
                    %Other
                    income (expense):Gain
                    (loss) on sales of data centers
                
                
                48.2
                
                
                (1.3
                )
                
                49.5
                
                
                NMInterest
                    income
                
                
                2.4
                
                
                1.3
                
                
                1.1
                
                
                84.6
                    %Interest
                    expense
                
                
                (5.8
                )
                
                (5.9
                )
                
                (0.1
                )
                
                (1.7)%Other
                    income, net
                
                
                2.1
                
                
                10.9
                
                
                (8.8
                )
                
                (80.7)%Income
                    (loss) from continuing operations, before income taxes
                
                
                43.4
                
                
                (7.2
                )
                
                50.6
                
                
                702.8
                    %Provision
                    for income taxes
                
                
                —
                
                
                0.4
                
                
                (0.4
                )
                
                NMIncome
                    (loss) from continuing operations
                
                
                43.4
                
                
                (7.6
                )
                
                51.0
                
                
                671.1
                    %Income
                    (loss) from discontinued operations, net of taxes
                
                
                3.0
                
                
                (0.8
                )
                
                3.8
                
                
                475.0
                    %Net
                    income (loss)
                
                $
                46.4
                
                $
                (8.4
                )
                $
                54.8
                
                
                652.4
                    %
  *NM—not
        meaningful*
 
 ***Revenue.*** **** Consolidated revenue in 2006 was $236.7 million, compared to $219.7 million
        in
        2005, an increase of $17.0 million, or 7.7%. Revenue from our U.S. operations
        increased by $13.5 million, or 6.6%, from $204.1 million in 2005 to $217.6
        million in 2006. The principal reason for this increase was due to the continued
        growth in our fiber services and metro transport services. In 2006, U.S.
        revenue
        from fiber services increased by $10.1 million, or 9.2%, from $110.2 million
        in
        2005 to $120.3 million in 2006 and revenue from metro transport services
        increased by $13.3 million, or 89.3%, from $14.9 million in 2005 to $28.2
        million in 2006. These increases were offset by a decrease in data center
        revenue of $4.5 million, or 15.5%, from $29.0 million in 2005 to $24.5 million
        in 2006 due to the sale of the domestic data centers in the fourth quarter
        of
        2006 (four in October 2006 and one in November 2006) and a decrease in
        termination revenue of $3.8 million, or 31.4%, from $12.1 million in 2005
        to
        $8.3 million in 2006. Revenue from our foreign operations, primarily in the
        U.K., increased by $3.5 million, or 22.4%, from $15.6 million in 2005 to
        $19.1
        million in 2006 due primarily to our focus on our core business and
        strategic investment in infrastructure.
 
 ***Costs
        of revenue.*** Consolidated costs of revenue in 2006 were $121.9 million, compared to $119.2
        million in 2005, an increase of $2.7 million, or 2.3%. Consolidated costs
        of
        revenue as a percentage of revenue was 51.5% in 2006, compared to 54.3% in
        2005,
        resulting in consolidated gross profit margin of 48.5% and 45.7% in 2006
        and
        2005, respectively. The cost of revenue for our U.S. operations was $113.6
        million and $112.4 million in 2006 and 2005, respectively, an increase of
        $1.2
        million, or 1.1%. The cost of revenue for our foreign operations was $8.3
        million and $6.8 million in 2006 and 2005, respectively, an increase of $1.5
        million, or 22.1%. The increase in costs of revenue represents increases
        in
        variable costs associated with our revenue streams and was not as substantial
        as
        the increase in revenue because a significant percentage of our costs of
        revenue
        are fixed and increased at a slower rate than revenue. Additionally, because
        we
        are spreading these costs over a larger revenue base, we had improved gross
        profit margins in 2006 compared to 2005.
  ***Selling,
        General and Administrative Expenses (“SG&A”)*** **.** Consolidated SG&A in 2006 was $71.1 million ,
        compared to $69.6 million in
        2005,
        an increase of $1.5 million ,
        or
        2.2%. SG&A as a percentage of revenue was 30.0% in 2006, compared to 31.7%
        in 2005. In the U.S., SG&A was $63.4 million in 2006, compared to $63.1
        million in 2005, an increase of $0.3 million, or 0.5%. SG&A for our U.S.
        operations in 2006 compared to 2005 is primarily the result of an increase
        in
        audit fees and financial consulting fees of $2.4 million and $2.1 million,
        respectively, which were attributable to the extra costs incurred through
        our
        efforts to become timely in our financial reporting, and a net increase in
        other
        general and administrative expenses of $0.8 million. These increases were
        partially offset by the reduction in domestic transaction taxes of $5.0 million,
        attributable to billing certain of these taxes to customers that commenced
        in
        the first quarter of 2006. SG&A for our foreign operations was $7.7 million
        and $6.5 million in 2006 and 2005, respectively, an increase of $1.2 million,
        or
        18.5%, which was due primarily to (i) an increase in payroll and payroll-related
        expenses of $1.2 million; (ii) an increase in professional fees of $1.3 million,
        $0.7 million of which related to the extra costs incurred through our efforts
        to
        become timely in our financial reporting and to become compliant with the
        requirements of the Sarbanes-Oxley Act of 2002. These increases were partially
        offset by a decrease in other operating costs of $1.2 million.
 
 ***Depreciation
        and amortization.*** **** Consolidated depreciation and amortization in 2006 was $47.2 million ,
        compared to $43.1 million in
        2005,
        an increase of $4.1 million ,
        or
        9.5%. Consolidated depreciation and amortization as a percentage of revenue
        was
        19.9% in 2006, compared to 19.6% in 2005. Depreciation and amortization
        increased as a result of additions to property and equipment in 2006 and
        the
        full year effect of depreciation on property and equipment acquired throughout
        2005. This increase was partially offset by the elimination of depreciation
        expense associated with property and equipment sold or disposed of during
        2006
        and 2005.
  ***Gain
        on sales of data centers.*** Gain
        on
        the sales of our domestic data centers **** of
        $48.2
        million in 2006 represented the excess of the proceeds received on the sale
        totaling $43.1 million plus the reversal of the deferred fair value rent
        liability and the SFAS No. 13 liability associated with the related parties
        totaling $28.0 million and $6.0 million, respectively, over the carrying
        value
        of the related assets sold. In 2005, a loss of $1.3 million was incurred
        on the
        sale of a domestic data center.
 
 ***Interest
        income*** **.** Interest
        income, substantially all of which was earned in the U.S., increased from
        $1.3 million in
        2005
        to $2.4 million in
        2006.
        The increase of $1.1 million ,
        or
        84.6%, was primarily due to the additional funds that we had available for
        investment following the sales of our domestic data centers in the fourth
        quarter of 2006 and an increase in short-term interest rates during
        2006.
 
 ***Interest
        expense.*** **** Interest
        expense, substantially all of which was incurred in the U.S., includes interest
        related to a capital lease obligation, interest accrued on certain tax
        liabilities, and interest accretion relating to certain asset retirement
        obligations. Interest expense decreased from $5.9 million in
        2005
        to $5.8 million in
        2006.
        The decrease of $0.1 million ,
        or
        1.7%, was primarily due to a decrease in interest expense on fair market
        value
        rent liabilities due to the reduction of such balances, which was primarily
        due
        to the sale of our domestic data centers.
  26
  ***Other
        income, net.*** **** Other
        income, net is composed primarily of non-recurring transactions and is not
        comparative from a trend perspective.
  Consolidated
        other income, net was $2.1 million in 2006, compared to $10.9 million in
        2005, a
        decrease of $8.8 million. In the U.S., other income, net was a net loss of
        $1.4
        million in 2006, compared to a net gain of $3.8 million in 2005, a decrease
        of
        $5.2 million. For our foreign operations, other income, net was a net gain
        of
        $3.5 million in 2006, compared to a net gain of $7.1 million in 2005, a decrease
        of $3.6 million. In 2006, consolidated other income, net was comprised primarily
        of gains arising from the reversal of certain tax liabilities of $3.2 million,
        gain on foreign currency of $2.0 million and other gains of $1.5 million,
        offset
        by losses on disposition of property and equipment of $4.6 million. In 2005,
        consolidated other income, net was comprised of the non-cash gain on the
        settlement of a contractual obligation of $9.0 million, a gain on the settlement
        of a lease of $3.5 million, offset by the loss on foreign currency of $1.2
        million and other losses totaling $0.4 million.
  ***Income
        (loss) from discontinued operations, net of taxes*** **.** As
        discussed in Note 7, “Discontinued Operations and Dispositions,” to the
        accompanying consolidated financial statements included elsewhere in this
        Annual
        Report on Form 10-K, we sold or liquidated six European subsidiaries during
        the
        years ended December 31, 2005 and 2004. The operating results of these entities,
        as well as the gain or loss on sale of disposition, were included in income
        (loss) from discontinued operations, net of taxes in the related statements
        of
        operations for all periods presented. Additionally, the operating results
        of
        AboveNet (UK), which was sold in November 2006, were included in the income
        (loss) from discontinued operations, net of taxes, in all periods
        presented.
 
 **Liquidity
        and Capital Resources**
  We
        had a
        working capital deficit at December 31, 2007 of $25.6 million, compared to
        working capital of $17.4 million at December 31, 2006. Cash and cash equivalent
        balances at December 31, 2007 were $45.8 million, compared to $70.7 million
        at
        December 31, 2006, a decrease of $24.9 million. The decrease in working capital
        at December 31, 2007 was primarily attributable to the use of cash for payments
        for purchases of property and equipment of $90.8 million and cash of
        $9.7
        millionutilized to repurchase shares in connection with the
        delivery of vested restricted stock units, and the accrual of litigation
        costs
        of $10.9 million partially offset by cash generated by operating activities.
        The
        decrease in cash was due primarily to the excess of cash used for purchases
        of
        property and equipment and cash used to purchase shares over cash generated
        by
        operating activities.
 
 Net
        cash
        provided by operating activities was $69.7 million in 2007, compared to $51.3
        million in 2006. Net cash provided by operating activities in 2007 resulted
        primarily from the add back of non-cash items deducted in the determination
        of
        net income, principally depreciation and amortization of $47.5 million and
        stock-based compensation expense of $8.2 million, provision for equipment
        impairment of $2.2 million, partially offset by the non-cash gain of $10.3
        million on the reversal of foreign currency translation adjustments from
        the
        liquidation of certain subsidiaries. Net cash provided by operating activities
        in 2006 resulted primarily from the add back of non-cash items deducted in
        the
        determination of net income, principally depreciation and amortization of
        $47.2
        million and stock-based compensation expense of $3.9 million, offset by the
        net
        gain on the sale of our data centers of $48.2 million included in the
        determination of net income.
 
 Accounts
        payable at December 31, 2007 was $7.9 million, compared to $14.6 million
        at
        December 31, 2006, a reduction of $6.7 million, which was due to an upgrade
        to
        the accounting system at December 31, 2007, which required us to close the
        accounts payable process earlier than in the prior year. Accrued expenses
        were
        $78.3 million at December 31, 2007, compared to $56.6 million at December
        31,
        2006, an increase of $21.7 million. The increase was attributable to the
        accrued
        litigation costs of $10.9 million, an increase in accrued capital expenditures
        of $7.2 million and an increase in overall accruals required because of the
        early closing of the accounts payable process at December 31, 2007, discussed
        above.
 
 Net
        cash
        used in investing activities in 2007 was $89.3 million, compared to $27.2
        million in 2006. Net cash used in investing activities in 2007 was primarily
        attributable to the purchases of property and equipment of $90.8 million.
        Net
        cash used in investing activities in 2006 reflects the proceeds generated
        from
        sales of property and equipment of $43.2 million (of which $43.1 million
        related
        to the sales of our domestic data centers) and the proceeds from the sale
        of the
        stock of AboveNet (UK) of $1.3 million, offset by the cash used for the purchase
        of property and equipment totaling $71.7 million. The purchase of property
        and
        equipment in each year relates to the capital required to connect new customers
        to our networks and to build our infrastructure. The increase in 2007 compared
        to 2006 was primarily due to the upgrade of our long haul network to next
        generation technology that has dramatically improved the long haul network's
        capacity and an upgrade of our core router network at major hubs to Juniper’s
        flagship T-Series platform **.**
 
 Net
        cash
        used in financing activities was $5.4 million in 2007, which is composed
        of
        the $9.7
        millionutilized to buy back shares from employees in connection with the
        delivery of vested restricted stock units, and the principal payment on our
        capital lease obligation of $0.1 million, offset by the proceeds from the
        exercise of warrants of $1.1 million, the excess tax benefit realized from
        share-based payment arrangements of $2.8 million and the reduction in restricted
        cash of $0.5 million. Net cash used in financing activities was $1.0 million
        in
        2006, which reflects the change in restricted cash and cash equivalents of
        $1.1
        million and the principal payment on our capital lease obligation of $0.1
        million, offset by the proceeds from the exercise of warrants of $0.2
        million.
 
 In
        2007,
        we generated cash from operations that was sufficient to fund our operating
        expenses. During 2007, our capital expenditures exceeded the net cash generated
        from operations, thus reducing liquidity. Additionally,
        in December 2007, in connection with the delivery of restricted stock units,
        we
        paid an aggregate of $9.7 million to purchase shares of common stock to fund
        estimated tax obligations. See Item 11, “Executive Compensation,” and Note 9,
“Stock-Based Compensation – Restricted Stock Units,” to the
        accompanying consolidated financial statements included
        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 closed a $60 million senior secured credit facility
        (the
“Credit Facility”) comprised of: (i) an $18 million revolving working capital
        line (the “Revolver”); (ii) a $24 million term loan (the “Term Loan”); and (iii)
        an $18 million delayed draw term loan (“Delayed Draw Term Loan”), which is
        available from the closing date to and including the 270 th day
        thereafter. The Credit Facility matures on the fifth anniversary of the closing
        date (February 28, 2013). The Credit Facility is secured by substantially
        all of
        our 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 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 restrict our ability to pay dividends, limit
        annual capital expenditures in 2008, 2009 and 2010, require that we maintain
        a
        minimum of $20 million in cash deposits at all times, 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. As of August
        31, 2008, we had $24 million outstanding under the Credit Facility. On
        September 26, 2008, we executed a joinder agreement to the Credit Facility
        that
        adds an additional lender and increases the amount of the Credit Facility
        to $90
        million effective October 1, 2008, subject to the terms of the joinder
        agreement, including the payment of a $0.45 million fee at closing and a
        $0.1
        million advisory fee. 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 Credit Facility, which
        was
        originally scheduled to expire on November 25, 2008, was extended to June
        30,
        2009. We believe that our existing cash, cash from operating activities and
        funds available under our Credit Facility will be sufficient to fund operating
        expenses, planned capital expenditures and other liquidity requirements
        (including the liability arising out of the GVN litigation) at
        least
        through the third quarter of 2009 .
 
 27
  At
        December 31, 2007, we had $10.9 million accrued with respect to the GVN lawsuit,
        of which $8.6 million had been paid through August 31, 2008. As of December
        31,
        2007, $0.8 million of the GVN liability had been paid and $10.9 million was
        included in accrued expenses on the consolidated balance sheet at such date.
        See
        Item 3, “Legal Proceedings,” and Item 8, “Financial
        Statements and Supplementary Data,” Note
        13,
“Litigation.”
 
 In
        addition, in the future we may consider making acquisitions of other companies
        or product lines to support our growth strategy. 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.
 
 ***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, 2007 measured from December 31,
        2007:
 **Payments Due By Period (In
                    Millions)****Contractual Obligations**
                
                **Total**
                
                **Less than**
                  **1 Year**
                
                **1-3**
                  **Years**
                
                **4-5**
                  **Years**
                
                **More than**
                  **5 Years**Operating
                    Lease Obligations
                
                $
                55.8
                
                $
                14.5
                
                $
                21.7
                
                $
                10.3
                
                $
                9.3Capital
                    Lease Obligations (Including Interest)
                
                
                2.4
                
                
                0.3
                
                
                0.5
                
                
                0.5
                
                
                1.1Other
                    Rights-of-Way, Franchise Fees and Building Access Fees
                
                
                135.0
                
                
                21.0
                
                
                28.4
                
                
                20.5
                
                
                65.1Total
                
                $
                193.2
                
                $
                35.8
                
                $
                50.6
                
                $
                31.3
                
                $
                75.5
  Excluded
        from this table are capital commitments (all of which relate to 2008), which
        totaled $26.0 million at December 31, 2007.
  Excluded
        from this table are contractual obligations incurred with respect to certain
        severance arrangements entered into in 2008, including the modification and
        termination of the contract of Mr. Doris (our former Senior Vice President
        and
        Chief Financial Officer) on March 4, 2008. See Item 8, Financial Statements
        and
        Supplementary Data, Note 16, “Subsequent Events - Employment Contract
        Termination and Employment Contracts,” for a further discussion.
 
 Excluded
        from this table are the obligations related to the Credit Facility consummated
        February 29, 2008. See Item 8, Financial Statements and Supplementary Data,
        Note
        16, “Subsequent Events - Bank Financing,” for a further discussion.
 
 **Segment
        Results (in millions)**
  Our
        results (excluding intercompany activity) are segmented according to groupings
        based on geography.
  **United
        States:**
 **2007**
                
                **2006**
                
                **$ Increase/**
                  **(Decrease)**
                
                **% Increase/**
                  **(Decrease)**Revenue
                
                $
                227.5
                
                $
                217.6
                
                $
                9.9
                
                
                4.5
                    %Costs
                    of revenue (excluding depreciation and amortization, shown separately
                    below, and including provision for equipment impairment of $2.2
                    for the
                    year ended December 31, 2007)
                
                
                101.9
                
                
                113.6
                
                
                (11.7
                )
                
                (10.3)%Selling,
                    general and administrative expenses
                
                
                69.3
                
                
                63.4
                
                
                5.9
                
                
                9.3
                    %Depreciation
                    and amortization
                
                
                41.4
                
                
                43.0
                
                
                (1.6
                )
                
                (3.7)%Operating
                    income (loss)
                
                
                14.9
                
                
                (2.4
                )
                
                17.3
                
                
                720.8
                    %Other
                    income (expense):Interest
                    income
                
                
                3.1
                
                
                2.4
                
                
                0.7
                
                
                29.2
                    %Interest
                    expense
                
                
                (2.3
                )
                
                (5.8
                )
                
                (3.5
                )
                
                (60.3)%Other
                    income (expense), net
                
                
                2.7
                
                
                (1.4
                )
                
                4.1
                
                
                292.9
                    %Gain
                    on sale of data centers
                
                
                —
                
                
                48.2
                
                
                (48.2
                )
                
                NMIncome
                    from continuing operations before income taxes
                
                
                18.4
                
                
                41.0
                
                
                (22.6
                )
                
                (55.1)%Provision
                    for income taxes
                
                
                4.5
                
                
                —
                
                
                4.5
                
                
                NMIncome
                    from continuing operations
                
                
                13.9
                
                
                41.0
                
                
                (27.1
                )
                
                (66.1)%Net
                    income
                
                $
                13.9
                
                $
                41.0
                
                $
                (27.1
                )
                
                (66.1)%
 28
  **United
          Kingdom and others:**
 **2007**
                
                **2006**
                
                **$ Increase/**
                  **(Decrease)**
                
                **% Increase/**
                  **(Decrease)**Revenue
                
                $
                26.1
                
                $
                19.1
                
                $
                7.0
                
                
                36.6
                    %Costs
                    of revenue (excluding depreciation and amortization, shown separately
                    below)
                
                
                8.4
                
                
                8.3
                
                
                0.1
                
                
                1.2
                    %Selling,
                    general and administrative expenses
                
                
                11.6
                
                
                7.7
                
                
                3.9
                
                
                50.6
                    %Depreciation
                    and amortization
                
                
                6.1
                
                
                4.2
                
                
                1.9
                
                
                45.2
                    %Loss
                    on litigation
                
                
                11.7
                
                
                —
                
                
                11.7
                
                
                NMOperating
                    loss
                
                
                (11.7
                )
                
                (1.1
                )
                
                (10.6
                )
                
                NMOther
                    income (expense):Gain
                    on reversal of foreign currency translation adjustmentsfrom
                    liquidation of subsidiaries
                
                
                10.3
                
                
                —
                
                
                10.3
                
                
                NMInterest
                    income
                
                
                0.2
                
                
                —
                
                
                0.2
                
                
                NMOther
                    income, net
                
                
                1.1
                
                
                3.5
                
                
                (2.4
                )
                
                (68.6)%(Loss)
                    income from continuing operations before income taxes
                
                
                (0.1
                )
                
                2.4
                
                
                (2.5
                )
                
                (104.2)%Provision
                    for income taxes
                
                
                —
                
                
                —
                
                
                —
                
                
                —(Loss)
                    income from continuing operations
                
                
                (0.1
                )
                
                2.4
                
                
                (2.5
                )
                
                (104.2)%Gain
                    on disposition of discontinued operations, net of taxes
                
                
                —
                
                
                3.9
                
                
                (3.9
                )
                
                NMLoss
                    from discontinued operations
                
                
                —
                
                
                (0.9
                )
                
                0.9
                
                
                NMNet
                    income from discontinued operations
                
                
                —
                
                
                3.0
                
                
                (3.0
                )
                
                NMNet
                    (loss) income
                
                $
                (0.1
                )
                $
                5.4
                
                $
                (5.5
                )
                
                (101.9)%
  **United
        States:**
 **2006**
                
                **2005**
                
                **$ Increase/**
                  **(Decrease)**
                
                **% Increase/
                    (Decrease)**Revenue
                
                $
                217.6
                
                $
                204.1
                
                $
                13.5
                
                
                6.6
                    %Costs
                    of revenue (excluding depreciation and amortization, shown separately
                    below)
                
                
                113.6
                
                
                112.4
                
                
                1.2
                
                
                1.1
                    %Selling,
                    general and administrative expenses
                
                
                63.4
                
                
                63.1
                
                
                0.3
                
                
                0.5
                    %Depreciation
                    and amortization
                
                
                43.0
                
                
                39.8
                
                
                3.2
                
                
                8.0
                    %Operating
                    loss
                
                
                (2.4
                )
                
                (11.2
                )
                
                8.8
                
                
                78.6
                    %Other
                    income (expense):Gain
                    (loss) on sale of data centers
                
                
                48.2
                
                
                (1.3
                )
                
                49.5
                
                
                NMInterest
                    income
                
                
                2.4
                
                
                1.3
                
                
                1.1
                
                
                84.6
                    %Interest
                    expense
                
                
                (5.8
                )
                
                (5.7
                )
                
                0.1
                
                
                1.8
                    %Other
                    (expense) income, net
                
                
                (1.4
                )
                
                3.8
                
                
                (5.2
                )
                
                (136.8)%Income
                    (loss) from continuing operations before income taxes
                
                
                41.0
                
                
                (13.1
                )
                
                54.1
                
                
                413.0
                    %Provision
                    for income taxes
                
                
                —
                
                
                0.4
                
                
                (0.4
                )
                
                NMIncome
                    (loss) from continuing operations
                
                
                41.0
                
                
                (13.5
                )
                
                54.5
                
                
                403.7
                    %Net
                    income (loss) from discontinued operations
                
                
                —
                
                
                —
                
                
                —
                
                
                —Net
                    income (loss)
                
                $
                41.0
                
                $
                (13.5
                )
                $
                54.5
                
                
                403.7
                    %
  29
  **United
        Kingdom and others:**
 **2006**
                
                **2005**
                
                **$ Increase/**
                  **(Decrease)**
                
                **% Increase/**
                  **(Decrease)**Revenue
                
                $
                19.1
                
                $
                15.6
                
                $
                3.5
                
                
                22.4
                    %Costs
                    of revenue (excluding depreciation and amortization, shown separately
                    below)
                
                
                8.3
                
                
                6.8
                
                
                1.5
                
                
                22.1
                    %Selling,
                    general and administrative expenses
                
                
                7.7
                
                
                6.5
                
                
                1.2
                
                
                18.5
                    %Depreciation
                    and amortization
                
                
                4.2
                
                
                3.3
                
                
                0.9
                
                
                27.3
                    %Operating
                    loss
                
                
                (1.1
                )
                
                (1.0
                )
                
                (0.1
                )
                
                (10.0)%Other
                    income (expense):Gain
                    on sale of data centers
                
                
                —
                
                
                —
                
                
                —
                
                
                —Interest
                    income
                
                
                —
                
                
                —
                
                
                —
                
                
                —Interest
                    expense
                
                
                —
                
                
                (0.2
                )
                
                (0.2
                )
                
                NMOther
                    income, net
                
                
                3.5
                
                
                7.1
                
                
                (3.6
                )
                
                (50.7)%Income
                    from continuing operations before income taxes
                
                
                2.4
                
                
                5.9
                
                
                (3.5
                )
                
                (59.3)%Provision
                    for income taxes
                
                
                —
                
                
                —
                
                
                —
                
                
                —Income
                    from continuing operations
                
                
                2.4
                
                
                5.9
                
                
                (3.5
                )
                
                (59.3)%Gain on
                    disposition of discontinued operations, net of taxes
                
                
                3.9
                
                
                —
                
                
                3.9
                
                
                NMLoss
                    from discontinued operations
                
                
                (0.9
                )
                
                (0.8
                )
                
                (0.1
                )
                
                (12.5)%Net
                    income (loss) from discontinued operations
                
                
                3.0
                
                
                (0.8
                )
                
                3.8
                
                
                475.0
                    %Net
                    income
                
                $
                5.4
                
                $
                5.1
                
                $
                0.3
                
                
                5.9
                    %
  *NM—not
        meaningful*
 
 
 **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 negatively impacted.
 
 **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**
  In
        June 2006, the FASB issued Interpretation No. 48, “Accounting for
        Uncertainty in Income Taxes — an interpretation of SFAS No. 109,”
(“Interpretation No. 48”). This Interpretation clarifies the accounting for
        uncertainty in income taxes recognized in an enterprise’s financial statements
        in accordance with SFAS No. 109. This Interpretation prescribed a
        recognition threshold and measurement attribute for the financial statement
        recognition and measurement of a tax position taken or expected to be taken
        in
        an income tax return. This Interpretation also provides guidance on
        de-recognition, classification, interest and penalties, accounting in interim
        periods, disclosure and transition. Interpretation No. 48 did not have a
        material impact on our consolidated financial position, results of operations
        or
        cash flows as of and for the year ended December 31, 2007.
 
 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”). EITF No. 06-3
        requires that companies disclose their accounting policies regarding the
        gross
        or net presentation of certain taxes. Taxes within the scope of EITF
        No. 06-3 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. Our policy is to record
        taxes
        within the scope of EITF No. 06-3 on a net basis.
 
 In
        September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (“SFAS
        No. 157”), effective for fiscal years beginning after November 15, 2007 and
        interim periods within those fiscal years. SFAS No. 157 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 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,” 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.” SFAS
        No. 157 requires, among other things, enhanced disclosures about investments
        that are measured and reported at fair value and establishes a hierarchical
        disclosure framework that prioritizes and ranks the level of market price
        observability used in measuring investments at fair value. The three levels
        of
        the fair value hierarchy under SFAS No. 157 are described below: Level 1
        -
        Valuations based on quoted prices in active markets for identical assets
        or
        liabilities that the entity has the ability to access. Level 2 - Valuations
        based on quoted prices for similar assets or liabilities, quoted prices in
        markets that are not active, or other inputs that are observable or can be
        corroborated by observable data for substantially the full term of the assets
        or
        liabilities. Level 3 - Valuations based on inputs that are supported by little
        or no market activity and that are significant to the fair value of the assets
        or liabilities. A financial instrument’s level within the fair value hierarchy
        is based on the lowest level of any input that is significant to the fair
        value
        measurement. We are currently evaluating the impact that the adoption of
        SFAS
        No. 157 will
        have
        on our financial position and results of operations .
  30
  In
        February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
        Financial Assets and Financial Liabilities,” (“SFAS No. 159”). SFAS No. 159
        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
        will be effective in the first quarter of fiscal 2009, is not expected to
        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 Combination
        (Revised),” (“SFAS No. 141(R)”), to replace SFAS No. 141, “Business
        Combinations,” SFAS No. 141(R) 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. We are still evaluating the impact of SFAS No.
        141(R), however, the adoption of this statement is not expected to have a
        material impact on our financial position or results of operations.
 
 In
        December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
        Consolidated Financial Statements – an amendment of ARB No. 51,” (“SFAS No.
        160”). SFAS No. 160 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. We are still evaluating the impact SFAS No. 160 will have, but we do
        not
        expect it to have a material impact on our financial position or results
        of
        operations.
 
 In
        February 2008, the FASB issued FASB Staff Position No. FAS 157-2 (“FSP
        No. FAS 157-2”). FSP No. FAS 157-2 permits a delay in the effective
        date of SFAS No. 157 to fiscal years beginning after November 15,
        2008, for nonfinancial assets and nonfinancial liabilities, except for items
        that are recognized or disclosed at fair value in the financial statements
        on a
        recurring basis (at least annually). The delay is intended to allow the FASB
        and
        constituents additional time to consider the effect of various implementation
        issues that have arisen, or that may arise, from the application of SFAS
        No. 157.
 
 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”), 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 and its
        related interpretations; and the effect of derivative instruments and related
        hedged items on financial position, financial performance and cash flows.
        SFAS
        No. 161 also requires disclosure of the fair values of derivative instruments
        and their gains and losses in a tabular format. SFAS No. 161 is effective
        for
        financial statements issued for fiscal years and interim periods beginning
        after
        November 15, 2008, with early adoption encouraged. We are currently assessing
        the impact that the adoption of SFAS No. 161 will have on our financial position
        and results of operations.
 
 In
        April
        2008, the FASB issued EITF No. 07-05, “Determining Whether an Instrument (or
        Embedded Feature) Is Indexed to an Entity’s Own Stock,” (“EITF No. 07-05”). EITF
        No. 07-05 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. EITF No. 07-05 is effective
        for
        financial statements issued for fiscal years beginning after December 15,
        2008
        and early application is not permitted. We are still evaluating what effect
        EITF
        No. 07-05 will have on our financial position and results of
        operations.
  In
        June
        2008, the FASB issued EITF No. 08-3, “Accounting by Lessees for Maintenance
        Deposits under Lease Agreements,” (“EITF No. 08-3”). EITF No. 08-3 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. EITF
        No. 08-3 is effective for fiscal years, and interim periods within those
        fiscal
        years, beginning after December 15, 2008. We do not expect its adoption will
        have a material impact on our financial position or results of
        operations.
 
 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”). EITF No. 03-6-1 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. EITF
        No.
        03-6-1 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 EITF No. 03-6-1.
        We are
        currently evaluating the impact, if any, that the adoption of EITF No. 03-6-1
        will have on our financial position and results of
        operations.
  31
  **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 2007, our foreign activities accounted for 10.3% 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.
 
 As
        of
        December 31, 2007, we did not have any debt, other than a capital lease
        obligation, which carried a fixed rate of interest, and as a result, we were
        not
        exposed to any interest rate risk.
 
 On
        February, 29, 2008, we closed our Credit Facility. See Item 7, “Management’s
        Discussion and Analysis of Financial Condition and Results of Operations
        - Liquidity and Capital Resources,” and Item 8, “Financial
        Statements and Supplementary Data,” included elsewhere in this Annual
        Report on Form 10-K. Under the terms of the Credit Facility, our borrowings
        bear
        interest based upon short-term LIBOR rates or our administrative agent’s 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 $0.24
        million (1% x $24 million) based upon the amount of the related debt outstanding
        at August 31, 2008. Effective
        August 4, 2008, the Company entered into a swap arrangement under which
        it fixed its borrowing costs with respect to the $24 million outstanding
        for
        three years at 3.65% per annum, plus the applicable margin of 3.25%. The
        swap
        had the effect of increasing our current interest expense compared to the
        then
        current LIBOR rate and reducing our risk of increases in future interest
        expenses from increasing LIBOR rates.
  32
  **ITEM 8.
        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**
  **A**  **BOVENET,
        INC. AND SUBSIDIARIES**
 
 **INDEX
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Page**Report
                  of Independent Registered Public Accounting Firm
              
              34Consolidated
                  Balance Sheets as of December 31, 2007 and 2006
              
              35Consolidated
                  Statements of Operations for the years ended December 31, 2007, 2006
                  and 2005
              
              36Consolidated
                  Statements of Shareholders’ Equity for the years ended December 31,
                  2007, 2006 and 2005
              
              37Consolidated
                  Statements of Cash Flows for the years ended December 31, 2007, 2006
                  and 2005
              
              38Consolidated
                  Statements of Comprehensive Income (Loss) for the years ended
                  December 31, 2007, 2006 and 2005
              
              39Notes
                  to Consolidated Financial Statements
              
              40
  33
  **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, 2007 and 2006 and the related consolidated
        statements of operations, shareholders’ equity, cash flows and comprehensive
        income (loss) for each of three years in the period ended December 31,
        2007. 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, 2007 and 2006, and the results of its operations and its cash
        flows for each of the three years ended in the period December 31, 2007, in
        conformity with accounting principles generally accepted in the United
        States.
 
 As
        discussed in Note 2 to the consolidated financial statements, the Company
        adopted the provisions of Statement of Financial Accounting Standards
        No. 123(R), “Share Based Payments,” utilizing the modified prospective
        transition method effective January 1, 2006.
 
 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, 2007, 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 September 29, 2008 expressed an adverse opinion
        thereon.
 
 /s/     BDO
                  Seidman, LLPNew
                  York, NYSeptember
                  29, 2008
  34
  **ABOVENET,
        INC. AND SUBSIDIARIES**
 
 **CONSOLIDATED
        BALANCE SHEETS**
 **(in
        millions, except share and per share information)**
 **December 31,****2007**
                
                **2006****ASSETS:**Current
                    assets:Cash
                    and cash equivalents
                
                $
                45.8
                
                $
                70.7Restricted
                    cash and cash equivalents
                
                
                4.9
                
                
                5.5Accounts
                    receivable, net of allowances of $0.7 and $1.2,
                    respectively
                
                
                18.4
                
                
                18.0Prepaid
                    costs and other current assets
                
                
                12.3
                
                
                11.3Total
                    current assets
                
                
                81.4
                
                
                105.5Property
                    and equipment, net of accumulated depreciation and amortization
                    of $172.6
                    and $131.3 at December 31, 2007 and 2006, respectively
                
                
                347.7
                
                
                299.2Other
                    assets
                
                
                3.2
                
                
                3.0Total
                    assets
                
                $
                432.3
                
                $
                407.7**LIABILITIES:**Current
                    liabilities:Accounts
                    payable
                
                $
                7.9
                
                $
                14.6Accrued
                    expenses
                
                
                78.3
                
                
                56.6Deferred
                    revenue—current portion
                
                
                20.8
                
                
                16.9Total
                    current liabilities
                
                
                107.0
                
                
                88.1Deferred
                    revenue
                
                
                91.7
                
                
                91.8Other
                    long-term liabilities
                
                
                9.9
                
                
                9.9Total
                    liabilities
                
                
                208.6
                
                
                189.8Commitments
                    and contingencies**SHAREHOLDERS’
                    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, 10,833,049
                    issued
                    and 10,687,956 outstanding as of December 31, 2007 and 10,473,389
                    issued and 10,458,112 outstanding as of December 31,
                    2006
                
                
                0.1
                
                
                0.1Additional
                    paid-in capital
                
                
                253.7
                
                
                241.6Treasury
                    stock at cost, 145,093 and 15,277 shares as of December 31, 2007
                    and 2006,
                    respectively
                
                
                (10.2
                )
                
                (0.5
                )Accumulated
                    other comprehensive (loss) income
                
                
                (7.4
                )
                
                3.0Accumulated
                    deficit
                
                
                (12.5
                )
                
                (26.3
                )Total
                    shareholders’ equity
                
                
                223.7
                
                
                217.9Total
                    liabilities and shareholders’ equity
                
                $
                432.3
                
                $
                407.7
  The
        accompanying notes are an integral part of these consolidated financial
        statements.
  35
 
 **ABOVENET,
        INC. AND SUBSIDIARIES**
 
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
 **(in
        millions, except share and per share information)**
 
 **Years Ended December 31,****2007**
              
              **2006**
              
              **2005**Revenue
              
              $
              253.6
              
              $
              236.7
              
              $
              219.7Costs
                  of revenue (excluding depreciation and amortization, shownseparately
                  below, and including provision for equipment impairment of $2.2
                  for the
                  year ended December 31, 2007)
              
              
              110.3
              
              
              121.9
              
              
              119.2Selling,
                  general and administrative expenses
              
              
              80.9
              
              
              71.1
              
              
              69.6Depreciation
                  and amortization
              
              
              47.5
              
              
              47.2
              
              
              43.1Loss
                  on litigation
              
              
              11.7
              
              
              —
              
              
              —Operating
                  income (loss)
              
              
              3.2
              
              
              (3.5
              )
              
              (12.2
              )Other
                  income (expense):Gain
                  on reversal of foreign currency translation adjustments from liquidation
                  of subsidiaries
              
              
              10.3
              
              
              —
              
              
              —Interest
                  income
              
              
              3.3
              
              
              2.4
              
              
              1.3Interest
                  expense
              
              
              (2.3
              )
              
              (5.8
              )
              
              (5.9
              )Other
                  income, net
              
              
              3.8
              
              
              2.1
              
              
              10.9Gain
                  (loss) on sales of data centers
              
              
              —
              
              
              48.2
              
              
              (1.3
              )Income
                  (loss) from continuing operations before income taxes
              
              
              18.3
              
              
              43.4
              
              
              (7.2
              )Provision
                  for income taxes
              
              
              4.5
              
              
              —
              
              
              0.4Income
                  (loss) from continuing operations
              
              
              13.8
              
              
              43.4
              
              
              (7.6
              )Gain
                  on disposition of discontinued operations
              
              
              —
              
              
              3.9
              
              
              —Loss
                  from discontinued operations
              
              
              —
              
              
              (0.9
              )
              
              (0.8
              )Net
                  income (loss) from discontinued operations
              
              
              —
              
              
              3.0
              
              
              (0.8
              )Net
                  income (loss)
              
              $
              13.8
              
              $
              46.4
              
              $
              (8.4
              )Income
                  (loss) per share, basic:Income
                  (loss) per share from continuing operations
              
              $
              1.28
              
              $
              4.07
              
              $
              (0.72
              )Income
                  (loss) per share from discontinued operations
              
              
              —
              
              
              .28
              
              
              (0.07
              )Basic
                  income (loss) per share
              
              $
              1.28
              
              $
              4.35
              
              $
              (0.79
              )Weighted
                  average number of common shares
              
              
              10,751,921
              
              
              10,669,365
              
              
              10,596,244Income
                  (loss) per share, diluted:Income
                  (loss) per share from continuing operations
              
              $
              1.13
              
              $
              3.68
              
              $
              (0.72
              )Income
                  (loss) per share from discontinued operations
              
              
              —
              
              
              .26
              
              
              (0.07
              )Diluted
                  income (loss) per share
              
              $
              1.13
              
              $
              3.94
              
              $
              (0.79
              )Weighted
                  average number of common shares
              
              
              12,184,139
              
              
              11,794,279
              
              
              10,596,244
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  36
  **ABOVENET,
        INC. AND SUBSIDIARIES**
 
 **CONSOLIDATED
        STATEMENTS OF SHAREHOLDERS’ EQUITY**
 **(in
        millions, except share and per share information)**
 
 **Common Stock**
              
              **Treasury Stock**
              
              **Other Shareholders’ Equity****Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount**
              
              **Additional**
                **Paid-in**
                **Capital**
              
              **Accumulated**
                **Other**
                **Comprehensive**
                **Income**
              
              **Accumulated**
                **Deficit**
              
              **Total**
                **Shareholders’**
                **Equity**Balance
                  at January 1, 2005
              
              
              10,424,093
              
              $
              0.1
              
              
              —
              
              $
              —
              
              $
              233.5
              
              $
              1.6
              
              $
              (64.3
              )
              $
              170.9Issuance
                  of common stock from exercise of warrants
              
              
              1,229
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Issuance
                  of common stock from vested restricted stock
              
              
              41,122
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Purchase
                  of treasury stock
              
              
              —
              
              
              —
              
              
              15,277
              
              
              (0.5
              )
              
              —
              
              
              —
              
              
              —
              
              
              (0.5
              )Foreign
                  currency translationadjustments
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              0.9
              
              
              —
              
              
              0.9Amortization
                  of stock-based compensation expense for stock options and restricted
                  stock
                  units
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              4.0
              
              
              —
              
              
              —
              
              
              4.0Net
                  loss
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (8.4
              )
              
              (8.4
              )Balance
                  at December 31, 2005
              
              
              10,466,444
              
              
              0.1
              
              
              15,277
              
              
              (0.5
              )
              
              237.5
              
              
              2.5
              
              
              (72.7
              )
              
              166.9Issuance
                  of common stock from exercise of warrants
              
              
              6,945
              
              
              —
              
              
              —
              
              
              —
              
              
              0.2
              
              
              —
              
              
              —
              
              
              0.2Foreign
                  currency translationadjustments
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              0.5
              
              
              —
              
              
              0.5Amortization
                  of stock-based
                  compensation expense for stock options andrestricted
                  stock units
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              3.9
              
              
              —
              
              
              —
              
              
              3.9Net
                  income
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              46.4
              
              
              46.4Balance
                  at December 31, 2006
              
              
              10,473,389
              
              
              0.1
              
              
              15,277
              
              
              (0.5
              )
              
              241.6
              
              
              3.0
              
              
              (26.3
              )
              
              217.9Issuance
                  of common stock from exercise of warrants
              
              
              48,941
              
              
              —
              
              
              —
              
              
              —
              
              
              1.1
              
              
              —
              
              
              —
              
              
              1.1Issuance
                  of common stock from vested restricted stock
              
              
              310,719
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Purchase
                  of treasury stock-
              
              
              
              
              
              
              
              
              129,816
              
              
              (9.7
              )
              
              —
              
              
              —
              
              
              —
              
              
              (9.7
              )Foreign
                  currency translationadjustments
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (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 andrestricted
                  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
              
              
              10,833,049
              
              $
              0.1
              
              
              145,093
              
              $
              (10.2
              )
              $
              253.7
              
              $
              (7.4
              )
              $
              (12.5
              )
              $
              223.7
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  37
  **ABOVENET,
        INC. AND SUBSIDIARIES**
 
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **(in
        millions)**
 **Years Ended December 31,****2007**
                
                **2006**
                
                **2005**Cash
                    flows provided by operating activities:Net
                    income (loss)
                
                $
                13.8
                
                $
                46.4
                
                $
                (8.4
                )Adjustments
                    to reconcile net income (loss) to net cash provided by
                    operations:Net
                    (income) loss from discontinued operations
                
                
                —
                
                
                (3.0
                )
                
                0.8Depreciation
                    and amortization
                
                
                47.5
                
                
                47.2
                
                
                43.1Provision
                    for equipment impairment
                
                
                2.2
                
                
                —
                
                
                —Gain
                    on reversal of foreign currency translation adjustments from
                    liquidation
                    of subsidiaries
                
                
                (10.3
                )
                
                —
                
                
                —Non-cash
                    gain on settlement of liabilities
                
                
                —
                
                
                (3.2
                )
                
                (9.0
                )Provision
                    for bad debts
                
                
                0.5
                
                
                0.5
                
                
                0.3Non-cash
                    stock-based compensation expense
                
                
                8.2
                
                
                3.9
                
                
                4.0(Gain)
                    loss on sale of data centers
                
                
                —
                
                
                (48.2
                )
                
                1.3Gain
                    on leased asset termination
                
                
                (0.4
                )
                
                (0.2
                )
                
                (3.5
                )Losses
                    on disposition of property and equipment, net
                
                
                0.2
                
                
                4.6
                
                
                —Other
                
                
                0.1
                
                
                (1.4
                )
                
                —Changes
                    in operating working capital:Accounts
                    receivable
                
                
                (0.8
                )
                
                (2.8
                )
                
                (0.2
                )Prepaid
                    costs and other current assets
                
                
                (2.2
                )
                
                (0.1
                )
                
                2.9Accounts
                    payable
                
                
                (6.7
                )
                
                4.2
                
                
                (1.0
                )Accrued
                    expenses
                
                
                14.1
                
                
                6.7
                
                
                2.8Other
                    assets
                
                
                (0.1
                )
                
                —
                
                
                1.8Deferred
                    revenue and other long-term liabilities
                
                
                3.6
                
                
                (3.3
                )
                
                8.7Net
                    cash provided by operating activities
                
                
                69.7
                
                
                51.3
                
                
                43.6Cash
                    flows used in investing activities:Proceeds
                    from sales of property and equipment, principally data
                    centers
                
                
                0.2
                
                
                43.2
                
                
                —Proceeds
                    from sale of discontinued operation
                
                
                1.3
                
                
                1.3
                
                
                —Purchases
                    of property and equipment
                
                
                (90.8
                )
                
                (71.7
                )
                
                (42.0
                )Net
                    cash used in investing activities
                
                
                (89.3
                )
                
                (27.2
                )
                
                (42.0
                )Cash
                    flows used in financing activities:Excess
                    tax benefit realized from share-based payment arrangements
                
                
                2.8
                
                
                —
                
                
                —Change
                    in restricted cash and cash equivalents
                
                
                0.5
                
                
                (1.1
                )
                
                (0.5
                )Proceeds
                    from exercise of warrants
                
                
                1.1
                
                
                0.2
                
                
                —Purchase
                    of treasury stock
                
                
                (9.7
                )
                
                —
                
                
                (0.5
                )Principal
                    payments — capital lease obligation
                
                
                (0.1
                )
                
                (0.1
                )
                
                (0.1
                )Net
                    cash used in financing activities
                
                
                (5.4
                )
                
                (1.0
                )
                
                (1.1
                )Effect
                    of exchange rates on cash
                
                
                0.1
                
                
                0.5
                
                
                (0.4
                )Net
                    cash provided by discontinued operations
                
                
                —
                
                
                1.2
                
                
                0.5Net
                    (decrease) increase in cash and cash equivalents
                
                
                (24.9
                )
                
                24.8
                
                
                0.6Cash
                    and cash equivalents, beginning of year
                
                
                70.7
                
                
                45.9
                
                
                45.3Cash
                    and cash equivalents, end of year
                
                $
                45.8
                
                $
                70.7
                
                $
                45.9Supplemental
                    cash flow information:Cash
                    paid for interest
                
                $
                0.1
                
                $
                0.1
                
                $
                0.1Cash
                    paid for income taxes
                
                $
                1.5
                
                $
                —
                
                $
                0.4
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  38
  **ABOVENET,
        INC. AND SUBSIDIARIES**
 
 **CONSOLIDATED
        STATEMENTS OF COMPREHENSIVE INCOME (LOSS)**
 **(in
        millions)**
 
 **Years Ended December 31,****2007**
              
              **2006**
              
              **2005**Net
                  income (loss)
              
              $
              13.8
              
              $
              46.4
              
              $
              (8.4
              )Foreign
                  currency translation adjustments
              
              
              (0.1
              )
              
              0.5
              
              
              0.9Reversal
                  of foreign currency translation adjustments from liquidation of
                  subsidiaries
              
              
              (10.3
              )
              
              —
              
              
              —Comprehensive
                  income (loss)
              
              $
              3.4
              
              $
              46.9
              
              $
              (7.5
              )
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  39


**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
      Plan
      of Reorganization governed the treatment of claims against and interest in
      each
      of the Debtors. Under the Plan of Reorganization, creditors of the debtors
      received, or are to receive, the following distributions, as set forth in
      greater detail therein:





·
            Administrative
                expense claims (post-petition claims relating to actual and necessary
                costs of administering the bankruptcy estates and operating the business
                of the Debtors), professional fee claims, senior indentured trustee
                fee
                claims and priority tax claims were settled in cash.·
            Certain
                secured claims were settled as follows:1)
            Class 1
                (a) - secured claims received a note secured by substantially all of
                the assets of the Company,2)
            Class 1
                (b) - secured claims were issued 944,773 shares of common stock and
                the right to purchase an allocated percentage of shares of common
                stock at
                $29.9543 per share,3)
            Class 2
                - other secured claims were issued 3,369,876 shares of common stock
                and
                the right to purchase an allocated percentage of shares of common
                stock at
                $29.9543 per share,4)
            Class 3
                - secured tax claims were settled in cash, and5)
            Class 4
                - general secured claims were settled in cash.·
            Class 5
                - other priority claims were settled in cash.·
            Unsecured
                note holder claims and general unsecured claims of MFN were settled
                by the
                issuance of 1,685,433 shares of common stock, the right to purchase
                an
                allocated percentage of shares of common stock at $29.9543 per share,
                five
                year stock warrants to purchase 709,459 shares of common stock at
                $20.00
                per share (expiring September 8, 2008) and seven year stock warrants
                to purchase 834,658 shares of common stock at $24.00 per share (expiring
                September 8, 2010), and certain avoidance proceeds collected by the
                Company.·
            Subsidiary
                unsecured claims were settled by authorizing the issuance of 2,749,918
                shares of common stock and the right to purchase an allocated percentage
                of shares of common stock at $29.9543 per share.·
            Convenience
                claims were settled in cash.





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:





***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, 2007 and 2006 and for the years ended
      December 31, 2007, 2006 and 2005.





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.




40


**ABOVENET,
      INC. AND SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(in
      millions, except share and per share information)**





***Misstatements***




In
      connection with the audit of the financial statements as of and for the year
      ended December 31, 2006, the Company determined that certain errors primarily
      related to income taxes, depreciation and certain accruals were included in
      the
      financial statements previously issued as of and for the years ended December
      31, 2005 and 2004 and as of and for the period ended December 31, 2003
      (including the fresh start balance sheet as of September 8, 2003). Had the
      adjustments been made in the applicable period, the effect of the adjustments
      would have been to increase net loss by $0.9, or $0.09 per basic and diluted
      share for the year ended December 31, 2005, increase net loss by $0.1, or $0.01
      per basic and diluted share for the year ended December 31, 2004 and decrease
      net loss by $0.2, or $0.02 per basic and diluted share for the period ended
      December 31, 2003. Management does not believe, based upon its qualitative
      and
      quantitative analysis, that such errors are material or require a restatement
      of
      any of the previously issued financial statements. Accordingly, the corrections
      were reflected in the financial statements as of and for the year ended December
      31, 2006 and resulted in a reduction to net income of $0.3, or $0.03 per basic
      and diluted share.





***2006
      Reclassification***




On
      February 29, 2008, the Company filed a Current Report on Form 8-K, which, among
      other things, included a consolidated statement of operations for the year
      ended
      December 31, 2006. The consolidated statement of operations for the year ended
      December 31, 2006 included in the Company’s Annual Report on Form 10-K for the
      year ended December 31, 2006 and herein reflects a change in the classification
      of certain expenses from the amounts recorded in the consolidated statement
      of
      operations included in the Current Report on Form 8-K dated February 29, 2008.
      The change resulted in costs of revenue decreasing by $9.3, from $131.2 to
      $121.9 and selling, general and administrative expenses increasing by $9.3,
      from
      $61.8 to $71.1 for the year ended December 31, 2006. This reclassification
      did
      not affect our operating loss, net income, earnings per share (basic and
      diluted), assets, liabilities or shareholders’ equity as of or for the year
      ended December 31, 2006.





***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.





Pursuant
      to the Plan of Reorganization, upon the Company’s emergence from bankruptcy, the
      Company issued to its pre-petition creditors 8,750,000 shares of common stock,
      rights to purchase 1,669,210 shares of common stock at a price of $29.9543,
      under a rights offering, of which rights to purchase 1,668,992 shares have
      been
      exercised, five-year stock purchase warrants to purchase 709,459 shares of
      common stock exercisable at a price of $20.00 per share, and seven-year stock
      purchase warrants to purchases 834,658 shares of common stock exercisable at
      a
      price of $24.00 per share. In addition, 1,064,956 shares of common stock were
      reserved for issuance under the Company’s Equity Incentive Plan. See Note 9,
“Stock-based Compensation.”





The
      Company’s emergence from bankruptcy resulted in a new reporting entity with no
      retained earnings or accumulated losses, effective as of September 8, 2003.
      Although the Effective Date of the Plan of Reorganization was September 8,
      2003, the Company accounted for the consummation of the Plan of Reorganization
      as if it occurred on August 31, 2003 and implemented fresh start accounting
      as of that date. There were no significant transactions during the period from
      August 31, 2003 to September 8, 2003. Fresh start accounting requires
      the Company to allocate the reorganization value of its assets and liabilities
      based upon their estimated fair values, in accordance with Statement of Position
      90-7, “Financial Reporting by Entities in Reorganization under the Bankruptcy
      Code” (“SOP 90-7”). The Company 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 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 based
      upon
      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 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.





***Principles
      of Consolidation***




The
      consolidated financial statements include the accounts of the Company, as
      applicable, 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***




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 related service period.





In
      accordance with SEC Staff Accounting Bulletin 101, “Revenue Recognition in
      Financial Statements,” as amended by SEC Staff Accounting Bulletin 104, “Revenue
      Recognition,” the Company generally amortizes revenue related to installation
      services on a straight-line basis over the contracted customer relationship,
      which generally ranges from two to twenty years.




41





**ABOVENET,
      INC. AND SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(in
      millions, except share and per share information)**





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. 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 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
      2007, 2006 and 2005, the Company included the receipts of bankruptcy claim
      settlements from former customers as termination revenue. Termination revenue
      is
      reported in the same manner as the original service provided, and amounted
      to
      $8.5, $8.3 and $12.1 in 2007, 2006 and 2005 respectively.





***Non-Monetary
      Transactions***




The
      Company may exchange capacity with other capacity or service providers. In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards (“SFAS”) No. 153, “Exchanges of
      Nonmonetary Assets — An Amendment of APB Opinion No. 29,” (“SFAS
      No. 153”). SFAS No. 153 amends Accounting Principles Board Opinion
      No. 29, “Accounting for Nonmonetary Transactions,” (“APB No. 29”) 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, 2007, 2006 and 2005.





***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,” 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
      outstanding letters of credit issued in favor of various third
      parties.





***Accounts
      Receivable, Allowance for Doubtful Accounts and Sales
      Credits***




Accounts
      receivable are customer obligations for services sold to such customers under
      normal trade terms. The Company’s customers are primarily communications
      carriers, corporate 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 credit worthiness, 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 are stated at their preliminary estimated fair values as of the
      Effective Date based on the Company’s reorganization value. 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, which is included in network infrastructure assets on the
      respective balance sheets. Certain internal direct labor costs of constructing
      or installing property and equipment are capitalized. Capitalized direct labor
      amounted to $8.6, $5.1 and $4.7 for the years ended December 31, 2007, 2006
      and 2005, 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:





Building (except certain storage huts which are 20 years)
            
            37.5
                yearsNetwork
                infrastructure assets
            
            20
                yearsSoftware
                and computer equipment
            
            3
                to 4 yearsTransmission
                equipment
            
            3
                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 (loss).




42


**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 $2.2, $8.9 and
      $2.0
      for the years ended December 31, 2007, 2006 and 2005, respectively. The
      Company fully depreciated the remaining carrying value of the network
      infrastructure rendered unusable amounting to $0.3, $1.6 and $0.4, on an
      original cost basis, for the years ended December 31, 2007, 2006 and 2005,
      respectively.





In
      accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
      Long-Lived Assets,” 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. Included in costs of revenue for the year ended December 31, 2007
      is
      a provision for equipment impairment of $2.2 recorded to recognize the loss
      in
      value of certain equipment held in inventory. There were no amounts provided
      for
      the years ended December 31, 2006 and 2005.





***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,” 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. We have asset retirement obligations related
      to the de-commissioning of electronics 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,”
and 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 $6.1
      and
      $5.6 at December 31, 2007 and 2006, respectively, of which $3.3 and $3.1,
      respectively, were included in “Accrued expenses,” and $2.8 and $2.5,
      respectively, were included in “Other long-term liabilities.” Accretion expense,
      which is included in “Interest expense,” amounted to $0.2 for each of the years
      ended December 31, 2007, 2006 and 2005.





***Income
      Taxes***




The
      Company accounts for income taxes in accordance with SFAS No. 109, “Accounting
      for Income Taxes,” (“SFAS No. 109”). 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 carry-forwards,
      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. The Company
      records a valuation allowance against deferred tax assets to the extent that
      it
      is more likely than not that some portion or all of the deferred tax assets
      will
      not be realized.





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,”
(“Interpretation No. 48”) when, despite our belief that our tax return positions
      are appropriate and supportable under local tax law, we believe there is
      uncertainty with respect to certain positions and we may not succeed in
      realizing the tax benefit. We have evaluated our tax positions for items of
      uncertainty in accordance with Interpretation No. 48 and have determined that
      our tax positions are highly certain. 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 year ended December 31, 2007.





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. A valuation allowance is provided when the Company determines that
      it
      is more likely than not that a portion of the deferred tax asset balance will
      not be realized.





The
      Company’s reorganization resulted in a significantly modified capital structure
      as a result of applying fresh-start accounting in accordance with SOP 90-7
      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. Specifically, fresh start accounting requires the reversal of such
      allowances to be recorded as a reduction of intangible assets until exhausted
      and thereafter as additional paid in capital. 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 Interpretation No. 48,
      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 year
      ended December 31, 2007. The tax expense is primarily due to current
      federal income taxes and minimum state and local income taxes.




43




**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 (loss). The Company’s foreign exchange transaction gains
      (losses) are generally included in “other income” 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”). SFAS No. 148 amended SFAS No. 123,
“Accounting for Stock-Based Compensation,” (“SFAS No. 123”), to provide
      alternative methods of transition to SFAS No. 123’s fair value method of
      accounting for stock-based employee compensation (see Note 9, “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
      outstanding stock options with respect to MFN’s common stock were
      cancelled.





Effective
      January 1, 2006, the Company adopted SFAS No. 123R, “Share-Based
      Payment,” (“SFAS No. 123R”), 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 occur upon
      adoption of 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,****2007**
            
            **2006**
            
            **2005**Dividend
                yield
            
            
            —
            
            
            —
            
            
            —Expected
                volatility
            
            
            80.00
            %
            
            80.00
            %
            
            80.00
            %Risk-free
                interest rate
            
            
            4.61
            %
            
            4.89
            %
            
            3.99
            %Expected
                life (years)
            
            
            5.00
            
            
            5.00
            
            
            4.00Weighted
                average fair value of options granted
            
            
            $  
                  41.77
            
            
            $
                    31.16
            
            
            $
                    16.25





***Restricted
      Stock Units***




Compensation
      cost for restricted stock unit awards is measured based upon the quoted closing
      market price for the stock on the date of grant. The compensation cost is
      recognized on a straight-line basis over the vesting period (see Note 9,
“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 709,459
      shares of common stock with an exercise price of $20.00 per share (expiring
      September 8, 2008) and (ii) seven year warrants to purchase 834,658
      shares of common stock with an exercise price of $24.00 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
      exercised totaled 48,941, 6,945 and 1,229, in 2007, 2006 and 2005,
      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, was greater than the warrant exercise price, the Company was 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 elected, by written notice, to not exercise its warrants. Under
      the Net Exercise, shares issued to the warrant holders would be reduced by
      the
      number of shares necessary to cover the aggregate exercise price of the shares,
      valuing such shares at the current market price, as defined in the Warrant
      Agreements. Any fractional shares, otherwise issuable, would be paid in cash.
      The expiration date for the five year warrants was September 8, 2008 and the
      Company exercised the unexercised five year warrants pursuant to Net Exercise.
      See Note 16, “Subsequent Events - Exercise of Warrants.”





***Fair
      Value of Financial Instruments***




The
      Company’s consolidated balance sheets include the following financial
      instruments: short-term cash investments, trade accounts receivable and trade
      accounts payable. The Company believes the carrying amounts in the financial
      statements approximates 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.




44


**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 contributed $1.4, $0.7 and $0.6 for the years ended December 31,
      2007, 2006 and 2005, respectively, net of forfeitures for its obligations under
      these plans.





***Recently
      Issued Accounting Pronouncements***




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”). EITF No. 06-3
      requires that companies disclose their accounting policies regarding the gross
      or net presentation of certain taxes. Taxes within the scope of EITF
      No. 06-3 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. Our policy is to record taxes
      within the scope of EITF No. 06-3 on a net basis.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (“SFAS
      No. 157”), effective for fiscal years beginning after November 15, 2007 and
      interim periods within those fiscal years. SFAS No. 157 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 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,” 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.” SFAS
      No. 157 requires, among other things, enhanced disclosures about investments
      that are measured and reported at fair value and establishes a hierarchical
      disclosure framework that prioritizes and ranks the level of market price
      observability used in measuring investments at fair value. The three levels
      of
      the fair value hierarchy under SFAS No. 157 are described below: Level 1 -
      Valuations based on quoted prices in active markets for identical assets or
      liabilities that the entity has the ability to access. Level 2 - Valuations
      based on quoted prices for similar assets or liabilities, quoted prices in
      markets that are not active, or other inputs that are observable or can be
      corroborated by observable data for substantially the full term of the assets
      or
      liabilities. Level 3 - Valuations based on inputs that are supported by little
      or no market activity and that are significant to the fair value of the assets
      or liabilities. A financial instrument’s level within the fair value hierarchy
      is based on the lowest level of any input that is significant to the fair value
      measurement. We are currently evaluating the impact that the adoption of SFAS
      No. 157 will have on our financial position or results of operations.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities,” (“SFAS No. 159”). SFAS No. 159
      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
      will be effective in the first quarter of fiscal 2009, is not expected to 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 Combination
      (Revised),” (“SFAS No. 141(R)”), to replace SFAS No. 141, “Business
      Combinations,” SFAS No. 141(R) 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. We are still evaluating the impact of SFAS No.
      141(R); however, the adoption of this statement is not expected to have a
      material impact on our financial position or results of operations.





In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
      Consolidated Financial Statements - an amendment of ARB No. 51,” (“SFAS No.
      160”). SFAS No. 160 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. We are still evaluating the impact SFAS No. 160 will have, but we do
      not
      expect it to have a material impact on our financial position or results of
      operations.





In
      February 2008, the FASB issued FASB Staff Position No. FAS 157-2 (“FSP
      No. FAS 157-2”). FSP No. FAS 157-2 permits a delay in the effective
      date of SFAS No. 157 to fiscal years beginning after November 15,
      2008, for nonfinancial assets and nonfinancial liabilities, except for items
      that are recognized or disclosed at fair value in the financial statements
      on a
      recurring basis (at least annually). The delay is intended to allow the FASB
      and
      constituents additional time to consider the effect of various implementation
      issues that have arisen, or that may arise, from the application of SFAS
      No. 157.





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”), 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 and its
      related interpretations; and the effect of derivative instruments and related
      hedged items on financial position, financial performance and cash flows. SFAS
      No. 161 also requires disclosure of the fair values of derivative instruments
      and their gains and losses in a tabular format. SFAS No. 161 is effective for
      financial statements issued for fiscal years and interim periods beginning
      after
      November 15, 2008, with early adoption encouraged. We are currently assessing
      the impact that the adoption of SFAS No. 161 will have on our financial position
      and results of operations.




45




**ABOVENET,
      INC. AND SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(in
      millions, except share and per share information)**





In
      April
      2008, the FASB issued EITF No. 07-05, “Determining Whether an Instrument (or
      Embedded Feature) Is Indexed to an Entity’s Own Stock,” (“EITF No. 07-05”). EITF
      No. 07-05 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. EITF No. 07-05 is effective
      for
      financial statements issued for fiscal years beginning after December 15, 2008
      and early application is not permitted. We are still evaluating what effect
      EITF
      No. 07-05 will have on our financial position and results of
      operations.




In
      June
      2008, the FASB issued EITF No. 08-3, “Accounting by Lessees for Maintenance
      Deposits under Lease Agreements,” (“EITF No. 08-3”). EITF No. 08-3 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. EITF
      No. 08-3 is effective for fiscal years, and interim periods within those fiscal
      years, beginning after December 15, 2008. We do not expect its adoption will
      have a material impact on our financial position or results of
      operations.





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”). EITF No. 03-6-1 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. EITF No.
      03-6-1 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 EITF No. 03-6-1. We
      are
      currently evaluating the impact, if any, that the adoption of EITF No. 03-6-1
      will have on our financial position and results of operations.





***Reclassifications***




Certain
      reclassifications have been made to the 2005 consolidated financial statements
      to conform to the classifications used in the 2006 consolidated financial
      statements.





**NOTE
      3: PREPAID EXPENSES AND OTHER CURRENT ASSETS**





Prepaid
      expenses and other current assets of continuing operations consist of the
      following





**December 31,****2007**
            
            **2006**Federal
                and state income tax deposits
            
            $
            2.5
            
            $
            3.1Prepaid
                property taxes
            
            
            2.1
            
            
            2.2Prepaid
                right-of-way charges
            
            
            1.9
            
            
            0.8Prepaid
                maintenance
            
            
            1.3
            
            
            0.6Prepaid
                insurance
            
            
            1.1
            
            
            1.1Prepaid
                rent
            
            
            0.9
            
            
            1.8Prepaid
                telecom
            
            
            0.5
            
            
            —Property
                tax refund receivable
            
            
            0.5
            
            
            —Other
                receivables
            
            
            0.7
            
            
            0.9Other
                prepaids
            
            
            0.8
            
            
            0.8Total
            
            $
            $12.3
            
            $
            $11.3


46


**ABOVENET,
      INC. AND SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(in
      millions, except share and per share information)**





**NOTE
      4: PROPERTY AND EQUIPMENT**





Property
      and equipment of continuing operations consist of the following:





**December 31,****2007**
            
            **2006**Land
                and building
            
            $
            0.3
            
            $
            0.3Leasehold
                improvements
            
            1.5
            
            1.8Furniture,
                fixtures and equipment
            
            21.1
            
            15.3Network
                infrastructure assets, including transmission equipment
            
            497.4
            
            413.1Total
                property and equipment
            
            520.3
            
            430.5Accumulated
                depreciation and amortization
            
            (172.6
            )
            (131.3
            )Property
                and equipment, net
            
            $
            347.7
            
            $
            299.2





Included
      in network infrastructure assets were certain assets and equipment, including
      transmission equipment, held in inventory for future use, which had an original
      cost (adjusted for a provision for equipment impairment of $2.2) of $60.5 and
      $46.6, accumulated depreciation of $49.0 and $28.9, and net carrying values
      of
      $11.5 and $17.7 at December 31, 2007 and 2006, respectively.





Depreciation
      and amortization expense related to property and equipment of continuing
      operations for the years ended December 31, 2007, 2006, and 2005 was
      approximately $47.5, $47.2, and $43.1, respectively.





In
      the
      fourth quarter of 2006, the Company sold certain assets, net of certain
      liabilities, related to its data center facilities located in New York,
      California, and Virginia for cash proceeds of $43.1, and sold the stock of
      AboveNet (UK) Limited, the U.K. company (“AUK”), which operated the London data
      center, for a price of £1.35 British pounds sterling, ($2.6 USD) of which £0.675
      British pounds sterling (approximately $1.3 USD, as measured on the date of
      receipt) was received at closing, and £0.675 British pounds sterling
      (approximately $1.3 USD, as measured on the date of receipt) was received in
      January 2007 (and was included in accounts receivable, net on the
      consolidated balance sheet as of December 31, 2006). The operations of the
      data center in London, U.K. were accounted for as a discontinued operation
      in
      all periods presented, as it was the sale of a legal entity with discreet
      financial information. The Company recognized an aggregate gain on sale of
      the
      data centers amounting to $52.1, of which $28.0 and $6.0 represented the
      reversal of the deferred fair value rent liability and SFAS No. 13
      obligations, respectively, associated with the related properties. The gain
      is
      summarized as follows:





**December 31,****2006**Gain
                on sale of U.S. domestic data centers
            
            $
            48.2Gain
                on sale of discontinued operations
            
            
            3.9Aggregate
                gain on sale of data centers
            
            $
            52.1





**NOTE
      5: ACCRUED EXPENSES**





Accrued
      expenses consist of the following:




**December 31,****2007**
            
            **2006**Accrued
                transaction taxes, including related interest
            
            $
            21.1
            
            $
            20.0Accrued
                capital expenditures
            
            12.6
            
            5.4Accrued
                payroll, bonuses and employee benefits
            
            11.0
            
            9.0Accrued
                litigation costs
            
            10.9
            
            —Accrued
                property tax
            
            4.8
            
            2.7Accrued
                conduit, right-of-way and occupancy expenses
            
            4.3
            
            3.8Asset
                retirement obligations
            
            3.3
            
            3.1Accrued
                repairs and maintenance
            
            2.4
            
            0.9Accrued
                accounting and auditing fees
            
            1.7
            
            1.5Accrued
                telecommunication costs
            
            1.5
            
            3.6Current
                portion of deferred fair market value rent liability
            
            1.5
            
            1.7Accrued
                other professional fees, including directors’ fees
            
            0.9
            
            1.1Accrued
                state and local income and franchise taxes payable
            
            0.6
            
            1.1Accrued
                utilities
            
            0.3
            
            0.2Capital
                lease obligation
            
            0.1
            
            0.1Accrued
                lease termination obligation
            
            —
            
            0.7Accrued
                reorganization costs
            
            —
            
            0.1Accrued
                SEC investigation expense
            
            —
            
            0.1Other
            
            1.3
            
            1.5Total
            
            $
            78.3
            
            $
            56.6




47




**ABOVENET,
      INC. AND SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(in
      millions, except share and per share information)**





**NOTE
      6: INCOME TAXES**





Income
      taxes have been provided based upon the tax laws and rates in the countries
      in
      which operations are conducted and income is earned. The provision for income
      taxes for the years ended December 31, 2007, 2006 and 2005 are as
      follows:




**Years
                Ended December 31,****2007**
            
            **2006**
            
            **2005**Current
                - Federal
            
            $
            3.3
            
            $
            —
            
            $
            —Current
                - State
            
            
            1.2
            
            
            —
            
            
            0.4Current
                - Foreign
            
            
            —
            
            
            —
            
            
            —Total
                Income Tax Provision
            
            $
            4.5
            
            $
            —
            
            $
            0.4





Deferred
      income taxes result from temporary differences in the financial reporting basis
      and tax basis of assets and liabilities. The amounts shown on the following
      table represent the total differences between the Company’s consolidated tax
      return basis of assets and liabilities and the corresponding basis of assets
      and
      liabilities for financial reporting. 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,****2007**
            
            **2006**Deferred
                Tax Assets:Property
                and Equipment
            
            $
            519.0
            
            $
            591.1Net
                Operating Loss (“NOL”) Carryforwards
            
            327.9
            
            275.5Accruals
                and Reserves
            
            7.0
            
            7.4Rent
            
            1.6
            
            2.1Deferred
                Compensation
            
            6.2
            
            6.1Other
            
            40.7
            
            36.4Total
                Deferred Tax Assets
            
            902.4
            
            918.6Valuation
                Allowance
            
            (800.9
            )
            (809.6
            )Net
                Deferred Tax Assets
            
            101.5
            
            109.0Deferred
                Revenue
            
            (101.5
            )
            (109.0
            )Total
            
            $
            —
            
            $
            —


**Years
                  Ended December 31,****2007**
              
              **2006**
              
              **2005**Income
                  (loss) from continuing operations before income taxes:Domestic
              
              $
              18.4
              
              $
              41.0
              
              $
              (13.1
              )Foreign
              
              
              (0.1
              )
              
              2.4
              
              
              (5.9
              )Total
              
              $
              18.3
              
              $
              43.4
              
              $
              (7.2
              )Rate
                  Reconciliation:Tax
                  at statutory rate
              
              
              35.0
              %
              
              35.0
              %
              
              (35.0
              )%State
                  income tax, net of federal benefit
              
              
              4.1
              %
              
              —
              %
              
              3.6
              %Valuation
                  allowance
              
              
              (15.8
              )%
              
              (35.5
              )%
              
              33.2
              %Permanent
                  items
              
              
              1.3
              %
              
              0.5
              %
              
              3.8
              %Tax
                  provision
              
              
              24.6
              %
              
              —
              %
              
              5.6
              %





The
      Company adopted the provisions of Interpretation No. 48 on January 1, 2007.
      At
      December 31, 2007, the Company’s tax positions are highly certain tax positions.
      Accordingly, no adjustments were required to the consolidated financial
      statements for any of the periods presented.





The
      Company established a valuation allowance related to deferred tax assets based
      on current years’ results of operations and anticipated profit levels in future
      periods, since it is more likely than not that its deferred tax assets will
      not
      be realized in the future.





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, that are
      not reduced pursuant to these provisions, and certain subsequently recognized
      “built-in” losses and deductions, if any, existing prior to the ownership
      change, will be subject to an overall annual limitation.





As
      of
      December 31, 2007, the Company has domestic NOL carryforwards of $686.9 and
      foreign NOL carryforwards of $184.5. Certain of these NOL carryforwards begin
      to
      expire in 2024. The Company’s annual limitation under the ownership change
      rules in the U.S. is $8.1. Accordingly, the Company estimates that $202.0
      of its domestic NOL carryforwards may be subject to limitation by United States
      Internal Revenue Code Section 382. Additionally, approximately $185.0 of
      the future depreciation deductions are subject to limitation because of the
      ownership change.





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 2006. The
      statute of limitations for these years will begin to expire in
      2011.




48


**ABOVENET,
      INC. AND SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(in
      millions, except share and per share information)**





**NOTE
      7: DISCONTINUED OPERATIONS AND DISPOSITIONS**





In
      March 2004, the Company sold 100% of the issued and outstanding stock of
      AboveNet Communications’ GmbH, which operated in Austria, to unaffiliated third
      parties for a nominal amount. The Company recognized a loss of $0.4 upon
      disposition.





In
      June 2004, the Company sold 100% of the issued and outstanding stock of
      Metromedia Fiber Network Italia s.r.l. to an unaffiliated third party for a
      nominal amount. The Company recognized a gain of $0.2 upon
      disposition.





In
      March 2005, the Company liquidated MFN International C.V., which operated
      in the Netherlands. The Company had written down its interest in MFN
      International C.V. to its estimated fair value at the fresh start date and
      accordingly, no gain or loss was recognized upon disposition.





In
      April 2005, the Company liquidated Metromedia Fiber Network (Switzerland)
      GmbH. The Company had written down its interest in Metromedia Fiber Network
      (Switzerland) GmbH to its estimated fair value at the fresh start date and
      accordingly, no gain or loss was recognized upon disposition.





In
      June 2005, the Company liquidated Metromedia Fiber Network Belgium BVBA. No
      gain or loss was recognized upon disposition.





In
      August 2005, the Company liquidated Metromedia Fiber Network Services GmbH
      of Austria. No gain or loss was recognized upon disposition.





In
      January 2006, the Company liquidated Sitesmith Netherlands B.V. No gain or
      loss was recognized upon disposition.





In
      February 2006, the Company liquidated Metromedia Fiber Network Sweden A.B.
      No gain or loss was recognized upon disposition.





In
      November 2006, the Company sold 100% of the issued and outstanding stock of
      AUK for an aggregate purchase price of £1.35 British pounds sterling, ($2.6 USD)
      of which £0.675 British pounds sterling (approximately $1.3 USD, as measured on
      the date of receipt) was received at closing, and £0.675 British pounds sterling
      (approximately $1.3 USD, as measured on the date of receipt) was received in
      January 2007 (and was included in accounts receivable, net on the
      consolidated balance sheet as of December 31, 2006). The Company recorded a
      gain of $3.9 with respect to the sale of AUK. AUK generated an operating loss
      of
      $0.9 in 2006 prior to its sale.





The
      following is a summary of the results of the discontinued operations, described
      above:




**Years
                Ended December 31,****2007**
            
            **2006**
            
            **2005**Revenue
            
            $
            —
            
            $
            1.0
            
            
            1.7Costs
                of revenue
            
            —
            
            0.7
            
            1.6Selling,
                general and administrative expenses
            
            —
            
            0.9
            
            0.8Operating
                loss
            
            —
            
            (0.6
            )
            (0.7
            )Other
                expense
            
            —
            
            (0.3
            )
            (0.1
            )Loss
                from discontinued operations before dispositions
            
            —
            
            (0.9
            )
            (0.8
            )Gain
                on disposition of discontinued operations
            
            —
            
            3.9
            
            —Income
                (loss) from discontinued operations
            
            $
            —
            
            $
            3.0
            
            $
            (0.8
            )





In
      late
      2007, the Company liquidated Metromedia Fiber Network B.V. Additionally, in
      late
      2007, the Company commenced the liquidation of Metromedia Fiber Network Services
      Ltd. and SiteSmith Ltd. The Company recognized the reversal of currency
      translation adjustments of $10.3 as other income on the consolidated statement
      of operations for the year ended December 31, 2007.





**NOTE
      8: INCOME (LOSS) PER COMMON SHARE**





Basic
      income (loss) 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 (loss) per common
      share were 10,751,921, 10,669,365 and 10,596,244 for the years ended
      December 31, 2007, 2006, and 2005, respectively. Total weighted average
      shares utilized in computing diluted net income (loss) per common share were
      12,184,139, 11,794,279 and 10,596,244 for the years ended December 31,
      2007, 2006, and 2005, respectively. Dilutive securities include options to
      purchase shares of common stock, restricted stock units and stock warrants.
      Due
      to the Company’s net loss, potentially dilutive securities totaling 565,240 for
      the year ended December 31, 2005, were excluded from the calculation of
      income per share as they were anti-dilutive. For the years ended
      December 31, 2007 and 2006, there were no potentially dilutive securities
      excluded from the calculation of income per common share.




49


**ABOVENET,
      INC. AND SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(in
      millions, except share and per share information)**





**NOTE
      9: STOCK-BASED COMPENSATION**





Stock-based
      compensation expense for each period relates to share-based awards granted
      under the Company’s 2003 Incentive Stock Option and Stock Grant Plan (the “2003
      Stock Incentive Plan”) and reflect awards outstanding during such period,
      including awards granted both prior to and during such period. The 2003 Stock
      Incentive Plan became effective on September 8, 2003. Under the 2003 Stock
      Incentive Plan, the Company is authorized to issue, in the aggregate,
      share-based awards of up to 1,064,956 common shares to employees, directors
      and
      consultants who are selected to participate. At December 31, 2007, the
      Company had 11,293 shares available for future awards under the 2003 Stock
      Incentive Plan. Stock-based compensation is recorded in selling general and
      administrative expenses.





***Stock
      Options***





During
      the year ended December 31, 2007, the Company awarded options to purchase 21,325
      shares of common stock, which have a ten year life from the date of grant,
      vest
      on the first anniversary of the date of grant and have per share exercise prices
      of $56.00 (13,475 options) and $73.00 (7,850 options).





During
      the year ended December 31, 2006, the Company awarded options to purchase
      26,800 shares of common stock, of which options to purchase 7,500 shares have
      a
      ten year life from the date of grant and vest on the first anniversary of the
      date of the grant and have a per share exercise price of $48.50 and options
      to
      purchase 19,300 shares that vest over a one year period from the date of grant,
      have a ten year life and have per share exercise prices of $40.00 (11,700
      shares), $53.75 (7,450 shares) and $59.00 (150 shares).





During
      the year ended December 31, 2005, the Company awarded options to purchase
      111,000 shares of common stock, of which options to purchase 91,330 shares
      have
      a ten year life and vest ratably on each of the first, second and third
      anniversaries of the date of the grant and have exercise prices ranging from
      $25.00 per share to $33.00 per share and options to purchase 19,670 shares
      that
      vest or have vested pursuant to certain previous grants, have a ten year life
      and have an exercise price of $25.00 per share.





The
      Company recognized non-cash stock-based compensation expense amounting to $1.7,
      $1.5, and $2.2 for the years ended December 31, 2007, 2006 and 2005
      respectively, with respect to stock options granted, which had an effect of
      decreasing net income by $0.16 per basic common share and by $0.14 per diluted
      common share for the year ended December 31, 2007; by $0.14 per basic common
      share and by $0.13 per diluted common share for the year ended December 31,
      2006, and had the effect of increasing net loss by $0.21per basic and diluted
      common share for the year ended December 31, 2005.





All
      such
      options are subject to forfeiture as specified in the respective award
      agreement.





Information
      regarding options to purchase common stock granted and outstanding for the
      years
      ended December 31, 2007, 2006 and 2005 is summarized below:




**Number**
              **Outstanding**
            
            **Weighted Average**
              **Exercise Price**
              **Per Share**
            
            **Aggregate Intrinsic**
              **Value**
            
            **Weighted Average**
              **Fair Value**
              **Per Share**Balance
                as of January 1, 2005
            
            
            480,265
            
            
            $    25.80
            
            
            
            
            
            $    16.26Granted
            
            
            111,000
            
            
            $    26.65
            
            
            
            
            
            $    16.25Forfeited
            
            
            (65,845
            )
            
            $    29.34
            
            
            
            
            
            $    18.49Balance
                as of December 31, 2005
            
            
            525,420
            
            
            $    25.54
            
            
            
            
            
            $    15.98Granted
            
            
            26,800
            
            
            $    46.31
            
            
            
            
            
            $    31.16Forfeited
            
            
            (74,703
            )
            
            $    27.40
            
            
            
            
            
            $    17.17Balance
                as of December 31, 2006
            
            
            477,517
            
            
            $    26.41
            
            
            
            
            
            $    16.65Granted
            
            
            21,325
            
            
            $    62.26
            
            
            
            
            
            $    41.77Forfeited
            
            
            (26,895
            )
            
            $    36.10
            
            
            
            
            
            $    23.45Balance
                as of December 31, 2007
            
            
            471,947
            
            
            $    27.48
            
            
            
            
            
            $    17.40Vested
                as of December 31, 2007
            
            
            434,478
            
            
            $    26.03
            
            
            
            
            
            $    16.41Exercisable
                as of December 31,2007
            
            
            434,478
            
            
            $    26.03
            
            
            $    22.6
            
            
            $    16.41





The
      fair
      value of vested options to purchase common stock was as follows at
      December 31:




**Number of Options**
              **to Purchase Common**
              **Stock Vested**
            
            **Total Fair**
              **Value of Vested Options**2007
            
            
            434,478
            
            
            $          
                7.12006
            
            
            372,419
            
            
            $          
                5.72005
            
            
            254,081
            
            
            $          
                3.8





The
      aggregate fair value of options to purchase shares of common stock that vested
      during the years ended December 31, 2007, 2006 and 2005 was $1.4 (62,059),
      $1.9
      (118,338), and $2.2 (142,038), respectively.





Information
      regarding the fair value of vested and unvested options to purchase common
      stock
      is as follows:




**Number**
              **Outstanding**
            
            **Weighted Average**
              **Fair Value**
              **Per Share**Unvested
                options, January 1, 2007
            
            
            105,098
            
            
            $      
                21.26Granted
            
            
            21,325
            
            
            $      
                41.77Forfeited
            
            
            (26,895
            )
            
            $      
                23.45Vested
            
            
            (62,059
            )
            
            $      
                22.77Unvested
                options, December 31, 2007
            
            
            37,469
            
            
            $      
                28.88


50


**ABOVENET,
      INC. AND SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(in
      millions, except share and per share information)**





At
      December 31, 2007, the Company had $0.9 of unearned stock-based
      compensation expense associated with options to purchase shares of common stock,
      which is expected to be incurred in 2008 to 2009.





In
      November 2005, the FASB issued FASB Staff Position No. SFAS 123(R)-3,
“Transition Election Related to Accounting for 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 zero.





The
      following table summarizes information concerning outstanding and exercisable
      options to purchase common stock at December 31, 2007:




**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**$20.95
            
            259,035
            
            5.7
            
            $20.95
            
            259,035
            
            5.7
            
            $20.95$25.00
            
            53,146
            
            7.7
            
            $25.00
            
            39,941
            
            7.7
            
            $25.00$30.00
                - $39.99
            
            112,891
            
            6.6
            
            $33.64
            
            106,452
            
            6.5
            
            $33.76$40.00
                - $49.99
            
            23,100
            
            7.3
            
            $44.94
            
            23,100
            
            7.3
            
            $41.84$50.00
                - $59.99
            
            16,175
            
            8.9
            
            $55.80
            
            5,950
            
            8.4
            
            $54.21$73.00
            
            7,600
            
            9.6
            
            $73.00
            
            —
            
            —
            
            —Total
            
            471,947
            
            6.4
            
            $27.48
            
            434,478
            
            6.2
            
            $26.03




***Restricted
      Stock Units***




For
      the
      years ended December 31, 2007, 2006 and 2005 the Company awarded 161,500,
      32,000 and 26,000, respectively, restricted stock units to employees of the
      Company under the 2003 Stock Incentive Plan. 105,000 of the restricted stock
      units granted in 2007 were scheduled to vest on the one year anniversary of
      the
      date of grant, and 56,500 of the restricted stock units granted in 2007 were
      scheduled to vest ratably on each of the first and second anniversaries of
      the
      date of grant. Of the restricted stock units granted in 2006, 12,000 were
      scheduled to vest ratably on each of the first four anniversaries of the date
      of
      grant and 20,000 were scheduled to vest upon the completion of the Company’s
      audited financial statements for the year ended December 31, 2006 (February
      29,
      2008). The 26,000 restricted stock units granted in 2005 were scheduled to
      vest
      ratably on each of the first four anniversaries of the date of grant. The
      restricted stock units require the Company to deliver a fixed number of shares
      to the employees on a fixed date after the shares have vested. The restricted
      stock units are subject to full or partial vesting in the event the employee’s
      employment is terminated without cause and vest fully in the event of an
      employee’s death. The issuance of vested shares related to the restricted stock
      units is subject to certain restrictions as provided by the 2003 Stock Incentive
      Plan, which is compliant with Section 409A of the Internal Revenue Code.
      Pursuant to restricted stock unit agreements between the Company and its
      executives if, at the time of delivery of the stock underlying the restricted
      stock units may not be sold by the executive for reasons set forth in the
      agreements, at the executive’s request, the Company is obligated to purchase
      sufficient shares of stock to satisfy the executive’s minimum tax withholding
      obligations. In 2007 and 2005, the Company issued 310,719 and 41,122 common
      shares, respectively, for vested restricted stock units, of which 129,816 and
      15,277 shares, respectively, were purchased by the Company. No shares were
      issued pursuant to restricted stock units in 2006.





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 $6.5, $2.4, and $1.8 for the years ended December 31, 2007,
      2006 and 2005, respectively, with respect to restricted stock units awarded,
      which had the effect of decreasing net income by $0.60 per basic common share
      and by $0.53 per diluted common share for the year ended December 31, 2007,
      $0.22 per basic common share, and by $0.20 per diluted common share for the
      year
      ended December 31, 2006, and increasing net loss by $0.17 per basic and
      diluted common share for the year ended December 31, 2005.





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 Value**Balance as
                of January 1, 2005
            
            
            370,716
            
            
            $ 24.12Granted
            
            
            26,000
            
            
            $ 26.50Issued
            
            
            (41,122
            )
            
            $ 20.95Balance
                as of December 31, 2005
            
            
            355,594
            
            
            $ 24.66Granted
            
            
            32,000
            
            
            $ 48.50Balance
                as of December 31, 2006
            
            
            387,594
            
            
            $ 26.62Granted
            
            
            161,500
            
            
            $ 82.67Issued
            
            
            (310,719
            )
            
            $ 24.05Forfeited
            
            
            (8,500
            )
            
            $ 44.50Balance
                as of December 31, 2007
            
            
            229,875
            
            
            $ 68.83


51


**ABOVENET,
      INC. AND SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(in
      millions, except share and per share information)**





At
      December 31, 2007, the Company had $9.7 of unearned stock-based
      compensation expense associated with the vesting of the restricted stock unit
      awards, of which $7.8 (before consideration of forfeitures) is expected to
      be
      recognized in 2008 and the balance of which is expected to be recognized in
      2009.





***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
      709,459 shares of common stock at $20.00 per share and seven-year warrants
      to
      purchase 834,658 shares of common stock at $24.00 per share (see Note
      1).





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 Price**Balance as
                of January 1, 2005
            
            
            706,579
            
            
            832,437
            
            
            $ 22.16Exercised
            
            
            (1,067
            )
            
            (162
            )
            
            $ 20.53Balance
                as of December 31, 2005
            
            
            705,512
            
            
            832,275
            
            
            $ 22.16Exercised
            
            
            (2,765
            )
            
            (4,180
            )
            
            $ 22.41Balance
                as of December 31, 2006
            
            
            702,747
            
            
            828,095
            
            
            $ 22.16Exercised
            
            
            (26,407
            )
            
            (22,534
            )
            
            $ 21.84Balance
                as of December 31, 2007
            
            
            676,340
            
            
            805,561
            
            
            $ 22.17





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 respective Warrant Agreements, 60 days prior to the expiration date of
      the
      respective warrants, was greater than the warrant exercise price, the Company
      was required to give each warrant holder notice that at the warrant expiration
      date, the warrants were deemed to have been exercised pursuant to the net
      exercise provisions of the respective Warrant Agreements (the “Net Exercise”),
      unless the warrant holder elected, by written notice, to not exercise its
      warrants. Under the Net Exercise, shares issued to the warrant holders were
      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, was paid
      in
      cash. The expiration date for the five year warrants was September 8, 2008
      and,
      the Company exercised the unexercised five year warrants pursuant to the Net
      Exercise. See Note 16, “Subsequent Events - Exercise of Warrants.”





**NOTE
      10: LONG-TERM DEBT**





**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, 2007, future minimum payments under the capital lease are as
      follows:




2008
            
            $
            0.32009
            
            
            0.22010
            
            
            0.32011
            
            
            0.22012
            
            
            0.3Thereafter
            
            
            1.1Total
                minimum lease payments
            
            
            2.4Less:
                amount representing interest
            
            
            (0.7
            )Obligation
                under capital lease
            
            
            1.7Less:
                current portion
            
            
            (0.1
            )Total
                long-term obligation
            
            $
            1.6




The
      current portion of the obligation under capital lease is reported within
“Accrued expenses” and the long-term portion is reported within “Other long-term
      liabilities.”


52


**ABOVENET,
      INC. AND SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(in
      millions, except share and per share information)**





**NOTE
      11: OTHER INCOME**





Other
      income consists of the following:





**Years Ended December 31,****2007**
            
            **2006**
            
            **2005**Gain
                on settlement or reversal of liabilities
            
            
            $ 2.2
            **(1)**
            
            $ 3.2
            **(2)**
            
            $ 9.0
            **(3)**Gain
                on legal settlement
            
            
            0.6
            
            
            —
            
            
            —Recovery
                of occupancy taxes previously paid
            
            
            0.5
            
            
            —
            
            
            —Gain
                (loss) on foreign currency
            
            
            0.3
            
            
            2.0
            
            
            (1.2
            )Losses
                on dispositions of property and equipment
            
            
            (0.5
            )
            
            (4.6
            )
            
            —Gain
                on leased asset termination
            
            
            0.3
            
            
            0.2
            
            
            3.5Other
            
            
            0.4
            
            
            1.3
            
            
            (0.4
            )Total
            
            
            $ 3.8
            
            
            $ 2.1
            
            
            $ 10.9


**(1)**Represents the reversal of certain tax liabilities resulting
          primarily from settlements with certain taxing authorities.


**(2)** **** Represents the reversal of certain tax liabilities resulting from either a
      favorable ruling from a jurisdiction determining the Company was not subject
      to
      certain transaction related taxes accrued in prior years, or the determination
      by the Company with respect to certain other jurisdictions that taxes accrued
      in
      prior years did not apply to the Company’s operations.





**(3)** **** Represents the settlement of a contractual obligation accrued in prior
      years.





**NOTE
      12: 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:





2008
            
            
            $    35.52009
            
            
            29.62010
            
            
            20.52011
            
            
            16.22012
            
            
            14.6Thereafter
            
            
            74.4Total
            
            
            $ 190.8





The
      expenses incurred for the above described obligations for the years ended
      December 31, 2007, 2006 and 2005 in continuing operations were $30.5,
      $33.3, and $33.3, respectively, which is net of sublease receipts of $1.9,
      $2.0
      and $1.9 for the years ended December 31, 2007, 2006 and 2005,
      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 $1.6, $4.2 and $5.1 in the years ended December 31, 2007, 2006 and
      2005, respectively, as reductions to rent expense in continuing operations.
      At
      December 31, 2007 and 2006, the deferred fair value rent liability was $4.0
      and $5.5, respectively, of which $1.5 and $1.7, respectively, are included
      in
      accrued expenses and $2.5 and $3.8, respectively, are included in other
      long-term liabilities on the related consolidated balance sheets.





At
      December 31, 2007, the Company is committed to construct approximately
      $26.0 related to network infrastructure.





The
      Company maintains employment agreements with its key executives. The agreements
      include, among other things, certain change in control and severance provisions.
      See Note 16, “Subsequent Events - Employment Contracts.”


53


**ABOVENET,
      INC. AND SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(in
      millions, except share and per share information)**





**NOTE
      13: 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. Under the Plan of Reorganization, which became effective on
      September 8, 2003 (“Plan of Reorganization”) or (“Plan”), essentially all
      claims against the Company’s U.S. subsidiaries that arose prior to the
      confirmation of the Plan on August 21, 2003, were discharged in accordance
      with the Plan of Reorganization. A summary of the treatment of claims in the
      bankruptcy proceeding is provided in Note 1 above.





***Global
      Voice Networks Limited (“GVN”)***





AboveNet
      Communications UK Limited, the Company’s U.K. operating subsidiary (“ACUK”), is
      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 is included in accrued expenses on
      the
      consolidated balance sheet at December 31, 2007.





***SBC
      Telecom, Inc. (“SBC”)***





The
      Company is 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 of the Southern
      District Court of New York (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 contract, 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. (See Note 16, “Subsequent Events - Litigation” for further
      discussion.)





***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 Commission.”





**NOTE
      14: 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 $0.3 in 2007, $0.1 in 2006 and
      $0.1
      in 2005, respectively. No amounts were outstanding at each of December 31,
      2007 and 2006. 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.


54


**ABOVENET,
      INC. AND SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(in
      millions, except share and per share information)**





**NOTE
      15: 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,****2007**
            
            **2006**
            
            **2005**RevenueUnited
                States
            
            $
            227.8
            
            $
            217.6
            
            $
            204.1United
                Kingdom
            
            
            29.4
            
            
            20.3
            
            
            16.4Other
            
            
            —
            
            
            0.5
            
            
            0.7Eliminations
            
            
            (3.6
            )
            
            (1.7
            )
            
            (1.5
            )Consolidated
                Worldwide
            
            $
            253.6
            
            $
            236.7
            
            $
            219.7





**December 31,****2007**
            
            **2006**Long-lived
                assetsUnited
                States
            
            $
            317.3
            
            $
            272.0United
                Kingdom
            
            
            30.3
            
            
            27.0Other
            
            
            0.1
            
            
            0.2Consolidated
                Worldwide
            
            $
            347.7
            
            $
            299.2





**NOTE
      16: SUBSEQUENT EVENTS**





***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 agreed to pay 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 to execute
      and deliver a consulting agreement with Mr. Doris. The consulting agreement
      provides that in exchange for Mr. Doris’ provision of consulting services to the
      Company for a period of nine months, Mr. Doris has been or shall be paid
      (i) $.03 annual amount pro rated per week for nine months and (ii) to
      the extent not previously paid under Mr. Doris’ employment agreement, (a) a
      bonus of $0.05 (the “2006 Filing Bonus”) within ten (10) days after the
      Company completes and files with the SEC a 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”) within ten (10) days after the Company completes
      and files with the SEC either a Form 10-K or a Form 8-K with respect
      to the Company’s fiscal year ended December 31, 2007, and in the event that
      the 2006 Filing Bonus has not been paid as of the time that the 2007 Filing
      Bonus is paid, then the 2006 Filing Bonus shall be paid at such time as well.
      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) shall
      be
      delivered to Mr. Doris on January 5, 2009 and (ii) the Company shall
      repurchase at the 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 was $1.6, which will be recognized in selling,
      general and administrative expenses for financial statement purposes during
      the
      quarter ended March 31, 2008.





***Bank
      Financing***




On
      February 29, 2008, the Company, excluding certain foreign subsidiaries, obtained
      a $60 senior secured credit facility (the “Credit Facility”), consisting of an
      $18 revolving credit facility (the “Revolver”) and a $42 term loan facility (the
“Term Loan”). The
      Credit Facility is secured by substantially all of the Company’s
      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”). In September 2008, the Delayed Draw option, which was
      originally scheduled to expire on November 25, 2008, was extended to June 30,
      2009. Under certain conditions, the Credit Facility may be increased to $100
      at
      the option of the Company and upon receipt of additional commitments from the
      lenders or other new third party lenders. The Credit Facility is to be used
      for
      general corporate purposes and for capital investment. The Revolver and the
      Term
      Loan each have a term of five years from the closing date of the 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 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 will be liable for an un-used commitment fee of 0.50% per annum or
      0.75%
      per annum, depending on the utilization of the Credit Facility. Interest will
      accrue 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. Additionally, the Company is required to maintain an unrestricted
      cash balance at all times of at least $20. On February 29, 2008, the Company
      received proceeds of $24 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.




On
      September 26, 2008, we executed a joinder agreement to the Credit Facility
      that
      adds an additional lender and increases the amount of the Credit Facility to
      $90
      effective October 1, 2008, subject to the terms of the joinder agreement,
      including the payment of a $0.45 fee at closing and a $0.1 advisory fee. The

      availability under the Revolver increased to $27, the Term Loan increased to
      $36
      and the available Delayed Draw Term Loan increased to $27.




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%.


55


**ABOVENET,
      INC. AND SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(in
      millions, except share and per share information)**




***Adoption
      of 2008 Equity Incentive Plan***




On
      August
      29, 2008, the Board of Directors of the Company approved the Company’s 2008
      Equity Incentive Plan (the “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. 750,000
      shares of Company 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.





On
      September 8, 2008, the Company granted to certain employees an aggregate 345,100
      restricted stock units, 190,000 of which vest 30% in one year, 10% in two years
      and 60% in three years, 86,000 of which vest ratably on each of the first,
      second and third anniversaries of the date of grant and 48,100 of which vest
      on
      the first anniversary of the date of grant. Additionally, William G. LaPerch,
      the President and Chief Executive Officer of the Company, may earn 21,000
      restricted stock units, which vest ratably in 2010, 2011 and 2012 based upon
      certain performance targets for the fiscal years 2009, 2010 and 2011. 
Additionally,
      the Company awarded options to purchase 1,000 shares of common stock to each
      of
      the five outside directors. The options have an exercise price of $60.00 per
      share, a ten year life and vest on the first anniversary of the date of
      grant.





***Employment
      Contracts***




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.





***Litigation***




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 asserts in the complaint
      that it is entitled to such fiber optic capacity and unspecified damages. On
      September 29, 2008, we signed a settlement agreement with Telekenex pursuant
      to
      which we agreed to pay $0.35 million and provide Telekenex additional fiber
      access in order to resolve the dispute. Pursuant to the settlement agreement,
      the parties released each other from any claims related to the dispute and
      Telekenex is required to dismiss the complaint





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), will be recorded as settlement revenue in the
      third
      quarter of 2008.





***Exercise
      of Warrants***




Under
      the terms of the Warrant Agreements described in Note 2, “Basis of Presentation
      and Significant Accounting Policies - Stock Warrants” and Note 9, “Stock-Based
      Compensation - 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, was greater than the warrant exercise price,
      the Company was 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 elected, by written notice, to not
      exercise its warrants. Under the Net Exercise, shares issued to the warrant
      holders were 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,
      were paid in cash. The expiration date for the five year warrants was September
      8, 2008. Accordingly, five year warrants to purchase 158,874 shares of common
      stock were deemed exercised pursuant to the Net Exercise, of which 106,456
      shares were issued to the warrant holders, 52,418 shares were returned to
      treasury and $4,295 was paid to recipients for fractional shares. In addition,
      five year warrants to purchase 25 shares of common stock were cancelled in
      accordance with instructions from warrant holders.





***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 will take an impairment charge of $2.3 with respect
      to
      the abandonment, in the quarter ended September 30, 2008. Additionally, the
      Company accrued maintenance fees of $0.1 during the year ended December 31,
      2007, which have not been paid.


56


**ABOVENET,
      INC. AND SUBSIDIARIES**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(in
      millions, except share and per share information)**





***Rights
      Agreement Amendment***




On
      August
      3, 2006, the Company entered into a Rights Agreement (the “Rights Agreement”)
      with American Stock Transfer & Trust Company, as rights agent.  The
      following description of the Rights Agreement does not purport to be complete
      and is qualified in its entirety by reference to the 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 4, 2006.




In
      connection with the Rights Agreement, the Company’s Board of Directors declared
      a dividend distribution of one preferred share purchase right (a “Right”) for
      each 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 (the
“Record Date”) to the stockholders of record on that date.  Each Right
      entitles the registered holder to purchase from the Company one one-hundredth
      of
      a share of Series A Junior Participating Preferred Stock, par value $0.01
      per share (the “Preferred Shares”), at a price of $100.00 per one one-hundredth
      of a Preferred Share (the “Purchase Price”), subject to adjustment.  Each
      one one-hundredth of a share of Preferred Shares has designations and powers,
      preferences and rights, and the qualifications, limitations and restrictions
      which make its value approximately equal to the value of a Common
      Share.




Until
      the
      earlier to occur of (i) 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, with respect to any of the Common Share certificates outstanding
      as
      of the Record Date, by such Common Share certificate. As
      discussed below, the definition of “Acquiring Person” was amended in August
      2008.




The
      Rights are not exercisable until the Distribution Date.  The Rights will
      expire on August 7, 2009, unless the Rights are earlier redeemed or exchanged
      by
      the Company.




The
      number of outstanding Rights and the number of one one-hundredths of a Preferred
      Share issuable upon exercise of each Right 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
      Rights Agreement.




Preferred
      Shares purchasable upon exercise of the Rights will not be redeemable. 
Each Preferred Share will be entitled to a minimum preferential quarterly
      dividend payment of $1.00 but will be entitled to an aggregate dividend of
      100
      times the dividend declared per Common Share.  In the event of liquidation,
      the holders of the Preferred Shares would be entitled to a minimum preferential
      liquidation payment of $100.00 per share, but would be entitled to receive
      an
      aggregate payment equal to 100 times the payment made per Common Share. 
Each Preferred Share will have 100 votes, voting together with the Common
      Shares.  Finally, in the event of any merger, consolidation or other
      transaction in which Common Shares are exchanged, each Preferred Share will
      be
      entitled to receive 100 times the amount of consideration received per Common
      Share.  These rights are protected by customary anti-dilution
      provisions.  The Preferred Shares would rank junior to any other series of
      the Company’s preferred stock.




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 $0.01 per Right (the
        “Redemption Price”). The Rights may also be redeemed at certain other times as
        described in the 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.




On
        August 7, 2008, the Company entered into an amendment (“Rights Agreement
        Amendment”) to its Rights Agreement. The Rights Agreement Amendment was filed as
        Exhibit 4.7 to the Company’s Current Report on Form 8-K filed with the SEC on
        August 12, 2008. Also on August 7, 2008, the Company entered into a
        standstill agreement with JGD Management Corp., York Capital Management,
        L.P.
        and certain of their affiliated funds holding Company securities that are
        parties thereto (collectively, the “York Group”).
 
 The
        Rights Agreement Amendment amends the Rights Agreement to, among other things,
        add an exception to the definition of “Acquiring Person” (as defined in the
        Rights Agreement) for an Excluded Stockholder and add a definition of “Excluded
        Stockholder.”   “Excluded Stockholder” is defined to mean the
        individually identified members of the York Group, funds and accounts managed
        by
        York Capital Management, L.P. that hold any Company securities and their
        respective affiliates and associates; provided, however, that, except as
        otherwise provided in the definition of “Acquiring Person,” none of the members
        of the York Group or their affiliates or associates will be an Excluded
        Stockholder if any such party, individually or collectively, become the
        beneficial owner of 20% or more of the outstanding Company common stock without
        the prior written consent of the Company.


57


**ABOVENET,
      INC. AND SUBSIDIARIES**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(in
      millions, except share and per share information)**





**NOTE
      17. QUARTERLY FINANCIAL DATA (UNAUDITED)**





The
      following tables present the unaudited quarterly results for the years ended
      December 31, 2007, and 2006.




**2007 Quarter Ended****March 31**
            
            **June 30**
            
            **September 30**
            
            **December 31**Revenue
            
            $
            57.5
            
            $
            61.3
            
            $
            67.3
            
            $
            67.5Costs
                of revenue
            
            
            24.7
            
            
            25.8
            
            
            27.9
            
            
            31.9
            (*)Selling,
                general and administrative expenses
            
            
            19.7
            
            
            18.3
            
            
            22.6
            
            
            20.3Depreciation
                and amortization
            
            
            11.5
            
            
            12.0
            
            
            12.0
            
            
            12.0Loss
                on litigation
            
            
            —
            
            
            —
            
            
            —
            
            
            11.7Operating
                income (loss)
            
            
            1.6
            
            
            5.2
            
            
            4.8
            
            
            (8.4
            )Other
                income (expense):Gain
                on reversal of foreign currency translation adjustment from liquidation
                of
                subsidiary
            
            
            —
            
            
            —
            
            
            —
            
            
            10.3Interest
                income
            
            
            0.9
            
            
            0.8
            
            
            0.8
            
            
            0.8Interest
                expense
            
            
            (0.6
            )
            
            (0.6
            )
            
            (0.5
            )
            
            (0.6
            )Other
                income (expense), net
            
            
            1.6
            
            
            (0.1
            )
            
            1.4
            
            
            0.9Income
                before income taxes
            
            
            3.5
            
            
            5.3
            
            
            6.5
            
            
            3.0Provision
                for income taxes
            
            
            0.8
            
            
            1.3
            
            
            1.5
            
            
            0.9Net
                income
            
            $
            2.7
            
            $
            4.0
            
            $
            5.0
            
            $
            2.1Basic
                income per share
            
            $
            0.25
            
            $
            0.37
            
            $
            0.46
            
            $
            0.19Weighted
                average number of common shares
            
            
            10,706,576
            
            
            10,723,801
            
            
            10,759,052
            
            
            10,808,528Diluted
                income per share
            
            $
            0.22
            
            $
            0.34
            
            $
            0.41
            
            $
            0.16Weighted
                average number of common shares
            
            
            12,009,158
            
            
            12,036,781
            
            
            12,213,649
            
            
            12,377,018





(*)
            Includes
                provision for equipment impairment of
                $2.2.





Fluctuations
      in revenue reported by period were impacted by termination revenue recognized
      by
      quarter as follows:




Quarter
                ended March 31, 2007
            
            $
            0.6Quarter
                ended June 30, 2007
            
            $
            1.5Quarter
                ended September 30, 2007
            
            $
            5.6Quarter
                ended December 31, 2007
            
            $
            0.8


58




**ABOVENET,
      INC. AND SUBSIDIARIES**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(in
      millions, except share and per share information)**





**2006 Quarter Ended****March 31**
            
            **June 30**
            
            **September 30**
            
            **December 31**Revenue
            
            $
            56.0
            
            $
            59.9
            
            $
            64.8
            
            $
            56.0Costs
                of revenue
            
            
            29.8
            
            
            31.2
            
            
            33.2
            
            
            27.7Selling,
                general and administrative expenses
            
            
            18.8
            
            
            18.0
            
            
            15.9
            
            
            18.4Depreciation
                and amortization
            
            
            11.8
            
            
            12.0
            
            
            11.8
            
            
            11.6Operating
                loss (income)
            
            
            (4.4
            )
            
            (1.3
            )
            
            3.9
            
            
            (1.7
            )Other
                income (expense):Gain
                on sales of data centers
            
            
            —
            
            
            —
            
            
            —
            
            
            48.2Interest
                income
            
            
            0.5
            
            
            0.4
            
            
            0.3
            
            
            1.2Interest
                expense
            
            
            (1.4
            )
            
            (1.4
            )
            
            (1.4
            )
            
            (1.6
            )Other
                income (expense), net
            
            
            1.4
            
            
            0.6
            
            
            1.0
            
            
            (0.9
            )(Loss)
                income from continuing operations before income taxes
            
            
            (3.9
            )
            
            (1.7
            )
            
            3.8
            
            
            45.2Provision
                for (benefit from) income taxes
            
            
            0.2
            
            
            0.2
            
            
            0.2
            
            
            (0.6
            )(Loss)
                income from continuing operations
            
            
            (4.1
            )
            
            (1.9
            )
            
            3.6
            
            
            45.8Gain
                on disposition of discontinued operations
            
            
            —
            
            
            —
            
            
            —
            
            
            3.9(Loss)
                gain from discontinued operations
            
            
            (0.2
            )
            
            (0.2
            )
            
            (0.6
            )
            
            0.1(Loss)
                income from discontinued operations
            
            
            (0.2
            )
            
            (0.2
            )
            
            (0.6
            )
            
            4.0Net
                (loss) income
            
            $
            (4.3
            )
            $
            (2.1
            )
            $
            3.0
            
            $
            49.8(Loss)
                income per share, basic:(Loss)
                income per share from continuing operations
            
            $
            (0.38
            )
            $
            (0.18
            )
            $
            0.34
            
            $
            4.29(Loss)
                income per share from discontinued operations
            
            
            (0.02
            )
            
            (0.02
            )
            
            (0.05
            )
            
            .37Basic
                (loss) income per share
            
            $
            (0.40
            )
            $
            (0.20
            )
            $
            0.29
            
            $
            4.66Weighted
                average number of common shares
            
            
            10,625,444
            
            
            10,636,656
            
            
            10,665,096
            
            
            10,702,542(Loss)
                income per share, diluted:(Loss)
                income per share from continuing operations
            
            $
            (0.38
            )
            $
            (0.18
            )
            $
            0.30
            
            $
            3.81(Loss)
                income per share from discontinued operations
            
            
            (0.02
            )
            
            (0.02
            )
            
            (0.05
            )
            
            .33Diluted
                (loss) income per share
            
            $
            (0.40
            )
            $
            (0.20
            )
            $
            0.25
            
            $
            4.14Weighted
                average number of common shares
            
            
            10,625,444
            
            
            10,636,656
            
            
            11,854,215
            
            
            12,049,184




The
      operating results for the fourth quarter of 2006 reflect the gain on sales
      of
      the domestic data centers to unaffiliated third parties, three of which were
      sold in October 2006 and one of which was sold in November 2006. The fourth
      quarter of 2006 also includes the gain on the sale of AUK on November 15, 2006.
      AUK operated the Company’s data center in London, and was accounted for as a
      discontinued operation for all periods presented.





Revenue
      is lower in the fourth quarter of 2006 than the prior quarters of 2006 due
      to
      the sale of the domestic data centers. Additionally, the quarterly revenue
      includes termination revenue as follows:




Quarter
                ended March 31, 2006
            
            $
            0.2Quarter
                ended June 30, 2006
            
            $
            0.4Quarter
                ended September 30, 2006
            
            $
            5.3Quarter
                ended December 31, 2006
            
            $
            2.4





Selling,
      general and administrative expenses were lower in the quarter ended September
      30, 2006 due primarily to a decrease in commission expenses and audit
      fees.


59




**ITEM 9.
      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE**




**Change
      in Certifying Accountant**





On
      August
      17, 2006, the Company dismissed KPMG LLP as its independent registered public
      accounting firm. The Audit Committee of the Company’s Board of Directors
      approved this dismissal.




KPMG
      LLP
      was engaged in December 2001 as the principal accountants of the Company and
      subsequently was engaged to perform audits of the Company’s consolidated
      financial statements as of and for the years ended December 31, 2001, 2002
      and
      2003. KPMG LLP never rendered an audit report with respect to the Company’s
      financial statements for any period. As disclosed in the Company’s Current
      Report on Form 8-K filed July 20, 2006, the Company determined that as a result
      of a lack of accounting records it did not expect to be able to produce or
      have
      management provide the required certifications for its financial statements
      for
      the fiscal year ended December 31, 2002 or the period from January 1, 2003
      to
      September 7, 2003. The Company had previously determined it also could not
      produce its financial statements for the fiscal year ended December 31,
      2001.




During
      the period from the commencement of the Company’s 2004 fiscal year on January 1,
      2004 through the Company’s dismissal of KPMG LLP on August 17, 2006, there were
      no disagreements between the Company and KPMG LLP on any matter of accounting
      principles or practices, financial statement disclosure, or auditing scope
      or
      procedure, which disagreements, if not resolved to the satisfaction of KPMG
      LLP,
      would have caused it to make a reference to the subject matter of the
      disagreements in connection with its reports.




During
      the period from the commencement of the Company’s 2004 fiscal year on January 1,
      2004 through the Company’s dismissal of KPMG LLP on August 17, 2006, there were
      no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K, except
      as described below.




The
      following was disclosed in the Company’s Current Report on Form 8-K filed March
      16, 2006, which matters were discussed with the Company’s Audit Committee and
      KPMG LLP:




(1)
            Management
                expects that, if the Company were to file its 2005 Form 10-K, management’s
                report on internal control over financial reporting would state that
                the
                Company’s management was unable to complete its assessment about the
                effectiveness of internal control over financial reporting as of
                December
                31, 2005. The Company’s inability to complete its assessment was due to
                certain entity level controls and process level controls which were
                not
                tested due to:




(a)
            an
                overall lack of internal controls in certain processes which impeded
                management’s ability to perform a proper
                assessment,




(b)
            management’s
                need to focus its available time and resources on remediating the
                internal
                control design and operating deficiencies that have been identified,
                and




(c)
            extensive
                modifications to certain systems and processes subsequent to year-end
                for
                which the controls and processes in place as of December 31, 2005
                can no
                longer be observed or assessed.




Based
      on
      the work completed to date, the Company has identified numerous material
      weaknesses in its internal control over financial reporting as of December
      31,
      2005. As a result, management would conclude that the Company’s internal control
      over financial reporting was not effective as of December 31, 2005 and would
      disclose the material weaknesses that had been identified in its assessment
      process. However, management would not be able to represent that all of the
      material weaknesses that existed as of December 31, 2005 had been identified
      and
      disclosed.




(2)
            The
                Company has and is continuing to expend considerable time and resources
                toward putting its controls in place. A material weakness (within
                the
                meaning of Public Company Accounting Oversight Board Auditing Standard
                No.
                2) in internal control over financial reporting is a control deficiency,
                or a combination of control deficiencies, that results in more than
                a
                remote likelihood that a material misstatement of the annual or interim
                financial statements will not be prevented or detected. It is possible
                that we will identify additional material weaknesses as we complete
                our
                assessment.




We
      have
      extensive work remaining to remediate the material weaknesses identified. We
      are
      in the process of further developing a remediation plan to address our
      deficiencies. As a result, this plan has extended into the 2006 fiscal year
      to
      remediate the material weaknesses identified. Under Section 404 of the
      Sarbanes-Oxley Act of 2002, we are required to include in our 2005 Form 10-K
      a
      report of our independent registered public accounting firm on our internal
      control over financial reporting as of December 31, 2005. We expect that our
      independent registered public accounting firm would issue a report on internal
      control over financial reporting which would include a disclaimer of opinion.
      We
      cannot provide any assurance that our independent registered public accounting
      firm would issue a disclaimer opinion on our internal control over financial
      reporting.




On
      August
      23, 2006, the Company engaged BDO Seidman, LLP as its new independent registered
      public accounting firm to audit the Company’s financial statements as of
      December 31 for each of 2003, 2004 and 2005, and for the period from September
      to December 31, 2003 and for each of the fiscal years ended December 31, 2004
      and 2005 and the fiscal year ending December 31, 2006.  The Audit Committee
      of the Company’s Board of Directors approved this engagement.




During
      the period from the commencement of the Company’s 2004 fiscal year on January 1,
      2004 through the Company’s engagement of BDO Seidman, LLP on August 23, 2006,
      the Company did not consult with BDO Seidman, LLP regarding either the
      application of accounting principles to a specified transaction, either
      completed or proposed; or the type of audit opinion that might be rendered
      on
      the Company’s financial statements, as well as any matters that were either the
      subject of a disagreement with KPMG LLP or reportable events described in Items
      304(a)(2)(i) or (ii) of Regulation S-K.




The
      Company furnished a copy of the relevant disclosure to each of KPMG LLP and
      BDO
      Seidman, LLP. KPMG LLP’s letter to the SEC stating its agreement with certain
      statements included in the Company’s disclosure and stating it was not in a
      position to agree or disagree with the rest of the disclosure, was filed as
      an
      exhibit to the Company’s Current Report on Form 8-K dated August 17,
      2006.


60


**ITEM 9A.
      CONTROLS AND PROCEDURES**




**Evaluation
      of Disclosure Controls and Procedures**




As
      of
      December 31, 2007, 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 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 not
      effective as of December 31, 2007. **




**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.





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, 2007 related to entity
      level controls, financial close and financial statement reporting processes
      and
      numerous financial statement areas, which indicate a pervasive lack of effective
      controls in the Company’s internal control over financial reporting. These
      material weaknesses were considered in determining the nature, timing, and
      extent of audit tests applied in the audit of the 2007 financial statements.





The
      Company did not maintain, in all material respects, effective internal controls
      over financial reporting as of December 31, 2007. 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”). The Company did not maintain an effective control
      environment. Specifically, the infrastructure was not adequate to support the
      activities of the Company’s accounting, financial reporting and disclosure
      responsibilities. Specifically, the Company lacked policies, procedures and
      controls for the preparation and review of the interim and annual consolidated
      financial statements and supporting schedules. Each of these control
      deficiencies could result in a misstatement of the aforementioned accounts
      or
      disclosures that would result in a material misstatement to the interim or
      annual consolidated financial statements that would not be prevented or
      detected. Accordingly, management has determined that each of the control
      deficiencies described above constitutes a material weakness. The Company’s
      independent registered public accounting firm’s report on internal controls over
      financial reporting, reflected below, included an adverse opinion on the
      effectiveness of the Company’s internal control over financial reporting as of
      December 31, 2007.





**Remediation**




Management
      is in the process of remediating the pervasive material weaknesses in its entity
      level controls, financial close and financial statement reporting processes
      and
      numerous financial statement areas. For the year ended December 31, 2007, the
      Company created a property and equipment sub-ledger and is in the process of
      converting those records to a more integrated sub-ledger system. Management
      has
      also commenced re-engineering efforts and is re-organizing departments to create
      more efficiency and lines of responsibility. Currently, the Company operates
      several disparate systems that produce financial information. The Company is
      investigating methods to integrate these systems or develop processes that
      better control information flow. The intention of these efforts is to develop
      stronger financial and operating and entity level controls, eliminate the
      material weaknesses that currently exist and provide for timely financial and
      tax reporting.





**Changes
      in Internal Control Over Financial Reporting**




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


61


**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, 2007, based on criteria established in *Internal
      Control — Integrated Framework* issued
      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.





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, 2007 related to entity
      level controls, financial close and financial statement reporting processes
      and
      numerous financial statement areas, which indicate a pervasive lack of effective
      controls in the Company’s internal control over financial reporting. These
      material weaknesses were considered in determining the nature, timing, and
      extent of audit tests applied in our audit of the 2007 financial statements,
      and
      this report does not affect our report dated September 29, 2008 on those
      financial statements.





In
      our
      opinion, AboveNet, Inc. did not maintain, in all material respects,
      effective internal control over financial reporting as of December 31,
      2007, based on the COSO criteria.





We
      do not
      express an opinion or any other form of assurance on management’s statements
      referring to any corrective actions taken by the Company after the date of
      management’s assessment.





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, 2006 and 2005, and the related consolidated statements of
      operations, shareholders’ equity, cash flows and comprehensive income (loss) for
      each of the three years in the period ended December 31, 2007 and our
      report dated September 29, 2008, expressed an unqualified opinion
      thereon.





/s/     BDO
                Seidman, LLPNew
                York, NYSeptember
                29, 2008





**ITEM 9B.
      OTHER INFORMATION**




Not
      applicable.


62


**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:





**Jeffrey
      Brodsky**




Mr.
      Brodsky, 49, 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. (formerly NTL Europe, 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. and TVMAX, Inc.





**Michael
      J. Embler**




Mr.
      Embler, 44, has been a member of the Board of Directors since September 2003
      and
      is a member of the Governance and Nominating Committee. Since 2005, Mr. Embler
      has been 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 has previously
      served as a Director of Grand Union Company and several other 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.





**Richard
      Postma**




Mr.
      Postma, 57, 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, L.L.C., since the time he co-founded it in 2000. He also
      currently serves as Chairman of US Xchange Directories, L.L.C., R.T. London,
      Inc., P&V Capital Holdings, L.L.C., and RVP Development Corporation. Mr.
      Postma has also served as Co-Chairman and Chief Executive Officer of US Xchange,
      L.L.C., 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.





**Richard
      Shorten, Jr.**




Mr.
      Shorten, 40, 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. He is 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., Infinia Corporation and Movie
      Gallery, Inc. 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.





**Stuart
      Subotnick**




Mr.
      Subotnick, 66, 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 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.





**William
      G. LaPerch**




Mr.
      LaPerch, 53, 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.





Each
      of
      the members of the Board of Directors, other than Mr. LaPerch, was appointed
      in
      connection with the Company’s emergence from bankruptcy and will serve until a
      replacement is duly elected and qualified or until his earlier resignation
      or
      removal. There are no family relationships among any of our directors or the
      executive officers.


63




**Executive
      Officers**




The
      following table sets forth the name, age and position of each of our executive
      officers as of August 31, 2008. Our executive officers are appointed by and
      serve at the discretion of the Company’s Board of Directors.




**Name**
            
            **Age**
            
            **Position**William
                G. LaPerch
            
            53
            
            President
                and Chief Executive Officer, and DirectorRobert
                Sokota
            
            44
            
            Senior
                Vice President, General Counsel, Chief Administrative Officer and
                SecretaryRajiv
                Datta
            
            37
            
            Senior
                Vice President and Chief Technology OfficerJohn
                Jacquay
            
            56
            
            Senior
                Vice President, Sales and MarketingDouglas
                Jendras
            
            41
            
            Senior
                Vice President, OperationsJoseph
                P. Ciavarella
            
            53
            
            Acting
                Chief Financial OfficerMichael
                A. Doris
            
            53
            
            Former
                Senior Vice President and Chief Financial
                Officer




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.
      Mr.
      Doris’ contract was terminated without cause on March 4, 2008.





**Robert
      Sokota**




Mr.
      Sokota, 44, 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, 37, 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, 56, 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, 41, 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.





**Joseph
      P. Ciavarella**




Mr. Ciavarella,
      53, a financial consultant who has provided consulting services to the Company
      since February 2007, was appointed as Acting Chief Financial Officer,
      effective March 4, 2008. Mr. Ciavarella has been an independent financial
      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) where he worked for over
      four years. 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.





**Michael
      A. Doris**




Mr.
      Doris, 53, was the Company’s Senior Vice President and Chief Financial Officer
      from August 2002 to March 2008, overseeing all financial and reporting processes
      and systems throughout the Company. Previously, from 1998 to 2002, Mr. Doris
      was
      the corporate controller for Marchon Eyewear, Inc. From 1991 to 1998, Mr. Doris
      was the Vice President of Finance for Allied Digital Technologies, Inc. Mr.
      Doris graduated from Fairfield University with a Bachelor of Science degree
      in
      Accounting and is a certified public accountant. Mr. Doris’ employment contract
      was terminated without cause on March 4, 2008. See a further discussion
      regarding Mr. Doris’ contract termination under “Potential Payments Upon
      Termination or Change of Control.”





**Corporate
      Governance**




The
      Board
      of Directors and the committees of the Board of Directors met numerous times
      during 2007. The Board of Directors held nine meetings in 2007. In addition,
      the
      Company’s independent directors met a number of times in regularly scheduled
      executive sessions at which only independent directors were present. In 2007,
      the Company had a standing Audit Committee, Compensation Committee and
      Governance and Nominating Committee. The Company also had a Strategy Committee
      created in September 2007, which did not meet in 2007. The Company’s Special
      Independent Committee was disbanded in March 2007. The Audit Committee met
      four
      times in 2007. The Compensation Committee met seven times in 2007. The
      Governance and Nominating Committee did not meet in 2007. The Special
      Independent Committee met once in 2007. Each director attended 75% or more
      of
      the meetings of the Board of Directors and the committees on which they
      served.






64




Each
      of
      the existing committees, other than the Strategy Committee, operates pursuant
      to
      a written charter, copies of which are available through the Investor Relations
      section of our website at *www.above.net* . **** The
      Code
      of Conduct can also be found through the Investor Relations section of our
      website *.* If
      a
      waiver of our Code of Conduct is granted to any of our directors or executive
      officers, we will promptly disclose the nature of the amendment or waiver on
      our
      website. In 2007, we combined the codes of conduct applicable to our U.S. based
      and non-U.S. based employees into a single uniform code of conduct. Prior to
      that time, our non-U.S. based employees were subject to a slightly modified
      version of the Code of Conduct intended to comply with their national laws
      and
      regulations. In August 2008, we amended the Code of Conduct to clarify that
      transactions in the Company’s securities between the Company and its employees
      should not be considered “trading” for the purpose of the Code of Conduct and
      are not otherwise prohibited by the Code of Conduct. The Board of Directors
      also
      granted waivers to the extent necessary for prior transactions in the Company’s
      securities between the Company and any of its employees. The amendment and
      waiver were promptly disclosed on the Company’s website.





We
      expect
      to require all of our directors to attend our annual meeting of stockholders.





The
      committees of the Board are described in more detail below.




**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 NASDAQ Market Place 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,
      2007 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 PCAOB, including Statement on Auditing Standards
      No. 61 (as the same may be amended or supplemented); and
      (iii) received the written disclosures and the letter from the independent
      registered public accountants required by Independence Standards Board Standard
      No. 1 (Independence Discussions with Audit Committees), as the same may be
      modified or supplemented, and has discussed with the independent auditors the
      firm’s independence.




Based
      upon these reviews and discussions, the Audit Committee recommended, and the
      Board of Directors approved, that our audited financial statements be included
      in this Annual Report on Form 10-K for the fiscal year ended December 31,
      2007, for filing with the SEC.




THE
      AUDIT
      COMMITTEE


Jeffrey
      Brodsky, Chairman


Richard
      Postma


Richard
      Shorten, Jr.





**Compensation
      Committee**




The
      Compensation Committee consists of Messrs. Subotnick (Chairman), Postma and
      Shorten, each of whom satisfies the independence and other qualification
      requirements of NASDAQ 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. In May 2008, the Committee retained Strategic Apex Group, LLC
      to
      provide it assistance in setting executive and management compensation for
      2008
      and beyond.





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. From time to time, the
      Compensation Committee reviews our compensation packages to ensure that they
      remain competitive with the compensation packages offered by similarly-situated
      companies and continue to incentivize management and align management’s
      interests with those of our stockholders.





**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 NASDAQ
      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 believes that candidates for director should
      have certain minimum qualifications, including the ability to read and
      understand basic financial statements, being over 21 years of age and having
      the
      highest personal integrity and ethics. At such time as it is necessary to
      nominate a candidate for director, the Governance and Nominating Committee
      also
      intends to consider such factors as whether the candidates possess relevant
      expertise upon which to be able to offer advice and guidance to management,
      have
      sufficient time to devote to our affairs, have demonstrated excellence in his
      or
      her field, have the ability to exercise sound business judgment and have the
      commitment to rigorously represent the long-term interests of our stockholders.
      However, the Governance and Nominating Committee retains the right to modify
      these qualifications from time to time.


65




Since
      our
      emergence from bankruptcy protection in 2003, the Governance and Nominating
      Committee has not had the opportunity to nominate 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.




At
      this
      time, the Governance and Nominating Committee does not have a policy with regard
      to the consideration of director candidates recommended by
      stockholders.  The
      Governance and Nominating Committee believes that it is in the best position
      to
      identify, review, evaluate and select qualified candidates for Board
      membership.




Pursuant
      to the Standstill Agreement dated August 2003 between the Company and 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
      (the “Kluge Trust”) and Stuart Subotnick, for so long as the Kluge Trust or its
      affiliates, beneficially owns 7.50% or more of the issued and outstanding common
      stock of the Company, the Governance and Nominating Committee shall nominate
      one
      individual designated by the Kluge Trust to the Board. The individual designated
      by the Kluge Trust must be reasonably acceptable to the Governance and
      Nominating Committee. Mr. Subotnick has served as the designee of the Kluge
      Trust since the effectiveness of our Plan of Reorganization. In April 2008,
      the
      Standstill Agreement was amended to make JWK Enterprises, LLC, an entity
      controlled by John W. Kluge, which also acquired the Kluge Trust’s ownership
      interests in the Company, a party to the Standstill Agreement entitled to the
      rights and subject to the obligations thereunder. The Standstill Agreement
      expired on September 8, 2008.




**Special
      Independent Committee**




The
      Special Independent Committee consisted of Messrs. Brodsky, Embler, Postma
      and
      Shorten. The Special Independent Committee was formed in 2003 to supervise
      the
      investigation of the issues related to the SEC’s investigation of the Company
      initiated in June 2002.





**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.





**Stockholder
      Communications with the Board of Directors**




Historically,
      the Company has not provided a formal process related to stockholder
      communications with the Board. Nevertheless, every effort has been made to
      ensure that the views of stockholders are heard by the Board or individual
      directors, as applicable, and that appropriate responses are provided to
      stockholders in a timely manner.





**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,
      2007, 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 the named executive officers were not timely filed with respect to shares
      delivered on December 28, 2007, pursuant to vested restricted stock units;
      (ii)
      a late Form 4 was filed relating to the acquisition of shares of our common
      stock on September 7, 2007 by FMA; and (iii) a late Form 4 was filed relating
      to
      the adjustment of shares of common stock, five year warrants and seven year
      warrants received by the Kluge Trust in connection with the final determination
      of allowed claims under the Plan of Reorganization, in September
      2007.





**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
      Doris), 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 2007 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 2007 compensation was represented
                by
                variable, performance-based pay.





The
      total
      compensation levels for the named executive officers are comparable to those
      of
      compensation levels of senior executives at comparable companies in our
      industry. This determination is based in part on the Compensation Committee’s
      review in 2007 of the compensation of senior executives of other peer group
      companies in the telecommunications industry, consisting of Global Crossing,
      Time Warner Telecom, XO Communications, Broadwing, FiberNet, Neon, Cogent and
      Savvis.





We
      believe that the current combination of annual salary, benefits, incentive
      cash
      bonus, and equity compensation  represents
      an appropriate mix of both short-term and long-term compensation for realizing
      our goals for compensation of the named executive officers.




66





***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 and on one occasion in 2007 comparative information on
                the
                compensation of executives at the peer group companies listed
                above;


·
            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.





The
      Compensation Committee has the authority to retain outside compensation
      consultants to assist it in setting our compensation policies, and did so in
      May
      2008.





***Setting
      Named Executive Officer Compensation***




In
      setting the annual base salary for the named executive officers in 2007, other
      than the Chief Executive Officer, the Chief Executive Officer recommended base
      salaries to the Compensation Committee, which amounts were approved by the
      Compensation Committee. The Chief Executive Officer also recommended the 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 set the annual base salary and incentive
      cash bonus for the Chief Executive Officer. In 2007, the Chief Executive Officer
      (except with respect to his own grants) recommended certain grants of restricted
      stock units for certain executives, including the named executive officers,
      which were approved by the Compensation Committee.





We
      have
      employment agreements with each of the named executive officers, except for
      Mr.
      Ciavarella, our Acting Chief Financial Officer, who is retained pursuant to
      a
      consulting agreement, and Mr. Doris, whose employment with the Company
      terminated on March 4, 2008. The contracts in place in 2007 (the “Prior
      Employment Agreements”) were scheduled to expire in September, 2008.





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”). Each of the September
      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 September 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 September 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
      September 2008 Employment Agreements provide that in the event that a 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 he terminates his
                employment for “good reason” (as defined therein), the named executive
                officer will be entitled to one year’s base salary, 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), 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), accrued paid time off
                and one
                year’s continuation of health and welfare benefits;
                or


·
            for
                cause by the Company or he terminates his employment without good
                reason,
                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.





***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. The Prior Employment Agreements provide
      for base salaries minimums that can be increased by us. The base salaries of
      the
      following named executive officers were increased as of March 1, 2007 as
      follows:




**Name**
            
            **From**
            
            **To**Rajiv
                Datta
            
            $
            256,500
            
            $
            282,150Douglas
                Jendras
            
            $
            248,250
            
            $
            263,145


67





The
      increases for Mr. Datta and Mr. Jendras were provided to keep pace with
      compensation paid to similarly situated employees at the peer group companies
      listed above and to reward exceptional performance. No named executive officer
      received a base salary increase in March 2008.





In
      connection with the execution of the September 2008 Employment Agreements,
      the
      base salaries of the following named executive officers were increased effective
      September 2, 2008 (with the exception of Mr. Sokota’s base salary of $315,000,
      which did not increase):





**Name**
            
            **From**
            
            **To**William
                J. LaPerch
            
            $
            500,000
            
            $
            550,000John
                Jacquay
            
            $
            290,000
            
            $
            300,000Rajiv
                Datta
            
            $
            282,150
            
            $
            290,000Douglas
                Jendras
            
            $
            263,145
            
            $
            280,000





***Incentive
      Cash Bonus Program***




The
      2007
      annual incentive cash bonus program for 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 was approved for various target levels of achieved adjusted EBITDA.
      Each adjusted 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 2007 earnings of the eligible employees
      in
      each employee tier. An additional discretionary amount was also provided for
      achieving certain adjusted EBITDA targets. To calculate adjusted EBITDA, we
      added back to EBITDA certain expenses relating to the SEC investigation, the
      historical financial statement audits and certain non-cash expenses, including
      share-based compensation expenses. These adjustments totaled $13.5 million
      in
      2007. The applicable percentages and discretionary amount for the calculation
      of
      the bonus pool were determined based on our achieving adjusted EBITDA of $69.7
      million, surpassing the adjusted EBITDA target in 2007 of $53.6 million. We
      believe that the achievement of the annual adjusted 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.




With
      the
      exception of Mr. Jacquay, the Prior Employment Agreements do not set any
      specific amount of annual incentive cash bonus, but provide for such amounts
      to
      be set by the Company’s Compensation Committee. In 2007, Mr. Jacquay’s
      employment agreement was amended to provide that he was entitled to an annual
      cash bonus of $250,000 in the event that the Company met the bonus objective
      set
      by the Compensation Committee. As a result, for 2007, $250,000 of Mr. Jacquay’s
      bonus was non-discretionary and the Compensation Committee approved the payment
      of an additional discretionary bonus of $125,000. 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.




Our
      2007
      bonus pool for U.S. based employees was determined based upon adjusted EBITDA
      achieved in 2007. In accordance with the Compensation Committee’s determination,
      incentive cash bonuses for 2007 for employees were paid on March 15, 2008. Payments
      to the named executive officers were as follows:




**Name**
            
            **Bonus**William
                G. LaPerch
            
            $
            225,000Michael
                A. Doris
            
            $
            150,000Robert
                Sokota
            
            $
            175,000John
                Jacquay
            
            $
            375,000Rajiv
                Datta
            
            $
            175,000Douglas
                Jendras
            
            $
            175,000





In
      setting annual incentive bonus amounts for the named executive officers, we
      consider 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 September 2008 Employment Agreements,
      target bonuses for Messrs. LaPerch, Sokota, Datta and Jendras were set at 35%
      of
      base salary. Mr. Jacquay’s target bonus was set at $250,000.





Our
      U.K.
      based employees receive quarterly incentive cash bonuses based upon the
      achievement of quarterly adjusted EBITDA targets and other quantitative and
      qualitative factors. Incentive cash bonuses paid in the U.K. are approved by
      our
      senior management.





***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. Through 2006,
      almost all new employees were granted stock options after becoming employed
      by
      us. At its meetings, the Compensation Committee typically granted options to
      employees who had been hired or additional options to employees who had been
      promoted, since the time of the previous Compensation Committee meeting.
      Employees were generally granted an amount of stock options, and in the case
      of
      executives, stock units, based on their employment level and in some cases
      based
      on prior performance.





On
      August
      7, 2007 equity compensation was granted to our named executive officers. Each
      of
      Messrs. Doris, Sokota, Jacquay, Datta and Jendras was granted 10,000 restricted
      stock units, which vested on the first anniversary of the date of grant. Mr.
      LaPerch was granted 20,000 restricted stock units under the same
      terms.





During
      2006, all named executive officers who had previously been granted stock units
      agreed to defer the delivery of the stock underlying vested stock units from
      April 15, 2007 until August 15, 2007. The delivery was further delayed to
      December 28, 2007. Our named executive officers had previously agreed to defer
      the delivery of the stock underlying vested stock units from January 3, 2005
      until April 15, 2007. Pursuant to the stock unit agreements between our named
      executive officers and us, in the event that at the time of the delivery of
      the
      stock underlying the stock units the stock is not covered by an applicable
      registration statement or the stock has not been listed on NASDAQ or other
      comparable exchange, at the named executive officer’s request, we are obligated
      to purchase sufficient shares of stock from such executives as is necessary
      to
      cover the executives’ minimum tax withholding obligations. In December, 2007, we
      delivered 310,719 shares of common stock to certain employees (including the
      named executive officers) and former employees, which represented shares
      underlying all vested restricted stock units at such date of which 303,369
      were
      delivered on December 28, 2007. We purchased an aggregate 129,816 shares from
      these individuals at $75.00 per share, the closing market price of our common
      stock on such date, in order to provide them with funds sufficient to satisfy
      minimum tax withholding obligations and provide these individuals with
      sufficient funds to meet our estimates of their residual income tax obligations
      (at their highest marginal tax rates). The aggregate value of the shares
      purchased by us of $9.7 million was charged to treasury stock. We decided to
      purchase these shares because the delivery of the shares underlying the stock
      units triggered significant tax obligations for the employees, and the employees
      were unable to sell the shares to third parties due to various securities law
      restrictions in order to pay their income tax obligations.






68





Stock
      options granted to employees are granted on the date the Compensation Committee
      meets and approves such grants. Meetings were scheduled for such times as
      management and Compensation Committee members believed appropriate, often
      immediately before or after the meetings of the Board of Directors. The exercise
      price of such stock options granted was the closing price of our common stock
      as
      reported by NASDAQ on the grant date. Generally, stock options granted in 2007
      and 2006 were scheduled to vest on the first anniversary of the grant date.
      In
      2007, grants of stock options were made on March 21, 2007 and July 18, 2007.
      In
      2006, grants of stock options were made on April 26, July 19, October 5 and
      December 6. Previously, we had granted stock options that vested over a three
      year period, with one-third of the grant vesting on each of the first, second
      and third anniversaries of the grant. In 2006, we changed our policy, subject
      to
      exception, to issue only one year grants (of one-third the previous grant
      amounts) in order to reduce the number of options granted and preserve shares
      available for future issuance under the 2003 Stock Incentive Plan. Stock options
      granted to our executives contain various vesting acceleration provisions in
      connection with the termination of the employee’s employment with the Company
      and, for certain named executive officers, as described below, upon a change
      of
      control of the Company.





Grants
      of
      restricted stock units were generally scheduled to vest over a four year period
      with one quarter of the grant amount vesting on each of the first, second,
      third
      and fourth anniversary of the grant date, or alternatively, for stock units
      granted shortly after our emergence from bankruptcy protection in September
      2003, one fifth of the grant amount vested on each of the grant date and the
      first, second, third and fourth anniversaries of the grant date. Stock units
      have been granted only to our senior executives and in 2007, certain members
      of
      management and to all non-employee directors. During 2006 and 2007, we made
      certain grants of restricted stock units with vesting periods ranging from
      one
      to two years. All grants of restricted stock units contain various acceleration
      provisions in connection with the termination of the employee’s employment with
      the Company upon a change of control of the Company.





***Adoption
      of 2008 Equity Incentive Plan***




On
      August
      29, 2008, the Board of Directors of the Company approved the Company’s 2008
      Equity Incentive Plan (the “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. 750,000
      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.




On
      September 8, 2008, Mr. LaPerch was granted 50,000 restricted stock units, which
      vest 15,000 on the first anniversary of the date of grant, 5,000 on the second
      anniversary of the date of grant and 30,000 on the third anniversary of the
      date
      of grant. Mr. LaPerch is also eligible to earn up to an additional 7,000
      restricted stock units in each of 2010, 2011 and 2012 based on certain
      performance targets for fiscal years 2009, 2010 and 2011. Each of Messrs.
      Sokota, Jacquay, Datta, and Jendras were granted 35,000 restricted stock units,
      which vest 10,500 on the first anniversary of the date of grant, 3,500 on the
      second anniversary of the date of grant and 21,000 on the third anniversary
      of
      the date of grant.




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
      granted 500 restricted stock units and options to purchase 1,000 shares of
      common stock. All such grants vest on the first anniversary of 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 higher level employees
      -
      including the named executive officers - are provided with Group Variable
      Universal Life for basic life insurance whereas all other employees are provided
      with group term life insurance. The named executive officers are each provided
      with Group Variable Universal 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 2007. The only perquisites
      consisted of the payment for the participation of the spouses of certain named
      executive officers at our annual President’s Club retreat, which for 2007 was
      held in Orlando, Florida, and a gross up to cover the taxes on such payment.
      We
      believed that the participation of these named executive officers’ spouses was
      important for the success of this event, particularly in light of the relative
      cost, and wanted to ensure their attendance.





***Severance***




Severance
      amounts for our named executive officers due under the Prior 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 or partial vesting of
      unvested stock options or stock units. Mr. Jacquay’s employment agreement was
      amended in 2007 to make it consistent with those of other named executive
      officers by providing for the payment of a pro rata bonus for the year of
      termination.





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.


69


***Post-Employment
      Restrictions***




Under
      their Prior Employment Agreements, Messrs. LaPerch, Doris and Sokota had each
      agreed that they will not compete with us for nine months following termination
      of their employment and will not solicit any of our customers or employees
      for
      one year following such termination.





Under
      their Prior Employment Agreements, Mr. Datta and Mr. Jendras had each agreed
      that they will not compete with us for three months following termination of
      their employment and will not solicit any of our customers or employees for
      six
      months following such termination.





We
      believe that these post-employment restrictions on the named executive officers
      provide us with some protection against the ability of the named executive
      officers to compete with us, and thereby possibly limit our ability to succeed
      after the termination of their employment.





Mr.
      Jacquay’s Prior Employment Agreement did not contain any post-employment
      restrictions on his ability to compete with us or to solicit our customers
      or
      employees.





Pursuant
      to the September 2008 Employment Agreements, Messrs. LaPerch, Sokota, Jacquay,
      Datta and Jendras have agreed that they will not compete 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. The shares of stock issued under our Equity Incentive Plan have
      not
      been covered by a registration statement under the Securities Act of 1933.
      Certain shares delivered to employees may, however, be sold pursuant to certain
      exceptions under the Securities Act of 1933. Except for transactions with the
      Company, no current named executive officers have purchased or sold our
      securities since our emergence from bankruptcy protection. We expect to seek
      registration of certain shares at such time as we become current with our
      periodic filing obligations under the Exchange Act. Prior to that time, we
      plan
      to adopt additional rules related to the purchase and sale of our securities
      by
      our employees including our named executive officers. 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 certain of our senior
      executive officers in 2007 exceeded the $1 million threshold under
      Section 162(m). Accordingly, some of their non-cash compensation will not
      be deductible for federal and state income tax purposes. We believe that the
      limitation on the tax deductibility of such compensation will have a limited
      effect on the Company’s ultimate income tax liability given the availability of
      prior net operating losses.





**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 this Annual Report and in the Company’s Annual Report on
      Form 10-K for the year ended December 31, 2007.





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.


70


**Summary
      Compensation Table**




The
      following summary compensation table sets forth information concerning the
      annual and long-term compensation earned by our named executive officers who
      served as such during the years ended December 31, 2007 and 2006.




Name
                and Principal Position
            
            Year
            
            Salary
              ($)
            
            Bonus
              ($)
            
            Stock
              Awards ($)
              (1)
            
            Option Awards
              ($)
                (2)
            
            Non-Equity
              Incentive
              Plan
              Compensation
            
            Changes in Pension
              Value
              and Nonqualified
              Deferred
              Compensation
              Earnings
            
            All Other
              Compensation
              ($)
            
            Total
              ($)William
                G. LaPerch, President and Chief
            
            
            2007
            
            $
            500,000
            
            $
            225,000
            
            $
            831,240
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            19,717
            (3)
            $
            1,575,957Executive
                Officer
            
            
            2006
            
            
            500,000
            
            
            265,000
            
            
            209,500
            
            
            20,415
            
            
            —
            
            
            —
            
            
            18,777
            (10)
            
            1,013,692Michael
                A. Doris,
            
            
            2007
            
            
            327,200
            
            
            150,000
            
            
            461,968
            
            
            —
            
            
            —
            
            
            —
            
            
            17,981
            (4)
            
            957,149Former
                Senior Vice President
            
            
            2006
            
            
            318,867
            
            
            125,000
            
            
            172,301
            
            
            16,842
            
            
            —
            
            
            —
            
            
            17,678
            (11)
            
            650,688and
                Chief Financial Officer (5)Robert
                Sokota,
            
            
            2007
            
            
            315,000
            
            
            175,000
            
            
            461,968
            
            
            —
            
            
            —
            
            
            —
            
            
            17,023
            (6)
            
            968,991Senior
                Vice President,
            
            
            2006
            
            
            315,000
            
            
            130,000
            
            
            172,301
            
            
            16,842
            
            
            —
            
            
            —
            
            
            16,435
            (12)
            
            650,578General
                Counsel,Chief
                Administrative Officer and SecretaryJohn
                Jacquay
            
            
            2007
            
            
            290,000
            
            
            375,000
            
            
            653,650
            
            
            82,221
            
            
            —
            
            
            —
            
            
            18,137
            (7)
            
            1,419,008Senior
                Vice President,
            
            
            2006
            
            
            287,500
            
            
            275,000
            
            
            309,900
            
            
            150,022
            
            
            —
            
            
            —
            
            
            18,085
            (13)
            
            1,040,507Sales
                & MarketingRajiv
                Datta
            
            
            2007
            
            
            277,875
            
            
            175,000
            
            
            505,038
            
            
            6,073
            
            
            —
            
            
            —
            
            
            16,912
            (8)
            
            980,898Senior
                Vice President
            
            
            2006
            
            
            254,000
            
            
            160,000
            
            
            183,290
            
            
            24,419
            
            
            —
            
            
            —
            
            
            15,455
            (14)
            
            637,164Chief
                Technology OfficerDouglas
                Jendras
            
            
            2007
            
            
            260,662
            
            
            175,000
            
            
            480,492
            
            
            6,073
            
            
            —
            
            
            —
            
            
            16,831
            (9)
            
            939,058Senior
                Vice President,
            
            
            2006
            
            
            246,250
            
            
            130,000
            
            
            157,040
            
            
            24,419
            
            
            —
            
            
            —
            
            
            15,350
            (15)
            
            573,059Operations





(1)
            Restricted
                stock units were granted on August 7, 2007 to Mr. LaPerch (20,000)
                and
                Messrs. Doris, Sokota, Jacquay, Datta and Jendras (10,000 each).
                These
                restricted stock units, other than those granted to Mr. Doris, vested
                on
                August 7, 2008. Those granted to Mr. Doris vested on March 4, 2008
                upon
                the termination of his contract in accordance with the terms of the
                grant.
                These amounts do not reflect actual value realized by the recipient.
                In
                accordance with SEC rules, this column represents the dollar amount
                recognized by the Company for financial statement reporting purposes
                for
                the year ended December 31, 2007 for stock awards in accordance with
                Statement of Financial Accounting Standards No. 123 (revised 2004),
                “Share-Based Payments” (“SFAS No. 123(R)”), excluding any estimate for
                forfeitures. No restricted stock units were granted in 2006. On
                December 28, 2007, common shares were delivered to each of the named
                executive officers pursuant to vested restricted stock units as
                follows:





Shares
                Delivered
            
            Shares
                Purchased
              by
                the Company
            
            TotalWilliam
                G. LaPerch
            
            
            28,825
            
            
            21,175
            
            
            50,000Michael
                A. Doris
            
            
            23,707
            
            
            17,415
            
            
            41,122Robert
                Sokota
            
            
            23,041
            
            
            18,081
            
            
            41,122John
                Jacquay
            
            
            17,988
            
            
            12,012
            
            
            30,000Rajiv
                Datta
            
            
            15,758
            
            
            12,367
            
            
            28,125Douglas
                Jendras
            
            
            13,548
            
            
            9,952
            
            
            23,500





No
      stock
      awards were forfeited by the named executive officers in 2007. For additional
      information on the valuation assumptions underlying the value of these awards,
      see Note 9, “Stock-Based Compensation,” to the accompanying consolidated
      financial statements included elsewhere in this Annual Report on Form
      10-K.





(2)
            No
                options awards were granted in 2007 and 2006. The amounts shown for
                prior
                grants do not reflect actual value realized by the recipient. In
                accordance with SEC rules, this column represents the dollar amount
                recognized by the Company for financial statement reporting purposes
                for
                the year ended December 31, 2007 for option awards in accordance
                with FAS
                123R, excluding any estimate for forfeitures. No option awards were
                forfeited by the named executive officers in 2007. For additional
                information on the valuation assumptions underlying the value of
                these
                awards, see Note 9, “Stock-Based Compensation,” to the accompanying
                consolidated financial statements included elsewhere in this Annual
                Report
                on Form 10-K.





(3)
            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.





(4)
            Includes
                health and welfare benefits of $12,539, life insurance premiums of
                $2,892,
                disability premiums of $300, and 401(k) match of
                $2,250.(5)
            Mr.
                Doris’ contract was terminated without cause on March 4,
                2008.(6)
            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.(7)
            Includes
                health and welfare benefits of $12,539, life insurance premiums of
                $3,448,
                disability premiums of $997, and other of $1,153.(8)
            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.(9)
            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.(10)
            Includes
                health and welfare benefits of $12,337, life insurance premiums of
                $2,821,
                disability premiums of $917, 401(k) match of $1,125 and other of
                $1,577.


71





(11)
            Includes
                health and welfare benefits of $12,404, life insurance premiums of
                $2,821,
                disability premiums of $273, 401(k) match of $1,125 and other of
                $1,055.(12)
            Includes
                health and welfare benefits of $12,348, life insurance premiums of
                $1,151,
                disability premiums of $567, 401(k) match of $1,125 and other of
                $1,244.(13)
            Includes
                health and welfare benefits of $12,404, life insurance premiums of
                $3,377,
                disability premiums of $913, and other of $1,391.(14)
            Includes
                health and welfare benefits of $12,411, life insurance premiums of
                $1,015,
                disability premiums of $904, and 401(k) match of
                $1,125.(15)
            Includes
                health and welfare benefits of $12,315, life insurance premiums of
                $1,015,
                disability premiums of $895, and 401(k) match of
                $1,125.





**Grants
      of Plan-Based Award**




We
      made
      grants of restricted stock units under our Equity Incentive Plan to our named
      executive officers during the year ended December 31, 2007 as
      follows:





**Named
                  Executive Officer**
              
              **Number
                  of RSUs Granted**
              
              **Grant
                  Date**
              
              **Scheduled**
                **Vesting
                  Date**
              
              
              **Grant
                  Date**
                **Fair
                  Value**William
                  G. LaPerch
              
              
              20,000
              
              
              August 7, 2007
              
              
              August 7, 2008
              
              $
              1,650,000Michael
                  A. Doris
              
              
              10,000
              
              
              August, 7, 2007
              
              
              August 7, 2008*
              
              $
              825,000Robert
                  Sokota
              
              
              10,000
              
              
              August 7, 2007
              
              
              August 7, 2008
              
              $
              825,000John
                  Jacquay
              
              
              10,000
              
              
              August 7, 2007
              
              
              August 7, 2008
              
              $
              825,000Rajiv
                  Datta
              
              
              10,000
              
              
              August 7, 2007
              
              
              August 7, 2008
              
              $
              825,000Douglas
                  Jendras
              
              
              10,000
              
              
              August 7, 2007
              
              
              August 7, 2008
              
              $
              825,000




*
      Mr.
      Doris’s stock award was fully vested upon the modification and termination of
      his contract on March 4, 2008. All of the other RSUs in the above table vested
      on August 7, 2008.





**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, 2007. This table excludes
      restricted stock units granted to Mr. LaPerch (50,000 plus an additional 7,000
      per year under his three year contract, subject to the achievement of certain
      goals) and Messrs Sokota, Jacquay, Datta and Jendras (35,000 each) in September
      2008.




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
                ($)
              
              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
              
              
              20,000
              (1)
              
              ──
              
              
              ──
              
              $
              20.95
              
              
              09/10/13
              
              
              ──
              
              
              ──
              
              $
              ──
              
              $
              ──20,000
              (6)
              
              ──
              
              
              ──
              
              
              ──
              
              
              ──
              
              
              20,000
              (6)
              
              1,560,000
              
              
              ──
              
              
              ──Michael
                  A. Doris
              
              
              16,500
              (1)
              
              ──
              
              
              ──
              
              $
              20.95
              
              
              09/10/13
              
              
              ──
              
              
              ──
              
              
              ──
              
              
              ──10,000
              (7)
              
              ──
              
              
              ──
              
              
              ──
              
              
              ──
              
              
              10,000
              (7)
              
              780,000
              
              
              ──
              
              
              ──Robert
                  Sokota
              
              
              16,500
              (1)
              
              ──
              
              
              ──
              
              $
              20.95
              
              
              09/10/13
              
              
              —
              
              
              ──
              
              
              ──
              
              
              ──10,000
              (6)
              
              ──
              
              
              ──
              
              
              ──
              
              
              ──
              
              
              10,000
              (6)
              
              780,000
              
              
              ──
              
              
              ──John Jacquay
              
              
              25,000
              (2)
              
              ──
              
              
              ──
              
              $
              36.50
              
              
              06/01/14
              
              
              —
              
              
              —
              
              
              ──
              
              
              ──7,000
              (4)
              
              ──
              
              
              ──
              
              $
              25.00
              
              
              12/19/15
              
              
              —
              
              
              —
              
              
              ──
              
              
              ──10,000
              (6)
              
              ──
              
              
              ──
              
              
              ──
              
              
              ──
              
              
              10,000
              (6)
              
              780,000
              
              
              ──
              
              
              ──10,000
              (8)
              
              ──
              
              
              ──
              
              
              ──
              
              
              ──
              
              
              10,000
              (8)
              
              780,000
              
              
              ──
              
              
              ──Rajiv
                  Datta
              
              
              10,000
              (1)
              
              ──
              
              
              ──
              
              $
              20.95
              
              
              09/12/13
              
              
              —
              
              
              —
              
              
              ──
              
              
              ──4,000
              (3)
              
              ──
              
              
              ──
              
              $
              36.50
              
              
              05/13/14
              
              
              —
              
              
              —
              
              
              ──
              
              
              ──80
              (5)
              
              ──
              
              
              ──
              
              $
              25.00
              
              
              12/19/15
              
              
              —
              
              
              —
              
              
              ──
              
              
              ──1,875
              (9)
              
              ──
              
              
              ──
              
              
              ──
              
              
              ──
              
              
              1,875
              (9)
              
              146,250
              
              
              ──
              
              
              ──10,000
              (6)
              
              ──
              
              
              ──
              
              
              ──
              
              
              ──
              
              
              10,000
              (6)
              
              780,000
              
              
              ──
              
              
              ──Douglas Jendras
              
              
              10,000
              (1)
              
              ──
              
              
              ──
              
              $
              20.95
              
              
              09/12/13
              
              
              ──
              
              
              ──
              
              
              ──
              
              
              ──4,000
              (3)
              
              ──
              
              
              ──
              
              $
              36.50
              
              
              05/13/14
              
              
              ──
              
              
              ──
              
              
              ──
              
              
              ──80
              (5)
              
              ──
              
              
              ──
              
              $
              25.00
              
              
              12/19/15
              
              
              ──
              
              
              ──
              
              
              ──
              
              
              ──2,500
              (9)
              
              ──
              
              
              ──
              
              
              ──
              
              
              ──
              
              
              2,500
              (9)
              
              195,000
              
              
              ──
              
              
              ──10,000
              (6)
              
              ──
              
              
              ──
              
              
              ──
              
              
              ──
              
              
              10,000
              (6)
              
              780,000
              
              
              ──
              
              
              ──




72





(1)
            Represents
                options to purchase an equivalent number of shares of AboveNet, Inc.
                Common Stock. The options were granted in September 2003 and vested
                in
                three equal installments in September 2004, September 2005 and September
                2006.





(2)
            Represents
                options to purchase an equivalent number of shares of AboveNet, Inc.
                Common Stock. The options were granted on June 1, 2004 and vested
                in three
                equal installments on June 1, 2005, June 1, 2006 and June 1,
                2007.





(3)
            Represents
                options to purchase an equivalent number of shares of AboveNet, Inc.
                Common Stock. The options were granted on May 13, 2004 and vested
                in three
                equal installments on May 13, 2005, May 13, 2006 and May 13,
                2007.





(4)
            Represents
                options to purchase an equivalent number of shares of AboveNet, Inc.
                Common Stock. The options were granted on December 19, 2005 and vested
                in
                three equal installments on December 19, 2005, June 1, 2006 and June
                1,
                2007.





(5)
            Represents
                options to purchase an equivalent number of shares of AboveNet’s common
                stock. The options vested in three equal installments on December
                19,
                2005, May 13, 2006 and May 13,
                2007.





(6)
            Represents
                restricted stock units granted August 7, 2007 to Mr. LaPerch (20,000),
                Mr.
                Sokota (10,000), Mr. Datta (10,000), Mr. Jacquay (10,000) and Mr.
                Jendras
                (10,000). These restricted stock units vested on August 7,
                2008.





(7)
            Mr.
                Doris’ contract was terminated on March 4, 2008, at which time the 10,000
                restricted stock units granted on August 7, 2007 became
                vested.





(8)
            These
                restricted stock units vested June 1,
                2008.





(9)
            These
                restricted stock units vested May 13,
                2008.





**Option
      Exercises and Stock Vested During Fiscal 2007**




**** Mr.
      Doris’ contract was terminated March 4, 2008. In connection with the
      termination, Mr. Doris’ 10,000 restricted stock units became
      vested.




There
      were no options exercised by any of the Company's named executive officers
      during 2007.





**Pension
      Benefits - Fiscal 2007**




There
      were no pension benefits earned by the Company's named executive officers in
      the
      year ended December 31, 2007.





**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.





**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 Prior Employment Agreements, which were in effect on December 31,
      2007.
      Each of the named executive officers (except for Mr. Doris, whose contract
      was
      terminated on March 4, 2008) entered into a September 2008 Employment Agreement
      with the Company on September 2, 2008.




***William
      G. LaPerch***




The
      following table shows the potential payments upon termination or a change of
      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, 2007.




Executive
                Benefits upon
              Payments
                Upon Separation
            
            Expiration of
              Employment
              Agreement
              ($)
            
            Voluntary
              Termination on
              12/31/07
              ($)
            
            For Cause
              Termination on
              12/31/07
              ($)
            
            Without Cause
              Termination on
              12/31/07
              ($)
            
            Change-in-Control
              and Termination on
              12/31/07
              ($)
            
            Disability on
              12/31/07
              ($)
            
            Death on
              12/31/07
              ($)***Compensation:***Cash
                Severance – Salary and Bonus
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            725,000
            (1)
            $
            725,000
            (1)
            $
            225,000
            
            $
            225,000Stock
                Options(2)
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Restricted
                Stock (3)
            
            
            —
            
            
            —
            
            
            —
            
            
            1,560,000
            
            
            1,560,000
            
            
            1,560,000
            
            
            1,560,000Benefits
                and Perquisites
            
            
            —
            
            
            —
            
            
            —
            
            
            13,553
            
            
            13,553
            
            
            —
            
            
            —Life
                Insurance
            
            
            —
            
            
            —
            
            
            —
            
            
            2,891
            (4)
            
            2,891
            (4)
            
            —
            
            
            1,000,000
            (5)**Total**
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            2,301,444
            
            $
            2,301,444
            
            $
            1,785,000
            
            $
            2,785,000





(1)
            Represents
                one year of severance at Mr. LaPerch’s 2007 annual base salary plus his
                2007 bonus of $225,000.(2)
            All
                options to purchase common stock granted to Mr. LaPerch were vested
                as of
                December 31, 2007.(3)
            Pursuant
                to the terms of the 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 and upon a change-in-control.
                The
                shares underlying the restricted stock units have been valued in
                the above
                table using the December 31, 2007 closing market price of our common
                stock
                of $78.00 per share ($78.00 x 20,000 shares = $1,560,000 at 100%
                vesting).


73





(4)
            Represents
                payment of life insurance premium.(5)
            Upon
                his death, Mr. LaPerch’s beneficiary would receive the proceeds of a
                $1,000,000 life insurance policy.





***Michael
      A. Doris***  (6)




The
      following table shows the potential payments upon termination or a change of
      control of the Company for Michael A. Doris, the Company’s former Senior Vice
      President and Chief Financial Officer, as if such termination had taken place
      on
      December 31, 2007.




Executive
                Benefits upon
              Payments
                Upon Separation
            
            Expiration of
              Employment
              Agreement
              ($)
            
            Voluntary
              Terminationon
              12/31/07
              ($)
            
            For Cause
              Terminationon
              12/31/07
              ($)
            
            Without Cause
              Terminationon
              12/31/07
              ($)(6)
            
            Change-in-Control
              and Termination on
              12/31/07
              ($)
            
            Disability on
              12/31/07
              ($)
            
            Death on
              12/31/07
              ($)***Compensation:***Cash
                Severance – Salary and Bonus
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            477,200
            (1)
            $
            477,200
            (1)
            $
            150,000
            
            $
            150,000Stock
                Options (2)
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Restricted
                Stock (3)
            
            
            —
            
            
            —
            
            
            —
            
            
            780,000
            
            
            780,000
            
            
            780,000
            
            
            780,000Benefits
                and Perquisites
            
            
            —
            
            
            —
            
            
            —
            
            
            12,839
            
            
            12,839
            
            
            —
            
            
            —Life
                Insurance
            
            
            —
            
            
            —
            
            
            —
            
            
            2,892
            (4)
            
            2,892
            (4)
            
            —
            
            
            1,000,000
            (5)**Total**
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            1,272,931
            
            $
            1,272,931
            
            $
            930,000
            
            $
            1,930,000





(1)
            Represents
                one year of severance at Mr. Doris’ 2007 annual base salary plus his 2007
                bonus of $150,000.(2)
            All
                options to purchase common stock granted to Mr. Doris were vested
                as of
                December 31, 2007.(3)
            Pursuant
                to the terms of the stock unit agreement, Mr. Doris’ 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, 2007 closing market price of our common stock of $78.00
                per
                share ($78.00 x 10,000 shares = $780,000 at 100%
                vesting).(4)
            Represents
                payment of life insurance premium.(5)
            Upon
                his death, Mr. Doris’ beneficiary would receive the proceeds of a
                $1,000,000 life insurance policy.(6)
            On
                March 4, 2008, Mr. Doris’ employment contract was modified and then
                terminated. Pursuant to the modification, the Company agreed to pay
                Mr. Doris upon termination (i) $327,200, (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 to execute and deliver a consulting agreement with Mr.
                Doris.
                The consulting agreement provides that in exchange for Mr. Doris’
                provision of consulting services to the Company for a period of
                nine months, Mr. Doris shall be paid (i) $6,292.31 per week and
                (ii) to the extent not previously paid under Mr. Doris’ employment
                agreement, (a) a bonus of $50,000 (the “2006 Filing Bonus”) within
                ten (10) days after the Company completes and files with the SEC a
                Form 10-K with respect to the Company’s fiscal year ended
                December 31, 2006 and (b) a bonus of $50,000 (the “2007 Filing
                Bonus”) within ten (10) days after the Company completes and files
                with the SEC either a Form 10-K or a Form 8-K with respect to
                the Company’s fiscal year ended December 31, 2007, and in the event
                that the 2006 Filing Bonus has not been paid as of the time that
                the 2007
                Filing Bonus is paid, then the 2006 Filing Bonus shall be paid at
                such
                time as well. 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) shall be delivered to Mr. Doris on
                January 5, 2009 and (ii) the Company shall repurchase at the
                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 received were as follows:




Salary
                and Bonuses
            
            $
            603,430Accrued
                Paid Time Off
            
            
            10,535Consulting
                Fee
            
            
            245,400Restricted
                Stock
            
            
            730,000
            *****Benefits
                and Perquisites
            
            
            28,616Life
                Insurance
            
            
            4,658**Total**
            
            $
            1,622,639





***** **** Based
      upon the closing price of AboveNet’s stock on March 4, 2008.


74


***Robert
      Sokota***




The
      following table shows the potential payments upon termination or a change of
      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, 2007.




Executive
                Benefits upon
              Payments
                Upon Separation
            
            Expiration of
              Employment
              Agreement
              ($)
            
            Voluntary
              Terminationon
              12/31/07
              ($)
            
            For Cause
              Terminationon
              12/31/07
              ($)
            
            Without Cause
              Terminationon
              12/31/07
              ($)
            
            Change-in-Control
              and Terminationon
              12/31/07
              ($)
            
            Disability on
              12/31/07
              ($)
            
            Death on
              12/31/07
              ($)***Compensation:***Cash
                Severance – Salary and Bonus
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            490,000
            (1)
            $
            490,000
            (1)
            $
            175,000
            
            $
            175,000Stock
                Options (2)
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Restricted
                Stock (3)
            
            
            —
            
            
            —
            
            
            —
            
            
            780,000
            
            
            780,000
            
            
            780,000
            
            
            780,000Benefits
                and Perquisites
            
            
            —
            
            
            —
            
            
            —
            
            
            12,595
            
            
            12,595
            
            
            —
            
            
            —Life
                Insurance
            
            
            —
            
            
            —
            
            
            —
            
            
            1,185
            (4)
            
            1,185
            (4)
            
            —
            
            
            1,000,000
            (5)**Total**
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            1,283,780
            
            $
            1,283,780
            
            $
            955,000
            
            $
            1,955,000





(1)
            Represents
                one year of severance at Mr. Sokota’s 2007 annual base salary plus his
                2007 bonus of $175,000.





(2)
            All
                options to purchase common stock granted to Mr. Sokota were vested
                as of
                December 31, 2007.





(3)
            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, 2007 closing market price of our common stock of $78.00
                per
                share ($78.00 x 10,000 shares = $780,000 at 100%
                vesting).





(4)
            Represents
                payment of life insurance premium.





(5)
            Upon
                his death, Mr. Sokota’s beneficiary would receive the proceeds of a
                $1,000,000 life insurance policy.





***John
      Jacquay***




The
      following table shows the potential payments upon termination or a change of
      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,
      2007.




Executive
                Benefits upon
              Payments Upon Separation
            
            Expiration of
              Employment
              Agreement
              ($)
            
            Voluntary
              Termination on
              12/31/07
              ($)
            
            For Cause
              Termination on
              12/31/07
              ($)
            
            Without Cause
              Termination on
              12/31/07
              ($)
            
            Change-in-Control
              and Termination on
              12/31/07
              ($)
            
            Disability on
              12/31/07
              ($)
            
            Death on
              12/31/07
              ($)***Compensation:***Cash
                Severance – Salary and Bonus
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            290,000
            (1)
            $
            665,000
            (2)
            $
            —
            
            $
            —Stock
                Options (3)
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Restricted
                Stock (4)
            
            
            —
            
            
            —
            
            
            —
            
            
            1,560,000
            
            
            1,170,000
            
            
            1,560,000
            
            
            1,560,000Benefits
                and Perquisites
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Life
                Insurance
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,000,000
            (5)**Total**
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            1,850,000
            
            $
            1,835,000
            
            $
            1,560,000
            
            $
            2,560,000





(1)
            Represents
                one year of severance at Mr. Jacquay’s 2007 annual base salary.





(2)
            Represents
                one year of severance at Mr. Jacquay’s 2007 annual base salary plus his
                2007 bonus of $375,000. Mr. Jacquay’s contract provides for accrued unpaid
                bonuses for the year of termination if terminated without cause within
                one
                year of a change-in-control.





(3)
            All
                options to purchase common stock granted to Mr. Jacquay were vested
                at
                December 31, 2007.





(4)
            Pursuant
                to the terms of the June 1, 2004 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 and 50% vested
                upon a
                change-in-control. The shares underlying the restricted stock units
                have
                been valued in the above table using the December 31, 2007 closing
                market
                price of our common stock of $78.00 per share ($78.00 x 10,000 shares
                =
                $780,000 at 100% vesting, and $78.00 x 5,000 shares = $390,000 at
                50%
                vesting). Pursuant to the August 7, 2007 stock unit agreement, Mr.
                Jacquay’s unvested restricted stock units would become 100% vested upon a
                change-in-control, death, disability or termination without cause.
                The
                shares underlying the restricted stock units have been valued in
                the above
                table at the December 31, 2007 closing market price of our common
                stock of
                $78.00 per share ($78.00 x 10,000 = $780,000 at 100%
                vesting).





(5)
            Upon
                his death, Mr. Jacquay’s beneficiary would receive the proceeds of a
                $1,000,000 life insurance
                policy.


75





***Rajiv
      Datta***




The
      following table shows the potential payments upon termination or a change of
      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,
      2007.




Executive Benefits upon
              Payments Upon Separation
            
            Expiration of
              Employment
              Agreement
              ($)
            
            Voluntary
              Termination on
              12/31/07
              ($)
            
            For Cause
              Termination on
              12/31/07
              ($)
            
            Without Cause
              Termination on
              12/31/07
              ($)
            
            Change-in-Control
              and Termination on
              12/31/07
              ($)
            
            Disability on
              12/31/07
              ($)
            
            Death on
              12/31/06
              ($)***Compensation:***Cash
                Severance – Salary and Bonus
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            360,250
            (1)
            $
            360,250
            (1)
            $
            —
            
            $
            —Stock
                Options(2)
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Restricted
                Stock (3)
            
            
            —
            
            
            —
            
            
            —
            
            
            889,688
            
            
            926,250
            
            
            889,688
            
            
            926,250Benefits
                and Perquisites
            
            
            —
            
            
            —
            
            
            —
            
            
            8,998
            
            
            8,998
            
            
            —
            
            
            —Life
                Insurance
            
            
            —
            
            
            —
            
            
            —
            
            
            676
            (4)
            
            676
            (4)
            
            —
            
            
            1,000,000
            (5)**Total**
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            1,259,612
            
            $
            1,296,174
            
            $
            889,688
            
            $
            1,926,250





(1)
            Represents
                eight months of severance based upon Mr. Datta’s 2007 annual base salary
                plus his 2007 bonus of $175,000.





(2)
            All
                options to purchase common stock granted to Mr. Datta were vested
                at
                December 31, 2007.





(3)
            Pursuant
                to the terms of the May 13, 2004 stock unit agreement, Mr. Datta’s
                unvested restricted stock units would become 100% vested upon a
                change-in-control or death and 75% vested if he was terminated without
                cause or for disability. The shares underlying the restricted stock
                units
                have been valued in the above table using the December 31, 2007 closing
                market price of our common stock of $78.00 per share ($78.00 x 1,875
                shares = $146,250) at 100% vesting and $78.00 x 1,406 shares = $109,688
                at
                75% vesting). Pursuant to the August 7, 2007 stock unit agreement,
                Mr.
                Datta’s unvested restricted stock units would become 100% vested upon a
                change-in-control, death, disability or termination without cause.
                The
                shares underlying the restricted stock units have been valued in
                the above
                table at the December 31,2007 closing market price of our common
                stock of
                $78.00 per share ($78.00 x 10,000 = $780,000 at 100% vesting).





(4)
            Represents
                payment of life insurance premium.





(5)
            Upon
                his death, Mr. Datta’s beneficiary would receive the proceeds of a
                $1,000,000 life insurance policy.





***Douglas
      Jendras***




The
      following table shows the potential payments upon termination or a change of
      control of the Company for Douglas Jendras, the Company’s Senior Vice President,
      Operations, as if such termination had taken place on December 31,
      2007.




Executive
                Benefits upon
              Payments
                Upon Separation
            
            Expiration
                of
              Employment
              Agreement
              ($)
            
            Voluntary
              Termination
              on
                12/31/07
              ($)
            
            For
                Cause
              Termination
              on
                12/31/07
              ($)
            
            Without
                Cause
              Termination
              on
                12/31/07
              ($)
            
            Change-in-Control
              and
                Termination on
              12/31/07
              ($)
            
            Disability on
              12/31/07
              ($)
            
            Death on
              12/31/07
              ($)***Compensation:***Cash
                Severance – Salary and Bonus
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            305,331
            (1)
            $
            305,331
            (1)
            $
            —
            
            $
            —Stock
                Options (2)
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Restricted
                Stock (3)
            
            
            —
            
            
            —
            
            
            —
            
            
            877,500
            
            
            975,000
            
            
            877,500
            
            
            975,000Benefits
                and Perquisites
            
            
            —
            
            
            —
            
            
            —
            
            
            6,691
            
            
            6,691
            
            
            —
            
            
            —Life
                Insurance
            
            
            —
            
            
            —
            
            
            —
            
            
            524
            (4)
            
            524
            (4)
            
            —
            
            
            1,000,000
            (5)**Total**
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            1,190,046
            
            $
            1,287,546
            
            $
            877,500
            
            $
            1,975,000





(1)
            Represents
                six months of severance based upon Mr. Jendras’ 2007 annual base salary
                plus his 2007 bonus of $175,000.





(2)
            All
                options to purchase common stock granted to Mr. Jendras were vested
                at
                December 31, 2007.





(3)
            Pursuant
                to the terms of the May 13, 2004 stock unit agreement, Mr. Jendras’
                unvested restricted stock units would become 100% vested upon a
                change-in-control or death and 50% vested if he was terminated without
                cause or for disability. The shares underlying the restricted stock
                units
                have been valued in the above table using the December 31, 2007 closing
                market price of our common stock of $78.00 per share ($78.00 x 2,500
                shares = $195,000 at 100% vesting and $78.00 x 1,250 shares = $97,500
                at
                50% vesting). Pursuant to the August 7, 2007 stock unit agreement,
                Mr.
                Jendras’ unvested restricted stock units would become 100% vested upon a
                change-in-control, death, disability or termination without cause.
                The
                shares underlying the restricted stock units have been valued in
                the above
                table at the December 31,2007 closing market price of our common
                stock of
                $78.00 per share ($78.00 x 10,000 = $780,000 at 100%
                vesting).




76





(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 Chairperson of the Board receives
      an additional annual retainer of $30,000 and the Chairperson 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 Chairperson of the Strategy Committee, which was created
      in
      September 2007, 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.





Mr.
      Embler contributes all of his director’s fees received to the funds managed by
      FMA holding Company securities.





**Director
      Summary Compensation Table**




The
      following table summarizes the compensation paid to our non-employee directors
      for the fiscal year ended December 31, 2007:




Name
            
            Fees Earned or
              Paid in Cash
              ($)
            
            Stock Awards
              ($) (4)
            
            Option Awards
              ($)
            
            Non-Equity
              Incentive Plan
              Compensation
              ($)
            
            Change in Pension Value
              and Nonqualified
              Deferred Compensation
              Earnings($)
            
            All Other
                Compensation ($)
            
            Total
              ($)Jeffrey
                Brodsky
            
            $
            122,500
            (1)(2)
            $
            240,625
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            363,125Michael
                J. Embler
            
            
            77,000
            (1)
            $
            240,625
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            $
            317,625Richard
                Postma
            
            
            90,000
            (1)
            $
            240,625
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            $
            330,625Richard
                Shorten, Jr.
            
            
            131,500
            (1)(3)
            $
            240,625
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            $
            372,125Stuart
                Subotnick
            
            
            86,000
            (1)
            $
            240,625
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            $
            326,625$
            507,000
            
            $
            1,203,125
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            1,710,125





(1)
            Includes
                $60,000 annual service retainer plus meeting attendance
                fees.(2)
            Includes
                $30,000 for services performed as Chairman of the Board and $10,000
                for
                services performed as Chairman of the Audit Committee.(3)
            Includes
                $40,000 for services performed as Chairman of the Strategy
                Committee.(4)
            On
                August 7, 2007, each of Messrs. Brodsky, Embler, Postma, Shorten
                and
                Subotnick was granted 7,000 restricted stock units, which vested
                on August
                7, 2008. These amounts do not reflect actual value realized by the
                recipient. No value was realized by any directors in 2007. In accordance
                with the SEC rules, this column represents the dollar amount recognized
                by
                the Company for financial statement reporting purposes for the year
                ended
                December 31, 2007 for such restricted stock units in accordance with
                FAS
                123R, excluding any estimate for forfeitures. No option awards were
                granted in 2007 and no awards were forfeited by the non-employee
                directors
                in 2007. For additional information on the valuation assumptions
                underlying the value of these awards, see Note 9, “Stock-Based
                Compensation,” to the accompanying consolidated financial statements
                included elsewhere in this Annual Report on Form 10-K. Pursuant to
                FMA’s
                internal policy, all non-cash compensation issued to Mr. Embler in
                connection with his service on the Board of Directors will be distributed
                directly to funds managed by FMA holding Company securities, when
                so
                available.





The
      above
      table excludes reimbursements for Board related expenses totaling
      $6,451.





**Compensation
      Committee Interlocks and Insider Participation**




During
      2007, 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 2007, 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.


77





**ITEM
      12.**  **SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
      MATTERS**




The
      following table sets forth, as of August 31, 2008, certain information regarding
      beneficial ownership of our common stock by (a) each person or entity who
      is known to us owning 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 August 31,
      2008.




**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
            
            
            2,468,229
            (2)
            
            22.6
            %Fiber
                LLC
              2300
                Carillow Point
              Kirkland,
                WA 98033
            
            
            1,514,191
            (3)
            
            14.1
            %JGD
                Management Corp. and affiliated persons
              c/o
                York Capital Management
              767
                Fifth Avenue, 17thFloor
              New
                York, NY 10153
            
            
            1,606,052
            (4)
            
            14.7
            %JWK
                Enterprises, LLC
              c/o
                Metromedia Company
              810
                7thAvenue, 29thFloor
              New
                York, NY 10019
            
            
            1,220,304
            (5)
            
            11.3
            %Stonehill
                Capital Management LLC and affiliated persons
              805
                Third Avenue, 30thFloor
              New
                York, NY 10022
            
            
            845,203
            (6)
            
            7.9
            %Jeffrey
                Brodsky
            
            
            10,000
            (7)
            
            *Michael
                Embler
            
            
            —
            (8)
            
            *Richard
                Postma
            
            
            10,000
            (7)
            
            *Richard
                Shorten, Jr.
            
            
            10,000
            (7)
            
            *Stuart
                Subotnick
            
            
            10,000
            (7)
            
            *William
                G. LaPerch
            
            
            68,825
            (9)
            
            *Michael
                A. Doris
            
            
            50,207
            (10)
            
            *Robert
                Sokota
            
            
            49,541
            (11)
            
            *John
                Jacquay
            
            
            65,984
            (12)
            
            *Rajiv
                Datta
            
            
            40,919
            (13)
            
            *Douglas
                Jendras
            
            
            39,069
            (14)
            
            *Joseph
                P. Ciavarella
            
            
            —
            
            
            *All
                directors and executive officers as a group (twelve persons)
            
            
            354,545
            (15)
            
            3.2
            %




*Less
      than 1%




(1)
            The
                applicable percentage of beneficial ownership is based on 10,974,760
                shares of common stock outstanding as of August 31, 2008 plus, 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 August 31, 2008.





(2)
            Includes
                2,363,463 shares of common stock and seven year warrants to purchase
                94,766 shares of common stock at $24 per share. Franklin Mutual Advisors,
                LLC (“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. Mr. Embler disclaims beneficial ownership of all shares
                described
                above. Also includes options to purchase 3,000 shares of common stock
                granted to Mr. Embler, which he holds as a nominee of FMA and disclaims
                any beneficial ownership and 7,000 restricted stock units granted
                to Mr.
                Embler on August 7, 2007, which vested on August 8, 2008, which he
                holds
                as a nominee of FMA and disclaims any beneficial ownership. All the
                common
                stock is beneficially owned by one or more open-end investment companies
                or other accounts managed by FMA. Excludes 500 restricted stock units
                and
                options to purchase 1,000 shares of common stock granted to Mr. Embler
                on
                September 8, 2008, which vest on the first anniversary of the date
                of
                grant.




78





(3)
            Based
                on information contained in a Form 4 filed with the Securities and
                Exchange Commission on December 26, 2007 by Fiber LLC, Craig McCaw
                and
                Eagle River Holdings, LLC.





(4)
            Based
                on information contained in the Schedule 13G (Amendment No. 6) filed
                by
                JGD Management Corp. (“JGD”) with the Securities and Exchange Commission
                on August 8, 2008.  Includes (i) 103,378 shares of common stock and
                warrants to purchase 18,889 shares of common stock directly owned
                by York
                Capital Management, L.P. (“York Capital”); (ii) 343,900 shares of common
                stock and warrants to purchase 9,637 shares of common stock directly
                owned
                by York Investment Limited (“York Investment”); (iii) 190,780  shares
                of common stock and warrants to purchase 34,244 shares of common
                stock
                directly owned by York Select, L.P. (“York Select”); (iv) 64,811 shares of
                common stock and warrants to purchase 20,521 shares of common stock
                directly owned by York Credit Opportunities Fund, L.P. (“York Credit
                Opportunities”); (v) 202,940  shares of common stock and warrants to
                purchase 50,431 shares of common stock directly owned by York Select
                Unit
                Trust (“York Select Trust”); (vi) 138,444 shares of common stock and
                warrants to purchase 9,505 shares of common stock directly owned
                by York
                Global Value Partners, L.P. (“York Global Value”); (vii) 161,821 shares of
                common stock and warrants to purchase 2,055 shares of common stock
                directly owned by York Enhanced Strategies Fund, LLC (“York Enhanced
                Strategies”);  (viii) 572 shares of common stock directly owned by
                York Long Enhanced Fund, L.P. (“York Long Enhanced”) (ix) 138,999 shares
                of common stock and warrants to purchase 44,012 shares of common
                stock
                directly owned by York Credit Opportunities Unit Trust (“York Unit Trust”)
                and (x) 67,272 shares of common stock and warrants to purchase 3,841
                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 Global Value and York Long
                Enhanced and the managers of York Investment, York Select Trust and
                York
                Enhanced Strategies have delegated certain management and administrative
                duties of such funds to JGD. In addition, JGD manages the Managed
                Accounts.




(5)
            Includes
                1,194,182 shares of common stock and seven year warrants to purchase
                26,122 shares of common stock at $24 per share. During 2008, the
                Kluge
                Trust transferred its ownership interest in the Company to JWK
                Enterprises, LLC, an entity affiliated with John W.
                Kluge.




(6)
            Based
                on information contained in the Schedule 13G (Amendment No. 1) filed
                with
                the Securities and Exchange Commission on March 12, 2008 by (i) Stonehill
                Capital Management LLC (“Stonehill Management”) as to 845,203 shares of
                common stock; (ii) Stonehill Institutional Partners, L.P. (“Stonehill
                Partners”) as to 412,301 shares of common stock; (iii) Stonehill Offshore
                Partners Limited (“Stonehill Offshore”) as to 432,902 shares of common
                stock; (iv) Stonehill Advisers LLC (“Stonehill Advisers”) as to 432,902
                shares of common stock; (v) Stonehill General Partner, LLC (“Stonehill
                GP”) as to 412,301 shares of common stock; (vi) John Motulsky (“Motulsky”)
                as to 845,203 shares of common stock; (vii) Christopher Wilson (“Wilson”)
                as to  845,203 shares of common stock; (viii) Wayne Teetsel
                (“Teetsel”) as to 845,203 shares of common stock; (ix) Thomas Varkey
                (“Varkey”) as to 845,203 shares of common stock and (x) Jonathan Sacks
                (“Sacks”) as to  845,203 shares of common stock. Stonehill
                Advisers is the investment adviser to Stonehill Offshore. Stonehill
                Management is the investment adviser to Stonehill Partners and Stonehill
                Offshore. Stonehill GP is the general partner of Stonehill Partners.
                Motulsky, Wilson, Teetsel, Varkey and Sacks are managing members
                of
                Stonehill GP, Stonehill Management and Stonehill
                Advisers.




(7)
            Includes
                fully vested options to purchase 3,000 shares of common stock and
                7,000
                shares underlying restricted stock units. Excludes 500 restricted
                stock
                units andoptions
                to purchase 1,000 shares of common stock granted September 8, 2008,
                which
                vest on the first anniversary of the date of
                grant.




(8)
            In
                accordance with FMA’s internal policy, all cash and non-cash compensation
                issued to Mr. Embler in connection with his service on the Board
                of
                Directors will be distributed directly to advisory clients of FMA
                when so
                available. See footnote(2)above.





(9)
            Includes
                28,825 shares underlying restricted stock units delivered on December
                28,
                2007, fully vested and exercisable options to purchase 20,000 shares
                of
                common stock and 20,000 restricted stock units granted on August
                7, 2007,
                which vested August 7, 2008. Excludes 50,000 restricted units granted
                September 8, 2008, of which 15,000 are scheduled to vest on the
                anniversary of the date of grant, 5,000 are scheduled to vest on
                the
                second anniversary of the date of grant and 30,000 are scheduled
                to vest
                on the third anniversary of the date of grant. Additionally, this
                amount
                excludes 21,000 restricted stock units that Mr. LaPerch may earn
                in 2010,
                2011 and 2012 based upon the achievement of certain performance targets.





(10)
            Includes
                23,707 shares underlying restricted stock units delivered on December
                28,
                2007, fully vested and exercisable options to purchase 16,500 shares
                of
                common stock and 10,000 restricted stock units granted on August
                7, 2007,
                which were originally scheduled to vest one year from the date of
                grant
                but were accelerated on March 4, 2008, when Mr. Doris’ employment contract
                was amended and terminated. See “Potential Payouts Upon Termination or
                Change of Control - Michael A.
                Doris.”





(11)
            Includes
                23,041 shares underlying restricted stock units delivered on December
                28,
                2007, fully vested and exercisable options to purchase 16,500 shares
                of
                common stock and 10,000 restricted stock units granted on August
                7, 2007,
                which vested August 7, 2008. Excludes 35,000 restricted stock units
                granted September 8, 2008, of which 10,500 are scheduled to vest
                on the
                first anniversary of the date of grant, 3,500 are scheduled to vest
                on the
                second anniversary of the date of grant and 21,000 are scheduled
                to vest
                on the third anniversary of the date of
                grant.





(12)
            Includes
                17,988 shares delivered on December 28, 2007, pursuant to vested
                restricted stock units, 5,996 shares delivered on June 1, 2008, pursuant
                to vested restricted stock units, fully vested and exercisable options
                to
                purchase 32,000 shares of common stock and 10,000 restricted stock
                units
                granted on August 7, 2007, which vested August 7, 2008. Excludes
                35,000
                restricted stock units granted September 8, 2008, of which 10,500
                are
                scheduled to vest on the first anniversary of the date of grant,
                3,500 are
                scheduled to vest on the second anniversary of the date of grant
                and
                21,000 are scheduled to vest on the third anniversary of the date
                of
                grant.





(13)
            Includes
                15,758 shares delivered on December 28, 2007, pursuant to vested
                restricted stock units, 1,081 shares delivered on May 13, 2008, pursuant
                to vested restricted stock units, fully vested and exercisable options
                to
                purchase 14,080 shares of common stock and 10,000 restricted stock
                units
                granted on August 7, 2007, which vested August 7, 2008. Excludes
                35,000
                restricted stock units granted September 8, 2008, of which 10,500
                are
                scheduled to vest on the first anniversary of the date of grant,
                3,500 are
                scheduled to vest on the second anniversary of the date of grant
                and
                21,000 are scheduled to vest on the third anniversary of the date
                of
                grant.





(14)
            Includes
                13,548 shares delivered on December 28, 2007, pursuant to vested
                restricted stock units, 1,441 shares delivered on May 13, 2008, pursuant
                to vested restricted stock units, fully vested and exercisable options
                to
                purchase 14,080 shares of common stock and 10,000 restricted stock
                units
                granted on August 7, 2007, which vested August 7, 2008. Excludes
                35,000
                restricted stock units granted September 8, 2008, of which 10,500
                are
                scheduled to vest on the first anniversary of the date of grant,
                3,500 are
                scheduled to vest on the second anniversary of the date of grant
                and
                21,000 are scheduled to vest on the third anniversary of the date
                of
                grant.





(15)
            Includes
                131,385 shares delivered on December 28, 2007, pursuant to vested
                restricted stock units, fully vested and exercisable options to purchase
                128,160 shares of common stock, 10,000 restricted stock units, which
                vested on March 4, 2008 upon Mr. Doris’ employment contract termination
                and 88,000 restricted stock units granted on August 7, 2007, which
                vested
                August 7, 2008. Excludes 190,000 restricted stock units granted September
                8, 2008, of which 57,000 are scheduled to vest on the first anniversary
                of
                the date of grant, 19,000 are scheduled to vest on the second anniversary
                of the date of grant and 114,000 are scheduled to vest on the third
                anniversary of the date of grant.




79







**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, 2007.




Plan
                category(1)
            
            Number of Securities to be
              Issued Upon Exercise of
              Outstanding Options and
              Restricted Stock Units (2)
            
            Weighted Average
              Exercise Price of
              Outstanding Options and
              Restricted Stock Units
                (2)
            
            Number of Securities Remaining
              Available for Future Issuance Under
              Equity Compensation Plan
              (Excluding Securities Reflected in the
              First Column)
                (3)Equity
                compensation plan approved by security holders
            
            
            —
            
            $
            —
            
            
            —Equity
                compensation plan not approved by security holders
            
            
            701,822
            
            
            27.48
            
            
            11,293Total
            
            
            701,822
            
            $
            27.48
            
            
            11,293





(1)
            Excludes
                shares availableunder the 2008 Equity Incentive Plan, described below.(2)
            Includes
              229,875 shares of common stock underlying restricted stock units. The
              weighted average exercise price does not take into account the shares
              to
              be delivered in connection with these outstanding restricted stock
              units,
              which have no exercise price.(3)
            Excludes
                warrants granted to creditors as part of settled bankruptcy claims,
                as
                follows:





Weighted Average
              Exercise Price
            
            Total Warrants
              Originally Issued
            
            Warrants Exercised as of
              December 31, 2007
            
            Unexercised Warrants
              Outstanding
              at December 31, 2007Five
                year stock purchase warrants
            
            $
            20.00
            
            
            709,459
            
            
            33,119
            
            
            676,340Seven
                year stock purchase warrants
            
            $
            24.00
            
            
            834,658
            
            
            29,097
            
            
            805,561





The
      above
      table does not take into consideration five year warrants to purchase 10 shares
      of common stock and seven year warrants to purchase 12 shares of common stock
      that were unclaimed and were cancelled at the conclusion of our bankruptcy
      case
      and five year warrants to purchase 25 shares of common stock that were
      cancelled in
      accordance with instructions from the warrant holder.





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 respective Warrant Agreements, 60 days prior to the expiration date of
      the
      respective warrants, was greater than the warrant exercise price, the Company
      was required to give each warrant holder notice that at the warrant expiration
      date, 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 elected, by written notice, to not exercise its
      warrants. Under the Net Exercise, shares issued to the warrant holders would
      be
      reduced by the number of shares necessary to cover the aggregate exercise price
      of the shares, valuing such shares at the current market price, as defined
      in
      the Warrant Agreements. Any fractional shares, otherwise issuable, would be
      paid
      in cash. The expiration date for the five year warrants was September 8, 2008.
      Accordingly, five year warrants to purchase 158,874 shares of common stock
      were
      deemed exercised pursuant to the Net Exercise, of which 106,456 shares were
      issued to the warrant holders, 52,418 shares were returned to treasury and
      $4,295 was paid to recipients for fractional shares. In addition, five year
      warrants to purchase 25 shares of common stock were cancelled in accordance
      with
      instructions from the warrant holder.





***Adoption
      of 2008 Equity Incentive Plan***




On
      August
      29, 2008, the Board of Directors of the Company approved the Company’s 2008
      Equity Incentive Plan (the “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. 750,000
      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.





**ITEM
      13.**  **CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE**




**Independence
      of the Board of Directors**




The
      NASDAQ **** Market
      Place Rules 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. While we are not currently listed on NASDAQ, the Board
      nevertheless consults with the our counsel to ensure that the Board’s
      determinations are consistent with relevant securities and other laws and
      regulations regarding the definition of “independent,” including those set forth
      in pertinent listing standards of the NASDAQ Market Place Rules, as in effect
      from time to time.





Consistent
      with these considerations, 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 NASDAQ **** Market
      Place Rules listing standards: Jeff 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 not **** an **** independent
      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. 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 and $274,557 in 2007. 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.


80





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.





**ITEM
      14.**  **PRINCIPAL
      ACCOUNTANT FEES AND SERVICES**




Aggregate
      fees billed for professional services rendered for the Company by BDO Seidman,
      LLP through August 31, 2008 for each of the years ended December 31,
      2007 and 2006 were:




**2007**
            
            **2006**Audit
                Fees
            
            $
            1,180,465
            
            $
            3,800,802Audit
                Related Fees
            
            
            —
            
            
            —Tax
                Fees
            
            
            —
            
            
            412,030All
                Other Fees
            
            
            1,500
            
            
            12,850Total
            
            $
            1,181,965
            
            $
            4,225,682





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 2008 is for services rendered through
      August 31, 2008.




**Year
                Incurred****2008**
            
            **2007**
            
            **2006**
            
            **Total**Audit
                Fees 2003 - 2005
            
            $
            —
            
            $
            3,891,443
            
            $
            1,955,490
            
            $
            5,846,933Audit
                Fees 2006
            
            
            1,835,720
            
            
            1,772,182
            
            
            192,900
            
            
            3,800,802Audit
                Fees 2007
            
            
            860,465
            
            
            320,000
            
            
            —
            
            
            1,180,465Tax
                Fees
            
            
            —
            
            
            388,930
            
            
            23,100
            
            
            412,030All
                Other Fees
            
            
            1,500
            
            
            10,850
            
            
            2,000
            
            
            14,350Total
            
            $
            2,697,685
            
            $
            6,383,405
            
            $
            2,173,490
            
            $
            11,254,580





***Audit
      Fees.*** As
      discussed in Item 9, “Changes In and Disagreements With Accountants on
      Accounting and Financial Disclosure,” in August 2006, BDO Seidman, LLP (“BDO”)
      was engaged to audit the Company’s financial statements as of December 31, 2006,
      2005, 2004 and 2003 and for each of the fiscal years ended December 31, 2006,
      2005, 2004 and for the period from September 8, 2003 to December 31, 2003.
      In
      May 2008, BDO was engaged to audit the Company’s financial statements as of and
      for the year ended December 31, 2007. The Audit Fees for the years ended
      December 31, 2007 and 2006, 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 years ended December 31, 2007
      and
      2006.





***Tax
      Fees.*** Tax Fees
      for the years ended December 31, 2007 and 2006 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.





***All
      Other Fees.*** These
      fees were for consulting services related to certain compensatory stock matters
      for the years ended December 31, 2007 and 2006. ****





***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, which 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.





All
      non-audit services were preapproved.


81





**PART
      IV**




**ITEM 15.
      EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**




**1.**
            **Financial
                Statements**





For
      a
      list of the financial statements of the Company included in this report, 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 September 29, 2008, 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
      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, LLPNew
                York, NYSeptember
                29, 2008




**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
                E****Balance at**
              **beginning**
              **of period**
            
            **Additions**
              **charged to**
              **costs and**
              **expenses**
            
            **Additions**
              **charged to**
              **other accounts**
            
            **Deductions**
            
            **Balance at**
              **end of**
              **period****2007**Reserve
                for uncollectible accounts and sales credits
            
            $
            1.2
            
            $
            0.5
            
            $
            —
            
            $
            (1.0
            )
            $
            0.7Deferred
                tax valuation allowance
            
            $
            809.6
            
            $
            —
            
            $
            —
            
            $
            (8.7
            )
            $
            800.9**2006**Reserve
                for uncollectible accounts and sales credits
            
            $
            1.8
            
            $
            0.5
            
            $
            —
            
            $
            (1.1
            )
            $
            1.2Deferred
                tax valuation allowance
            
            $
            729.2
            
            $
            80.4
            
            $
            —
            
            $
            —
            
            $
            809.6**2005**Reserve
                for uncollectible accounts and sales credits
            
            $
            1.3
            
            $
            0.3
            
            $
            0.2
            
            $
            —
            
            $
            1.8Deferred
                tax valuation allowance
            
            $
            757.4
            
            $
            —
            
            $
            —
            
            $
            (28.2
            )
            $
            729.2





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**





**Exhibit No.**
            
            **Description
                of Exhibit**3.1
            
            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).




82




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).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.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).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).




83





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).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).




84





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).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 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).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.10.52
            *
            Stock
                Unit Agreement dated as of September 8, 2008, by and between AboveNet,
                Inc. and William LaPerch.10.53
            *
            Stock
                Unit Agreement dated as of September 8, 2008, by and between AboveNet,
                Inc. and Robert Sokota.10.54
            *
            Stock
                Unit Agreement dated as of September 8, 2008, by and between AboveNet,
                Inc. and John Jacquay.10.55
            *
            Stock
                Unit Agreement dated as of September 8, 2008, by and between AboveNet,
                Inc. and Rajiv Datta.10.56
            *
            Stock
                Unit Agreement dated as of September 8, 2008, by and between AboveNet,
                Inc. and Doug Jendras.




85





10.57
            *
            Stock
                Unit Agreement dated as of September 8, 2008, by and between AboveNet,
                Inc. and Jeffrey Brodsky.10.58
            *
            Stock
                Unit Agreement dated as of September 8, 2008, by and between AboveNet,
                Inc. and Michael Embler.10.59
            *
            Stock
                Unit Agreement dated as of September 8, 2008, by and between AboveNet,
                Inc. and Richard Postma.10.60
            *
            Stock
                Unit Agreement dated as of September 8, 2008, by and between AboveNet,
                Inc. and Richard Shorten, Jr.10.61
            *
            Stock
                Unit Agreement dated as of September 8, 2008, by and between AboveNet,
                Inc. and Stuart Subotnick.10.62
            *
            Stock
                Option Agreement dated as of September 8, 2008, by and between AboveNet,
                Inc. and Jeffrey Brodsky.10.63
            *
            Stock
                Option Agreement dated as of September 8, 2008, by and between AboveNet,
                Inc. and Michael Embler.10.64
            *
            Stock
                Option Agreement dated as of September 8, 2008, by and between AboveNet,
                Inc. and Richard Postma.10.65
            *
            Stock
                Option Agreement dated as of September 8, 2008, by and between AboveNet,
                Inc. and Richard Shorten, Jr.10.66
            *
            Stock
                Option Agreement dated as of September 8, 2008, by and between AboveNet,
                Inc. and Stuart Subotnick.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.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.16.1
            
            Letter
                from KPMG LLP to the Securities and Exchange Commission dated August
                18,
                2006 (incorporated by reference from Form 8-K dated August 17, 2006
                and
                filed with the Securities and Exchange Commission on August 23,
                2006).21.1
            
            Subsidiaries.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.


86





**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:
                September 29, 2008
            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:
                September 29, 2008
            By:
            /s/
                William G. LaPerchWilliam
                G. LaPerch
              President,
                Chief Executive Officer and Director
              (Principal
                Executive Officer)




Date:
                  September 29, 2008
            By:
            /s/
                Joseph P. CiavarellaJoseph
                P. Ciavarella
              Acting
                Chief Financial Officer
              (Principal
                Financial and Accounting Officer)




Date:
                  September 29, 2008
            By:
            /s/
                Jeffrey BrodskyJeffrey
                Brodsky
              Director




Date:
                  September 29, 2008
            By:
            /s/
                Michael J. EmblerMichael
                J. Embler
              Director




Date:
                  September 29, 2008
            By:
            /s/
                Richard PostmaRichard
                Postma
              Director




Date:
                  September 29, 2008
            By:
            /s/
                Richard Shorten, Jr.Richard
                Shorten, Jr.
              Director




Date:
                  September 29, 2008
            By:
            /s/
                Stuart SubotnickStuart
                Subotnick
              Director




87


**EXHIBIT
      LIST**





**Exhibit No.**
            
            **Description
                of Exhibit**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.10.51
            *
            Stock
                Unit Agreement dated as of September 8, 2008, by and between AboveNet,
                Inc. and William LaPerch.10.52
            *
            Stock
                Unit Agreement dated as of September 8, 2008, by and between AboveNet,
                Inc. and William LaPerch.10.53
            *
            Stock
                Unit Agreement dated as of September 8, 2008, by and between AboveNet,
                Inc. and Robert Sokota.10.54
            *
            Stock
                Unit Agreement dated as of September 8, 2008, by and between AboveNet,
                Inc. and John Jacquay.10.55
            *
            Stock
                Unit Agreement dated as of September 8, 2008, by and between AboveNet,
                Inc. and Rajiv Datta.10.56
            *
            Stock
                Unit Agreement dated as of September 8, 2008, by and between AboveNet,
                Inc. and Doug Jendras.10.57
            *
            Stock
                Unit Agreement dated as of September 8, 2008, by and between AboveNet,
                Inc. and Jeffrey Brodsky.10.58
            *
            Stock
                Unit Agreement dated as of September 8, 2008, by and between AboveNet,
                Inc. and Michael Embler.10.59
            *
            Stock
                Unit Agreement dated as of September 8, 2008, by and between AboveNet,
                Inc. and Richard Postma.10.60
            *
            Stock
                Unit Agreement dated as of September 8, 2008, by and between AboveNet,
                Inc. and Richard Shorten, Jr.10.61
            *
            Stock
                Unit Agreement dated as of September 8, 2008, by and between AboveNet,
                Inc. and Stuart Subotnick.10.62
            *
            Stock
                Option Agreement dated as of September 8, 2008, by and between AboveNet,
                Inc. and Jeffrey Brodsky.10.63
            *
            Stock
                Option Agreement dated as of September 8, 2008, by and between AboveNet,
                Inc. and Michael Embler.10.64
            *
            Stock
                Option Agreement dated as of September 8, 2008, by and between AboveNet,
                Inc. and Richard Postma.10.65
            *
            Stock
                Option Agreement dated as of September 8, 2008, by and between AboveNet,
                Inc. and Richard Shorten, Jr.10.66
            *
            Stock
                Option Agreement dated as of September 8, 2008, by and between AboveNet,
                Inc. and Stuart Subotnick.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.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.




21.1
            
            Subsidiaries.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.