**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, 2006**




**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**
            
            **13-3982836****(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 ̈
            Smaller
                reporting company ̈(Do
                not check if a small 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, 2006 was approximately $350
      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 April 30, 2008, was  **10,700,592** .





**DOCUMENTS
      INCORPORATED BY REFERENCE:** NOT
      APPLICABLE







**ABOVENET,
      INC.**




**For
      The Year Ended December 31, 2006**




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
                17Item
                    7.
                Management’s
                    Discussion and Analysis of Financial Condition and Results of
                    Operations
                19Item
                    7A.
                Quantitative
                    and Qualitative Disclosures about Market Risk
                29Item
                    8.
                Financial
                    Statements and Supplementary Data
                30Item
                    9.
                Changes
                    in and Disagreements with Accountants on Accounting and Financial
                    Disclosure
                54Item
                    9A.
                Controls
                    and Procedures
                54Item
                    9B.
                Other
                    Information
                56**Part
                    III.**Item
                    10.
                Directors,
                    Executive Officers and Corporate Governance
                57Item
                    11.
                Executive
                    Compensation
                60Item
                    12.
                Security
                    Ownership of Certain Beneficial Owners and Management and Related
                    Stockholder Matters
                72Item
                    13.
                Certain
                    Relationships and Related Transactions, and Director
                    Independence
                74Item
                    14.
                Principal
                    Accountant Fees and Services
                74**Part
                    IV.**Item
                    15.
                Exhibits
                    and Financial Statement Schedules
                76Signatures
                80
  
 **PART
          I**
 
 **EXPLANATORY
          NOTE**
  This
          Annual Report on Form 10-K is for the fiscal year ended December 31, 2006.
          Although we are required by the rules of the Securities and Exchange Commission
          to include selected financial information in Item 6 below for the year
          ended
          December 31, 2002 and 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 500 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 and 2006.
 
 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. This report is included in Item 8, “Financial
          Statements and Supplementary Data,” included elsewhere in this Annual Report on
          Form 10-K.
 
 **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 approximately 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 into our metro networks. These laterals represent an incremental
          footprint of 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 125 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 25 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 over1,400on-net buildings that we connect to with our own fiber laterals,
                    we have
                    access to approximately 1,600 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, which include
          Basic and
          Enhanced Wave services, as well as the Metro Ethernet product, are also
          based on
          a dedicated, private fiber infrastructure from end-to-end, but provide
          lower
          cost and lower capacity solutions to customers.
 
 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
          result 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 over 47 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,****2006**
                
                **2005**
                
                **2004**RevenueUnited
                    States
                
                $
                217.6
                
                $
                204.1
                
                $
                174.9United
                    Kingdom
                
                
                20.3
                
                
                16.4
                
                
                13.6Other
                
                
                0.5
                
                
                0.7
                
                
                1.6Eliminations
                
                
                (1.7
                )
                
                (1.5
                )
                
                (0.8
                )Consolidated
                    Worldwide
                
                $
                236.7
                
                $
                219.7
                
                $
                189.3
 
 **December 31,****2006**
                
                **2005**Long-lived
                    assetsUnited
                    States
                
                $
                272.0
                
                $
                284.3United
                    Kingdom
                
                
                27.0
                
                
                20.6Other
                
                
                0.2
                
                
                0.3Consolidated
                    Worldwide
                
                $
                299.2
                
                $
                305.2
  See
          Item
          7, “Management's Discussion and Analysis of Financial Condition and Results
          of
          Operations – Segment
          Results,”
and Note 14, “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 two 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, 2005, we
          had a
          total of 519 employees, of which 454 were employed in the U.S., 63 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. Approximately 40 former U.S. based employees
          were retained by the purchasers of our data centers in connection with
          the sale
          of these data centers in the fourth quarter of 2006. 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. 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
          for all financial statement periods presented. 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.
  6
 *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.
 
 *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 revenues 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.
  7
 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 revenues 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.
 
 ***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.
 
 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.
  8
 *Central
          Office* - a
          facility used to house telecommunications equipment (e.g. switching equipment)
          that is used to make connections between the local loops (local
          distribution network) in the vicinity of the facility to regional or
          long distance telecommunications facilities. Central Offices are typically
          operated by the ILEC.
 
 *CLEC* - this
          is an acronym for “competitive local exchange carrier,” a carrier providing
          telecommunications services in competition with the ILEC.
 
 *Co-location* - the
          placement of equipment in a telecommunications POP, data center or central
          office.
 
 *Data
          Center* -
          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.
  9
 *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.
 
 *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 toreach 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 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, we have filed Current Reports on Form 8-K to
          report
          certain events, including one dated February 29, 2008, which reported the
          audited consolidated financial statements as of December 31, 2006 and 2005
          and
          for the years ended December 31, 2006, 2005 and 2004, and one dated August
          4,
          2007, which reported the audited consolidated financial statements as of
          December 31, 2005, 2004 and 2003 and for the years ended December 31, 2005
          and
          2004 and for the period from September 8, 2003 to December 31, 2003. 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.
  10
 ***We
          are not in compliance with our reporting obligations under the Securities
          Exchange Act of 1934.***
  We
          have
          not made any 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 2006 would include selected financial information for 2002 and 2003.
          Because
          of a lack of historical records, we have not provided selected financial
          information for 2002 or 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.
 
 ***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 is referred to as
          termination revenue. Termination revenue amounted to $8.3 million, $12.1
          million
          and $2.9 million in 2006, 2005 and 2004, respectively. This revenue is
          not
          predictable and may not be sustainable.
 
 ***We
          have 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
          historically incurred net losses. Although in 2006, we generated net income,
          principally from the sale of our remaining data centers, we cannot assure
          you
          that we will continue to do so in the future.
 
 In
          order
          for us to continue to generate positive operating cash flow and achieve
          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 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. See Item 7, “Management’s Discussion and
          Analysis of Financial Condition and Results of Operations - Liquidity and
          Capital Resources,” and Note 15, “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 bears interest at short-term LIBOR or at the
          administrative agent's base rate at our discretion, plus the applicable
          margins,
          as defined. If interest rates increase, our interest expense will also
          increase.
          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 cash
          reserves and, potentially, additional equity or debt financings to meet
          our cash
          needs. Our future capital requirements may increase if we acquire or invest
          in
          additional businesses, assets, services or technologies. 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.
 
 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.
  11
 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, 2006, 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.
 
 ***Pricing
          pressures continue to cause prices for some of our services to
          decline.***
  The
          telecommunications industry is highly competitive and prices have generally
          declined for many services over the past several years. We anticipate that
          prices for certain telecommunications services such as IP bandwidth will
          continue to decline due to a number of factors including: (i) 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 (ii) technological advances that permit
          substantial increases in the transmission capacity of many of our competitors’
networks.
 
 ***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.
          We
          have substantially committed all shares available under the 2003 Stock
          Incentive
          Plan and as a result, currently, have limited ability to use equity compensation
          to retain or attract employees. While we are considering our alternatives,
          the
          lack of shares under our stock incentive plan could limit our ability to
          retain
          and attract employees.
 
 ***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, 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.
  12
 ***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.
 
 ***Customer
          agreements contain service level and delivery obligations that could subject
          us
          to liability or the loss of revenues.***
  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 have 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.
 13
 ***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.
 
 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
          April 30, 2008, two stockholders affiliated with certain of our directors
          beneficially owned in the aggregate approximately 33.7% of our outstanding
          common stock and our executive officers and directors, as a group, beneficially
          owned approximately 2.5% 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 thirteen years (as of December 31, 2006), 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.
 
 As
          of
          December 31, 2006, we conducted our business in the U.S. through 109 operating
          leases totaling approximately 518,000 rentable square feet. We do not own
          any of
          the 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.
  14
 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.
 
 We
          are a
          party to a fiber lease agreement with SBC Telecom, Inc. (“SBC”), a subsidiary of
          AT&T, pursuant to which we believe that SBC was obligated to lease
          40,000 fiber miles of fiber, reducible to 30,000 under certain circumstances,
          for a term of 20 years at a price set forth in the agreement. 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.
 
 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.
          Additional portions of the disputed duct and fiber were constructed and
          delivered after February 2008. We will be required
          to construct the balance of the disputed duct and fiber and deliver it
          to GVN in
          2008 pursuant to a schedule ordered by the court. ACUK has certain repair
          and
          maintenance obligations that it must perform with respect to such duct.
          GVN is
          also seeking to enforce an option requiring ACUK to construct 180 to 200
          chambers for GVN along the network. There is a dispute regarding the scope
          of
          this obligation that will be decided separately through an arbitration
          proceeding. Regardless of the outcome of the arbitration, we believe that
          our
          costs to perform the construction under the option will exceed the option
          price
          payable by GVN. We are also liable for a significant portion of GVN’s legal
          expenses incurred as a result of the legal dispute, $1.1 million USD of
          which
          has been paid. In addition, the court has scheduled a trial for June 2008
          to determine the extent of the damages for which ACUK will be liable. We
          believe
          that the court has ruled that the amount of such damages should be limited
          to
          the purchase price of the duct and fiber of $3.5 million USD and that GVN
          cannot
          recover certain types of damages excluded by the Duct Purchase Agreement.
          GVN
          has alleged damages of ₤4.9 million British pounds sterling by arguing that
          there is no liability limitation with respect to the fiber lease, and including
          interest and changes in exchange rates. Although we cannot determine the
          precise
          amount of the damages that ACUK will be required to pay or the costs it
          will
          incur in paying GVN’s legal fees or performing the required
          construction, repair or maintenance, we believe that the amounts will
          be material. Such expenses will be accrued at December 31, 2007 and
          included in our 2007 operating results.
 
 **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 2006 and 2005.
 
 **Year
                    ended December 31, 2006**
                
                **High**
                
                **Low**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**Year
                    ended December 31, 2005**First
                    Quarter Ended March 31, 2005
                
                $
                36.00
                
                $
                29.00Second
                    Quarter Ended June 30, 2005
                
                $
                33.00
                
                $
                24.50Third
                    Quarter Ended September 30, 2005
                
                $
                32.50
                
                $
                20.00Fourth
                    Quarter Ended December 31, 2005
                
                $
                28.50
                
                $
                23.00
  There
          were 1,057 and 933 stockholders of record of AboveNet’s common stock on December
          31, 2007 and 2006, respectively.
  ***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
          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 stock purchase warrants, exercisable
          at a
          price of $20 per share, of which warrants to purchase 6,712 shares of common
          stock had been exercised as of December 31, 2006, and 834,658 shares of
          common
          stock were reserved for issuance upon the exercise of the seven year stock
          purchase warrants, exercisable at a price of $24 per share, of which warrants
          to
          purchase 6,563 shares of common stock had been exercised as of December
          31,
          2006.
 
 ***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.
 
 ***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, 2006.
  Plan
                    category
                
                Number
                    of Securities to be Issued Upon Exercise of Outstanding Options
                    and
                    Restricted Stock Units(1)
                
                Weighted
                    Average Exercise Price of Outstanding Options and Restricted
                    Stock
                    Units(1)
                
                Number
                    of Securities Remaining Available for Future Issuance Under
                  Equity
                    Compensation Plan (Excluding Securities Reflected in the First
                    Column)(2)Equity
                    compensation plan approved by security holders
                
                
                —
                
                $
                —
                
                
                —Equity
                    compensation plan not approved by security holders
                
                
                865,111
                
                
                26.41
                
                
                158,723Total
                
                
                865,111
                
                $
                26.41
                
                
                158,723
 
 (1)
                Includes
                    387,594 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.(2)
                The
                    above table excludes warrants granted to creditors as part of
                    settled
                    bankruptcy claims, as follows:
 
 Weighted
                    Average
                  Exercise
                    Price
                
                Total
                    Warrants Issued
                
                Warrants
                    Exercised as of December 31, 2006
                
                Unexercised
                    Warrants Outstanding
                  at
                    December 31, 2006Five
                    year stock purchase warrants
                
                $
                20.00
                
                
                709,459
                
                
                6,712
                
                
                702,747Seven
                    year stock purchase warrants
                
                $
                24.00
                
                
                834,658
                
                
                6,563
                
                
                828,095
  16
 **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, 2006. 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****AboveNet,
                    Inc.**
                
                $
                100
                
                $
                107
                
                $
                91
                
                $
                81
                
                $
                171**NASDAQ
                    (U.S.)**
                
                
                100
                
                
                102
                
                
                111
                
                
                113
                
                
                123**Russell
                    2000 Index**
                
                
                100
                
                
                102
                
                
                120
                
                
                123
                
                
                144
 
 **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, 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 year ended December 31, 2002 and for the period from
          January
          1, 2003 to September 7, 2003, which periods preceded our emergence from
          bankruptcy, because we lack certain records necessary to include the proper
          information. The historical financial data as of December 31, 2006 and 2005
          and for the years ended December 31, 2006, 2005 and 2004, 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 its 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.
 17
 (In
          millions, except share and per share information)
 **Years
                    Ended December 31,**
                
                **Period
                    from September 8, 2003**
                  **to
                    December 31,****2006**
                
                **2005**
                
                **2004**
                
                **2003****Statements
                    of Operations data:**Revenue
                
                $
                236.7
                
                $
                219.7
                
                $
                189.3
                
                $
                59.6Costs
                    of revenue
                
                
                121.9
                
                
                119.2
                
                
                112.2
                
                
                36.9Selling,
                    general and administrative expenses
                
                
                71.1
                
                
                69.6
                
                
                71.7
                
                
                32.6Depreciation
                    and amortization
                
                
                47.2
                
                
                43.1
                
                
                40.8
                
                
                13.0Operating
                    loss
                
                
                (3.5
                )
                
                (12.2
                )
                
                (35.4
                )
                
                (22.9
                )Gain
                    (loss) on sales of data centers
                
                
                48.2
                
                
                (1.3
                )
                
                —
                
                
                —Interest
                    income
                
                
                2.4
                
                
                1.3
                
                
                1.1
                
                
                0.5Interest
                    expense
                
                
                (5.8
                )
                
                (5.9
                )
                
                (11.1
                )
                
                (4.9
                )Other
                    income, net
                
                
                2.1
                
                
                10.9
                
                
                9.2
                
                
                1.4Income
                    (loss) from continuing operations before income taxes
                
                
                43.4
                
                
                (7.2
                )
                
                (36.2
                )
                
                (25.9
                )Provision
                    for income taxes
                
                
                —
                
                
                0.4
                
                
                0.5
                
                
                0.3Income
                    (loss) from continuing operations
                
                
                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)
                
                $
                46.4
                
                $
                (8.4
                )
                $
                (37.8
                )
                $
                (26.5
                )Income
                    (loss) per share, basic:Income
                    (loss) per share from continuing operations
                
                $
                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
                
                $
                4.35
                
                $
                (0.79
                )
                $
                (3.58
                )
                $
                (2.52
                )Shares
                    used in computing basic income (loss) per share
                
                
                10,669,365
                
                
                10,596,244
                
                
                10,550,249
                
                
                10,499,961Income
                    (loss) per share, diluted:Income
                    (loss) per share from continuing operations
                
                $
                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
                
                $
                3.94
                
                $
                (0.79
                )
                $
                (3.58
                )
                $
                (2.52
                )Shares
                    used in computing diluted income (loss) per share
                
                
                11,794,279
                
                
                10,596,244
                
                
                10,550,249
                
                
                10,499,961
  **At
                    December 31,****2006**
                
                **2005**
                
                **2004**
                
                **2003****Balance
                    Sheet data:**Cash
                    and cash equivalents
                
                $
                70.7
                
                $
                45.9
                
                $
                45.3
                
                $
                105.1Working
                    capital (deficit)
                
                
                17.4
                
                
                (5.8
                )
                
                (4.0
                )
                
                70.8Property
                    and equipment, net
                
                
                299.2
                
                
                305.2
                
                
                312.3
                
                
                328.6Total
                    assets
                
                
                407.7
                
                
                385.0
                
                
                400.2
                
                
                499.0Long-term
                    debt(*)
                
                
                1.5
                
                
                1.6
                
                
                1.8
                
                
                71.9Total
                    shareholders’ equity
                
                
                217.9
                
                
                166.9
                
                
                170.9
                
                
                203.6
 
 (*)
                At
                    December 31, 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,****2006**
                
                **2005**
                
                **2004**
                
                **2003****Cash
                    flow data:**Net
                    cash provided by (used in) operating activities
                
                $
                51.3
                
                $
                43.6
                
                $
                25.8
                
                $
                (8.1
                )Net
                    cash used in investing activities
                
                
                (27.2
                )
                
                (42.0
                )
                
                (23.0
                )
                
                (8.5
                )Net
                    cash (used in) provided by financing activities
                
                
                (1.0
                )
                
                (1.1
                )
                
                (62.5
                )
                
                41.8
  18
 **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 (loss) income are revenue, costs of revenue,
          selling
          and general and administrative expenses and depreciation and amortization.
          Below
          is a description of these components. We are reporting an operating loss
          for all
          periods presented in our consolidated financial statements 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 capital committed and expended.
 
 Some
          of
          the most important non-financial 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.
          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.
  ***2006
          Highlights***
  Our
          consolidated revenues increased in 2006 by $17.0 million, compared to 2005
          due
          principally to the growth of our metro transport services, which increased
          by
          $13.3 million in 2006, compared to 2005. This was partially offset by the
          reduction in revenue due to the sale of our data center business in the
          fourth
          quarter of 2006. We had a full year of revenue from our data center businesses
          in 2005.
  During
          2006, we generated net income of $46.4 million and at December 31, 2006 we
          had $70.7 million of unrestricted cash, compared to $45.9 million of
          unrestricted cash at December 31, 2005, an increase in liquidity of $24.8
          million. This increase was attributable primarily to cash generated from
          operating activities of $51.3 million, and the proceeds generated from
          sales of
          property and equipment of $43.2 million, primarily related to the sale
          of our domestic data centers, offset by capital expenditures of $71.7
          million.
 
 ***2007
          and 2008 Outlook***
  In
          2007,
          our revenue increased compared to 2006. Because a large percentage of our
          costs
          are fixed and we were able to increase our revenues, our costs grew at
          a slower
          rate than our revenues, which resulted in improved operating results. However,
          these improved operating results will be negatively impacted by the recognition
          of the loss resulting from the GVN litigation. See Item 3, “Legal Proceedings,” and
          Note
          15, “Subsequent Events - Litigation,” to
          the
          accompanying consolidated financial statements included elsewhere in this
          Annual
          Report on Form 10-K.
  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. We believe,
          based on
          our business plan, that unrestricted cash on hand, in conjunction with
          availability under the credit facility we consummated on February 29, 2008,
          will
          provide us with the liquidity needed to fund our operations (including
          the
          liability arising out of the GVN litigation) at least through the second
          quarter
          of 2009. See below in this Item 7 under, “Liquidity and Capital Resources,” for
          further information related to the credit facility.
  ***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
          telecommunications service. 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 includes 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.
  19
 ***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 for income taxes), including property taxes on owned
          real estate 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,
          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.
 
 ***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
          estimate 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 determine 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.
  20
 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 2006, 2005 and
          2004, 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 $8.3 million, $12.1 million
          and $2.9
          million in 2006, 2005 and 2004, 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 reclassified to property and equipment at the date
          the
          project is complete. 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 $5.1 million, $4.7
          million
          and $3.8 million for the years ended December 31, 2006, 2005 and 2004,
          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
                
                37.5
                    yearsNetwork
                    infrastructure assets
                
                20
                    yearsSoftware
                    and computer equipment
                
                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).
 
 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
          a
“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 $8.9 million, $2.0 million and
          $0.8
          million for the years ended December 31, 2006, 2005 and 2004, respectively.
          We fully depreciated the remaining carrying value of the network infrastructure
          rendered unusable amounting to $1.6 million, $0.4 million and $0.1 million,
          on
          an original cost basis, for the years ended December 31, 2006, 2005 and
          2004,
          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. No impairment losses were recorded for the years ended
          December 31, 2006, 2005 and 2004.
 
 ***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
          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.
  21
 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 $5.6
          million and $5.4 million at December 31, 2006 and 2005, respectively, of
          which for both years $3.1 million was included in “Accrued expenses,” and $2.5
          million and $2.3 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, 2006,
          2005 and 2004.
 
 ***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 loss. Our foreign exchange transaction gains
          (losses) are generally included in “other income” in the consolidated statements
          of operations.
 
 ***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 all of the 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 ).
 
 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,****2006**
                
                **2005**
                
                **2004**Dividend
                    yield
                
                
                —
                
                
                —
                
                
                —Expected
                    volatility
                
                
                80.00
                %
                
                80.00
                %
                
                80.00
                %Risk-free
                    interest rate
                
                
                4.89
                %
                
                3.99
                %
                
                3.61
                %Expected
                    life (years)
                
                
                5.00
                
                
                4.00
                
                
                4.00Weighted
                    average fair value of options granted
                
                $
                31.16
                
                $
                16.25
                
                $
                21.11
 
 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.
  22
 **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*
 
 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 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 was $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 costs 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 costs 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.
  23
 ***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.
 
 ***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.
  ***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 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 loss from discontinued
          operations, net of taxes, in all periods presented.
 
 **Results
          of Operations for the Year Ended December 31, 2005 Compared to the Year
          Ended December 31, 2004**
  ***Consolidated
          Results (in millions):***
 **Years
                    Ended December 31,****2005**
                
                **2004**
                
                **$
                    Increase/**
                  **(Decrease)**
                
                **%
                    Increase/**
                  **(Decrease)**Revenue
                
                $
                219.7
                
                $
                189.3
                
                $
                30.4
                
                
                16.1
                %Costs
                    of revenue (excluding depreciation and amortization, shown separately
                    below)
                
                
                119.2
                
                
                112.2
                
                
                7.0
                
                
                6.2
                %Selling,
                    general and administrative expense
                
                
                69.6
                
                
                71.7
                
                
                (2.1
                )
                
                (2.9
                )%Depreciation
                    and amortization
                
                
                43.1
                
                
                40.8
                
                
                2.3
                
                
                5.6
                %Operating
                    loss
                
                
                (12.2
                )
                
                (35.4
                )
                
                23.2
                
                
                65.5
                %Other
                    income (expense):Loss
                    on sales of data centers
                
                
                (1.3
                )
                
                —
                
                
                (1.3
                )
                
                NMInterest
                    income
                
                
                1.3
                
                
                1.1
                
                
                0.2
                
                
                18.2
                %Interest
                    expense
                
                
                (5.9
                )
                
                (11.1
                )
                
                5.2
                
                
                46.8
                %Other
                    income, net
                
                
                10.9
                
                
                9.2
                
                
                1.7
                
                
                18.5
                %Loss
                    from continuing operations before reorganization items
                
                
                (7.2
                )
                
                (36.2
                )
                
                29.0
                
                
                80.1
                %Provision
                    for income taxes
                
                
                0.4
                
                
                0.5
                
                
                (0.1
                )
                
                (20.0
                )%Loss
                    from continuing operations before income taxes
                
                
                (7.6
                )
                
                (36.7
                )
                
                29.1
                
                
                79.3
                %Loss
                    from discontinued operations, net of taxes
                
                
                (0.8
                )
                
                (1.1
                )
                
                0.3
                
                
                27.3
                %Net
                    loss
                
                $
                (8.4
                )
                $
                (37.8
                )
                $
                29.4
                
                
                77.8
                %
  *NM—not
          meaningful*
 
 ***Revenue.*** **** ****** Consolidated
          revenue in 2005 was $219.7 million, compared to $189.3 million in 2004,
          an
          increase of $30.4 million, or 16.1%. Revenue from our U.S. operations increased
          by $29.2 million, or 16.7%, from $174.9 million in 2004 to $204.1 million
          in
          2005. This was primarily attributable to an increase in fiber services
          revenue
          of $9.9 million, or 9.9%, an increase in metro transport services of $3.5
          million, or 30.7%, an increase in data center revenues of $4.9 million,
          or
          20.3%, and an increase in IP revenue of $0.9 million, or 4.1%. Additionally,
          termination revenue increased $9.2 million, from $2.9 million in 2004 to
          $12.1
          million in 2005, primarily as the result of settlements received from former
          customers. These increases were offset by a decrease in managed services
          of $2.1
          million, or 35.6%, which resulted from a reduced focus in that business.
          Revenue
          from our foreign operations, primarily in the U.K., increased by $1.2 million,
          or 8.3%, from $14.4 million in 2004 to $15.6 million in 2005 due
          primarily to our focus on our core business and strategic investment in
          infrastructure.
 
 ***Costs
          of revenue.*** **** Consolidated costs of revenue in 2005 was $119.2 million ,
          compared to $112.2 million in
          2004,
          an increase of $7.0 million ,
          or
          6.2%. Consolidated costs of revenue as a percentage of revenue was 54.3%
          in
          2005, compared to 59.3% in 2004, resulting in consolidated gross profit
          margin
          of 45.7% and 40.7% in 2005 and 2004, respectively. The costs of revenue
          for our
          U.S. operations was $112.4 million and $102.2 million in 2005 and 2004,
          respectively, an increase of $10.2 million, or 10.0%. The costs of revenue
          for
          our foreign operations was $6.8 million and $10.0 million in 2005 and 2004,
          respectively, a decrease of $3.2 million, or 32.0%. The increase in consolidated
          gross profit margin was attributable to improved efficiencies as we continued
          to
          bring our variable expenses in line with our level of operations. 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 2005
          compared to 2004.
 
 ***SG&A.*** Consolidated SG&A in 2005 was $69.6 million ,
          compared to $71.7 million in
          2004,
          a decrease of $2.1 million ,
          or
          2.9%. SG&A as a percentage of revenue was 31.7% in 2005, compared to 37.9%
          in 2004. In the U.S., SG&A was $63.1 million in 2005, compared to $65.0
          million in 2004, a decrease of $1.9 million, or 2.9%. The decrease in SG&A
          from our U.S. operations in 2005 compared to 2004 was primarily attributable
          to
          (i) a decrease in insurance premiums of $2.9 million; (ii) a decrease in
          payroll
          and payroll related expenses of $1.7 million; (iii) a decrease in domestic
          transaction taxes of $1.4 million; and (iv) a decrease in legal fees of
          $1.1
          million. These decreases were substantially offset by (i) an increase in
          commission expense of $3.8 million; and (ii) an increase in audit fees
          of $1.6
          million. SG&A for our foreign operations was $6.5 million and $6.7 million
          in 2005 and 2004, respectively, a decrease of $0.2 million, or
          3.0%.
  24
 ***Depreciation
          and amortization.*** **** Consolidated depreciation and amortization in 2005 was $43.1 million ,
          compared to $40.8 million in
          2004,
          an increase of $2.3 million ,
          or
          5.6%. Consolidated depreciation and amortization as a percentage of revenue
          was
          19.6% in 2005, compared to 21.6% in 2004. The increase in depreciation
          and
          amortization was attributable to the full year effect of depreciation expense
          associated with property and equipment added during 2004 and depreciation
          associated with additions purchased throughout 2005. This increase was
          partially
          offset by the elimination of depreciation expense associated with property
          and
          equipment sold or disposed of during 2004 and 2005.
 
 ***Interest
          income.*** Interest
          income, substantially all of which was earned in the U.S., increased from
          $1.1 million in
          2004
          to $1.3 million in
          2005.
          The increase of $0.2 million ,
          or
          18.2%, was due primarily to an increase in cash available for investing
          in
          short-term interest bearing investments.
 
 ***Interest
          expense.*** **** Interest
          expense, substantially all of which was incurred in the U.S., decreased
          from
          $11.1 million in
          2004
          to $5.9 million in
          2005.
          The decrease of $5.2 million ,
          or
          46.8%, resulted from two factors: (i) there was no interest expense incurred
          in
          2005 with respect to the Term Note, which was repaid in full on August
          10, 2004
          and thus was outstanding for part of 2004; and (ii) the reduction in interest
          expense incurred on the fair value deferred rent balance due to the sale
          of a
          data center during the first quarter of 2005, and the purchase of the land
          and
          building of a data center we operated, eliminating the related fair value
          deferred rent balance thus reducing the balance upon which interest expense
          was
          incurred, in the second quarter of 2005.
  ***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 $10.9 million in 2005, compared to $9.2 million in
          2004,
          an increase of $1.7 million, or 18.5%. In the U.S., other income, net was
          a net
          gain of $3.8 million in 2005, compared to a net gain of $8.1 million in
          2004, a
          decrease of $4.3 million, or 53.1%. For our foreign operations, other income,
          net was a net gain of $7.1 million in 2005, compared to a net gain of $1.1
          million in 2004, an increase of $6.0 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. In 2004, consolidated other income, net was
          comprised of the non-cash settlement of an obligation resulting in a gain
          of
          $7.5 million, a gain on foreign currency of $0.6 million and other gains
          totaling $1.1 million.
  ***Loss
          from discontinued operations, net of taxes.*** Upon
          our
          emergence from bankruptcy in September 2003, management decided to sell
          or
          dispose of certain of our European operations. Accordingly, we included
          the
          results of these operations, plus the gain or loss on the sale or liquidation
          of
          such entities, in loss from discontinued operations, net of taxes in the
          related
          statements of operations for all periods presented. Additionally, AboveNet
          (UK)
          was sold on November 15, 2006. The assets and liabilities, results of operations
          and cash flows of AboveNet (UK) were also treated as discontinued operations
          for
          all periods presented.
 
 **Liquidity
          and Capital Resources**
  Working
          capital at December 31, 2006 was $17.4 million, compared to $(5.8) million
          at
          December 31, 2005. Cash balances at December 31, 2006 were $70.7 million,
          compared to $45.9 million at December 31, 2005, an increase of $24.8 million.
          The increase in working capital at December 31, 2006 is attributable primarily
          to proceeds generated from sales of property and equipment totaling $43.2
          million, net cash generated by operating activities totaling $51.3 million,
          partially offset by cash payments for purchases of property and equipment
          of
          $71.7 million.
 
 Net
          cash
          provided by operating activities was $51.3 million in 2006, compared to
          $43.6
          million in 2005. 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. The net cash provided by operating activities in 2005 similarly
          resulted
          primarily from the add back of non-cash expenses deducted in the determination
          of net income, principally depreciation and amortization expense of $43.1
          million and stock-based compensation expense of $4.0 million, and an increase
          in
          deferred revenue and long-term liabilities of $8.7 million, partially offset
          by
          a non-cash gain on settlement of liabilities of $9.0 million and a gain
          on a
          leased asset termination of $3.5 million.
 
 Net
          cash
          used in investing activities in 2006 was $27.2 million, compared to $42.0
          million in 2005. Net cash used in investing activities in 2006 reflects
          the
          proceeds from sales of property and equipment totaling $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 and to build our
          infrastructure. Net cash used in investing activities in 2005 represented
          the
          cash utilized for the purchase of property and equipment of $42.0 million
          for
          similar purposes.
 
 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. Net cash used in financing
          activities was $1.1 million in 2005, which reflects the change in restricted
          cash and cash equivalents of $0.5 million, the purchase of treasury stock
          of
          $0.5 million, and the principal payment on our capital lease obligation
          of $0.1
          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
          to
          certain executives and employees, we purchased from such executives and
          employees stock for a total of $9.7 million to fund certain estimated tax
          obligations. See Item 11, “Executive Compensation,” and Note 15, “Subsequent
          Events - Restricted Stock Units,”to the
          accompanying consolidated financial statementsincluded
          elsewhere in this Annual Report on Form 10-K.We expect that our cash
          from operations will continue to exceed our operating expenses and plan
          to
          continue to fund a portion of our future capital projects for both our
          existing
          business and growth with our net cash from operations. On February 29,
          2008, we
          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
          April 30,
          2008, we had $24 million outstanding under the Credit Facility. 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 second quarter of 2009 .
 
 In
          2008,
          we expect our cash from operations to be sufficient to fund operating
          requirements (including the settlement of the GVN lawsuit (see Item 3,
“Legal
          Proceedings,” and Note 15, “Subsequent Events - Litigation,” to the accompanying
          consolidated financial statements). Additionally, we expect that our cash
          in
          excess of our operating requirements, combined with proceeds borrowed under
          the
          Credit Facility, will be sufficient to fund our capital requirements for
          corporate infrastructure and customer build-out pursuant to our growth
          strategy.
  25
 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, 2006 measured from December 31,
          2006:
  **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
                
                $
                61.5
                
                $
                14.5
                
                $
                26.0
                
                $
                10.6
                
                $
                10.4Capital
                    Lease Obligations (Including Interest)
                
                
                2.5
                
                
                0.2
                
                
                0.5
                
                
                0.5
                
                
                1.3Other
                    Rights-of-Way, Franchise Fees and Building Access Fees
                
                
                135.9
                
                
                26.4
                
                
                25.6
                
                
                19.4
                
                
                64.5Total
                
                $
                199.9
                
                $
                41.1
                
                $
                52.1
                
                $
                30.5
                
                $
                76.2
  Excluded
          from this table are capital commitments (all of which relate to 2007),
          which
          totaled $18.0 million at December 31, 2006.
 **Segment
          Results**
  Our
          results are segmented according to groupings based on geography.
  **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
                      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
                  %
 26
 **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
                %
 
 **United
          States:**
 **2005**
                
                **2004**
                
                **$
                    Increase/**
                  **(Decrease)**
                
                **%
                    Increase/**
                  **(Decrease)**Revenue
                
                $
                204.1
                
                $
                174.9
                
                $
                29.2
                
                
                16.7
                %Costs
                    of revenue (excluding depreciation and amortization, shown separately
                    below)
                
                
                112.4
                
                
                102.2
                
                
                10.2
                
                
                10.0
                %Selling,
                    general and administrative expenses
                
                
                63.1
                
                
                65.0
                
                
                (1.9
                )
                
                (2.9
                )%Depreciation
                    and amortization
                
                
                39.8
                
                
                38.3
                
                
                1.5
                
                
                3.9
                %Operating
                    loss
                
                
                (11.2
                )
                
                (30.6
                )
                
                19.4
                
                
                63.4
                %Other
                    income (expense):Loss
                    on sale of data centers
                
                
                (1.3
                )
                
                —
                
                
                (1.3
                )
                
                NMInterest
                    income
                
                
                1.3
                
                
                1.1
                
                
                0.2
                
                
                18.2
                %Interest
                    expense
                
                
                (5.7
                )
                
                (11.0
                )
                
                5.3
                
                
                48.2
                %Other
                    income, net
                
                
                3.8
                
                
                8.1
                
                
                (4.3
                )
                
                (53.1
                )%Loss
                    from continuing operations before income taxes
                
                
                (13.1
                )
                
                (32.4
                )
                
                19.3
                
                
                59.6
                %Provision
                    for income taxes
                
                
                0.4
                
                
                0.5
                
                
                (0.1
                )
                
                (20.0
                )%Loss
                    from continuing operations
                
                
                (13.5
                )
                
                (32.9
                )
                
                19.4
                
                
                59.0
                %Net
                    income (loss) from discontinued operations
                
                
                —
                
                
                —
                
                
                —
                
                
                —Net
                    loss
                
                $
                (13.5
                )
                $
                (32.9
                )
                $
                19.4
                
                
                59.0
                %
  27
 **United
          Kingdom and others:**
 **2005**
                
                **2004**
                
                **$
                    Increase/**
                  **(Decrease)**
                
                **%
                    Increase/**
                  **(Decrease)**Revenue
                
                $
                15.6
                
                $
                14.4
                
                $
                1.2
                
                
                8.3
                %Costs
                    of revenue (excluding depreciation and amortization, shown separately
                    below)
                
                
                6.8
                
                
                10.0
                
                
                (3.2
                )
                
                (32.0
                )%Selling,
                    general and administrative expenses
                
                
                6.5
                
                
                6.7
                
                
                (0.2
                )
                
                (3.0
                )%Depreciation
                    and amortization
                
                
                3.3
                
                
                2.5
                
                
                0.8
                
                
                32.0
                %Operating
                    loss
                
                
                (1.0
                )
                
                (4.8
                )
                
                3.8
                
                
                79.2
                %Other
                    income (expense):Gain
                    on sale of data centers
                
                
                —
                
                
                —
                
                
                —
                
                
                —Interest
                    income
                
                
                —
                
                
                —
                
                
                —
                
                
                —Interest
                    expense
                
                
                (0.2
                )
                
                (0.1
                )
                
                (0.1
                )
                
                (100.0
                )%Other
                    income, net
                
                
                7.1
                
                
                1.1
                
                
                6.0
                
                
                545.5
                %Income
                    (loss) from continuing operations before income taxes
                
                
                5.9
                
                
                (3.8
                )
                
                9.7
                
                
                255.3
                %Provision
                    for income taxes
                
                
                —
                
                
                —
                
                
                —
                
                
                —Income
                    (loss) from continuing operations
                
                
                5.9
                
                
                (3.8
                )
                
                9.7
                
                
                255.3
                %Loss
                    on disposition of discontinued operations, net of taxes
                
                
                —
                
                
                (0.2
                )
                
                0.2
                
                
                NMLoss
                    from discontinued operations
                
                
                (0.8
                )
                
                (0.9
                )
                
                0.1
                
                
                11.1
                %Net
                    loss from discontinued operations
                
                
                (0.8
                )
                
                (1.1
                )
                
                0.3
                
                
                27.3
                %Net
                    income (loss)
                
                $
                5.1
                
                $
                (4.9
                )
                $
                10.0
                
                
                204.1
                %
 *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.
 
 **Off-balance
          sheet arrangements**
  We
          do
          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 tax recognized in an enterprise’s financial statements in
          accordance with SFAS No. 109, “Accounting for Income Taxes.” 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. This Interpretation is effective
          for fiscal years beginning after December 15, 2006. We are currently
          evaluating the impact of adopting Interpretation No. 48.
 
 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, (“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. EITF No. 06-3 will be effective for our quarterly
          reporting period ended March 31, 2007 and there will be no impact on our
          financial position or results of operations. 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”). SFAS No.157 clarifies that the fair value
          is the amount that would be exchanged to sell an asset or transfer a liability
          in an orderly transaction between market participants. This statement also
          requires that a fair value measurement technique include an adjustment
          for risks
          inherent in a particular valuation technique and/or the risks inherent
          in the
          inputs to the model if market participants would also include such an
          adjustment. The provisions of SFAS No. 157 are effective for fiscal periods
          beginning after November 15, 2007 and are to be applied prospectively. We
          are currently evaluating the impact of adopting SFAS No. 157.
  28
 In
          September 2006, the staff of the SEC issued Staff Accounting Bulletin
          (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when
          Quantifying Misstatements in Current Year Financial Statements.” SAB
          No. 108 provides guidance on the consideration of the effects of prior year
          misstatements in quantifying current year misstatements for the purpose
          of
          determining whether the current year’s financial statements are materially
          misstated. SAB No. 108 is effective for fiscal years ending after
          November 15, 2006. The Company adopted the provisions of SAB No. 108
          as of December 31, 2006, as required. The adoption of SAB No. 108 did
          not have a material impact on our consolidated financial position, results
          of
          operations or cash flows.
 
 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
          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.
 
 **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 2006, our foreign activities accounted for 8.1% of consolidated
          revenues.
          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, 2006, 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 March 31, 2008. In order to manage our exposure
          to
          increases in LIBOR, we may consider an interest rate hedging
          arrangement.
  29
 **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
                
                31Consolidated
                    Balance Sheets as of December 31, 2006 and 2005
                
                32Consolidated
                    Statements of Operations for the years ended December 31, 2006, 2005
                    and 2004
                
                33Consolidated
                    Statements of Shareholders’ Equity for the years ended December 31,
                    2006, 2005 and 2004
                
                34Consolidated
                    Statements of Cash Flows for the years ended December 31, 2006, 2005
                    and 2004
                
                35Consolidated
                    Statements of Comprehensive Income (Loss) for the years ended
                    December 31, 2006, 2005 and 2004
                
                36Notes
                    to Consolidated Financial Statements
                
                37
  30
 **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, 2006 and 2005 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,
          2006. 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, 2006 and 2005, and the results of its operations and its cash
          flows for each of the three years ended in the period December 31, 2006, 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, 2006, 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 February 28, 2008 expressed an adverse opinion
          thereon.
 
 /s/     BDO
                    Seidman, LLPNew
                    York, NYFebruary 28,
                    2008, except for Notes 2, 15 and 16, which are as of May 9,
                    2008
  31
 **ABOVENET,
          INC. AND SUBSIDIARIES**
 
 **CONSOLIDATED
          BALANCE SHEETS**
 **(in
          millions, except share and per share information)**
  **December 31,****2006**
                
                **2005****ASSETS:**Current
                    assets:Cash
                    and cash equivalents
                
                $
                70.7
                
                $
                45.9Restricted
                    cash and cash equivalents
                
                
                5.5
                
                
                4.4Accounts
                    receivable, net of allowances of $1.2 and $1.8,
                    respectively
                
                
                18.0
                
                
                14.7Prepaid
                    costs and other current assets
                
                
                11.3
                
                
                11.0Current
                    assets of discontinued operations
                
                
                —
                
                
                0.8Total
                    current assets
                
                
                105.5
                
                
                76.8Property
                    and equipment, net of accumulated depreciation and amortization
                    of $131.3
                    and $94.8, respectively
                
                
                299.2
                
                
                305.2Other
                    assets
                
                
                3.0
                
                
                2.6Non-current
                    assets of discontinued operations
                
                
                —
                
                
                0.4Total
                    assets
                
                $
                407.7
                
                $
                385.0**LIABILITIES:**Current
                    liabilities:Accounts
                    payable
                
                $
                14.6
                
                $
                10.2Accrued
                    expenses
                
                
                56.6
                
                
                55.1Deferred
                    revenue—current portion
                
                
                16.9
                
                
                16.4Current
                    liabilities of discontinued operations
                
                
                —
                
                
                0.9Total
                    current liabilities
                
                
                88.1
                
                
                82.6Deferred
                    revenue
                
                
                91.8
                
                
                93.8Other
                    long-term liabilities
                
                
                9.9
                
                
                40.5Long-term
                    liabilities of discontinued operations
                
                
                —
                
                
                1.2Total
                    liabilities
                
                
                189.8
                
                
                218.1Commitments
                    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, 10,473,389
                    issued
                    and 10,458,112 outstanding as of December 31, 2006 and 10,466,444
                    issued and 10,451,167 outstanding as of December 31,
                    2005
                
                
                0.1
                
                
                0.1Additional
                    paid-in capital
                
                
                241.6
                
                
                237.5Treasury
                    stock at cost, 15,277 shares
                
                
                (0.5
                )
                
                (0.5
                )Accumulated
                    other comprehensive income
                
                
                3.0
                
                
                2.5Accumulated
                    deficit
                
                
                (26.3
                )
                
                (72.7
                )Total
                    shareholders’ equity
                
                
                217.9
                
                
                166.9Total
                    liabilities and shareholders’ equity
                
                $
                407.7
                
                $
                385.0
  
 The
          accompanying notes are an integral part of these consolidated financial
          statements.
 32
 **ABOVENET,
          INC. AND SUBSIDIARIES**
 
 **CONSOLIDATED
          STATEMENTS OF OPERATIONS**
 **(in
          millions, except share and per share information)**
 
 **Years
                    Ended December 31,****2006**
                
                **2005**
                
                **2004**Revenue
                
                $
                236.7
                
                $
                219.7
                
                $
                189.3Costs
                    of revenue (excluding depreciation and amortization, shown
                  separately
                    below)
                
                
                121.9
                
                
                119.2
                
                
                112.2Selling,
                    general and administrative expenses
                
                
                71.1
                
                
                69.6
                
                
                71.7Depreciation
                    and amortization
                
                
                47.2
                
                
                43.1
                
                
                40.8Operating
                    loss
                
                
                (3.5
                )
                
                (12.2
                )
                
                (35.4
                )Other
                    income (expense):Gain
                    (loss) on sales of data centers
                
                
                48.2
                
                
                (1.3
                )
                
                —Interest
                    income
                
                
                2.4
                
                
                1.3
                
                
                1.1Interest
                    expense
                
                
                (5.8
                )
                
                (5.9
                )
                
                (11.1
                )Other
                    income, net
                
                
                2.1
                
                
                10.9
                
                
                9.2Income
                    (loss) from continuing operations before income taxes
                
                
                43.4
                
                
                (7.2
                )
                
                (36.2
                )Provision
                    for income taxes
                
                
                —
                
                
                0.4
                
                
                0.5Income
                    (loss) from continuing operations
                
                
                43.4
                
                
                (7.6
                )
                
                (36.7
                )Gain
                    (loss) on disposition of discontinued operations
                
                
                3.9
                
                
                —
                
                
                (0.2
                )Loss
                    from discontinued operations
                
                
                (0.9
                )
                
                (0.8
                )
                
                (0.9
                )Net
                    income (loss) from discontinued operations
                
                
                3.0
                
                
                (0.8
                )
                
                (1.1
                )Net
                    income (loss)
                
                $
                46.4
                
                $
                (8.4
                )
                $
                (37.8
                )Income
                    (loss) per share, basic:Income
                    (loss) per share from continuing operations
                
                $
                4.07
                
                $
                (0.72
                )
                $
                (3.48
                )Income
                    (loss) per share from discontinued operations
                
                
                .28
                
                
                (0.07
                )
                
                (0.10
                )Basic
                    income (loss) per share
                
                $
                4.35
                
                $
                (0.79
                )
                $
                (3.58
                )Weighted
                    average number of common shares
                
                
                10,669,365
                
                
                10,596,244
                
                
                10,550,249Income
                    (loss) per share, diluted:Income
                    (loss) per share from continuing operations
                
                $
                3.68
                
                $
                (0.72
                )
                $
                (3.48
                )Income
                    (loss) per share from discontinued operations
                
                
                .26
                
                
                (0.07
                )
                
                (0.10
                )Diluted
                    income (loss) per share
                
                $
                3.94
                
                $
                (0.79
                )
                $
                (3.58
                )Weighted
                    average number of common shares
                
                
                11,794,279
                
                
                10,596,244
                
                
                10,550,249
  
 The
          accompanying notes are an integral part of these consolidated financial
          statements.
  33
 **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, 2004
                  
                  
                  10,418,992
                  
                  $
                  0.1
                  
                  
                  —
                  
                  $
                  —
                  
                  $
                  228.5
                  
                  $
                  1.5
                  
                  $
                  (26.5
                  )
                  $
                  203.6Issuance
                      of commonstock
                      from exerciseof
                      warrants
                  
                  
                  5,101
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  0.1
                  
                  
                  —
                  
                  
                  —
                  
                  
                  0.1Foreign
                      currency translationadjustments
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  0.1
                  
                  
                  —
                  
                  
                  0.1Amortization
                      of stock-based compensation expense for stock options andrestricted
                      stock units
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  4.9
                  
                  
                  —
                  
                  
                  —
                  
                  
                  4.9Net
                      loss
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (37.8
                  )
                  
                  (37.8
                  )Balance
                      at December 31, 2004
                  
                  
                  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
                  )
                  $
                  217.9
 
 
 The
          accompanying notes are an integral part of these consolidated financial
          statements.
 34
 **ABOVENET,
          INC. AND SUBSIDIARIES**
 
 **CONSOLIDATED
          STATEMENTS OF CASH FLOWS**
 **(in
          millions)**
 
 **Years
                    Ended December 31,****2006**
                
                **2005**
                
                **2004**Cash
                    flows provided by operating activities:Net
                    income (loss)
                
                $
                46.4
                
                $
                (8.4
                )
                $
                (37.8
                )Adjustments
                    to reconcile net income (loss) to net cash provided by
                    operations:Net
                    (income) loss from discontinued operations
                
                
                (3.0
                )
                
                0.8
                
                
                1.1Depreciation
                    and amortization
                
                
                47.2
                
                
                43.1
                
                
                40.8Non-cash
                    gain on settlement of liabilities
                
                
                (3.2
                )
                
                (9.0
                )
                
                (8.6
                )Provision
                    for bad debts
                
                
                0.5
                
                
                0.3
                
                
                0.5Non-cash
                    stock-based compensation expense
                
                
                3.9
                
                
                4.0
                
                
                4.9(Gain)
                    loss on sale of data centers
                
                
                (48.2
                )
                
                1.3
                
                
                —Gain
                    on leased asset termination
                
                
                (0.2
                )
                
                (3.5
                )
                
                —Losses
                    on disposition of property and equipment, net
                
                
                4.6
                
                
                —
                
                
                —Other
                
                
                (1.4
                )
                
                —
                
                
                (0.8
                )Changes
                    in operating working capital:Accounts
                    receivable
                
                
                (2.8
                )
                
                (0.2
                )
                
                10.7Prepaid
                    costs and other current assets
                
                
                (0.1
                )
                
                2.9
                
                
                10.4Accounts
                    payable
                
                
                4.2
                
                
                (1.0
                )
                
                (9.0
                )Accrued
                    expenses
                
                
                6.7
                
                
                2.8
                
                
                6.5Other
                    assets
                
                
                —
                
                
                1.8
                
                
                —Deferred
                    revenue and other long-term liabilities
                
                
                (3.3
                )
                
                8.7
                
                
                7.1Net
                    cash provided by operating activities
                
                
                51.3
                
                
                43.6
                
                
                25.8Cash
                    flows used in investing activities:Proceeds
                    from sales of property and equipment, principally data
                    centers
                
                
                43.2
                
                
                —
                
                
                —Proceeds
                    from sale of discontinued operations
                
                
                1.3
                
                
                —
                
                
                —Purchases
                    of property and equipment
                
                
                (71.7
                )
                
                (42.0
                )
                
                (23.0
                )Net
                    cash used in investing activities
                
                
                (27.2
                )
                
                (42.0
                )
                
                (23.0
                )Cash
                    flows used in financing activities:Change
                    in restricted cash and cash equivalents
                
                
                (1.1
                )
                
                (0.5
                )
                
                —Proceeds
                    from exercise of warrants
                
                
                0.2
                
                
                —
                
                
                0.1Purchase
                    of treasury stock
                
                
                —
                
                
                (0.5
                )
                
                —Principal
                    payments — capital lease obligation
                
                
                (0.1
                )
                
                (0.1
                )
                
                (0.1
                )Repayment
                    of note payable
                
                
                —
                
                
                —
                
                
                (62.5
                )Net
                    cash used in financing activities
                
                
                (1.0
                )
                
                (1.1
                )
                
                (62.5
                )Effect
                    of exchange rates on cash
                
                
                0.5
                
                
                (0.4
                )
                
                0.2Net
                    cash provided by (used in) discontinued operations
                
                
                1.2
                
                
                0.5
                
                
                (0.3
                )Net
                    increase (decrease) in cash and cash equivalents
                
                
                24.8
                
                
                0.6
                
                
                (59.8
                )Cash
                    and cash equivalents, beginning of year
                
                
                45.9
                
                
                45.3
                
                
                105.1Cash
                    and cash equivalents, end of year
                
                $
                70.7
                
                $
                45.9
                
                $
                45.3Supplemental
                    cash flow information:Cash
                    paid for interest
                
                $
                0.1
                
                $
                0.1
                
                $
                6.9Cash
                    paid for income taxes
                
                $
                —
                
                $
                0.4
                
                $
                0.5
  
 The
          accompanying notes are an integral part of these consolidated financial
          statements.
  35
 **ABOVENET,
          INC. AND SUBSIDIARIES**
 
 **CONSOLIDATED
          STATEMENTS OF COMPREHENSIVE INCOME (LOSS)**
 **(in
          millions)**
 
 **Years
                    Ended December 31,****2006**
                
                **2005**
                
                **2004**Net
                    income (loss)
                
                $
                46.4
                
                $
                (8.4
                )
                $
                (37.8
                )Foreign
                    currency translation adjustments
                
                
                0.5
                
                
                0.9
                
                
                0.1Comprehensive
                    income (loss)
                
                $
                46.9
                
                $
                (7.5
                )
                $
                (37.7
                )
 
 
 The
          accompanying notes are an integral part of these consolidated financial
          statements.
  36
 **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, 2006 and 2005 and for the years ended
          December 31, 2006, 2005 and 2004.
 
 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 prospective financial statements.
  37
 **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, contained 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 will be 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 estimate 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 determine
          the
          fair market value of its property and equipment. The determination of fair
          values of assets and liabilities was subject to significant estimates and
          assumptions. The unaudited fresh start adjustments reflected at
          September 8, 2003 consisted of the following: (i) reduction of
          property and equipment, (ii) reduction of indebtedness,
          (iii) reduction of vendor payables, (iv) reduction of the carrying
          value of deferred revenue, (v) increase of deferred rent to fair market
          value, (vi) cancellation of MFN’s common stock and additional paid-in
          capital, in accordance with the Plan of Reorganization, (vii) issuance of
          new AboveNet, Inc. common stock and additional paid-in capital, and
          (viii) elimination of the comprehensive loss and accumulated deficit
          accounts.
 
 ***Principles
          of Consolidation***
  The
          consolidated financial statements include the accounts of the Company,
          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.
  38
 **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 are no longer obligated to provide services for consideration
          previously received and for which revenue recognition has been deferred.
          During
          2006, 2005 and 2004, 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
          $8.3, $12.1 and $2.9 in 2006, 2005 and 2004, 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, 2006, 2005 and 2004.
 
 ***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 2015, 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 reclassified to property and equipment at the date
          the
          project is complete. Certain internal direct labor costs of constructing
          or
          installing property and equipment are capitalized. Capitalized direct labor
          amounted to $5.1, $4.7 and $3.8 for the years ended December 31, 2006, 2005
          and 2004, 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
                
                37.5
                    yearsNetwork
                    infrastructure assets
                
                20
                    yearsSoftware
                    and computer equipment
                
                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).
  39
 **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 a “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 $8.9,
          $2.0
          and $0.8 for the years ended December 31, 2006, 2005 and 2004,
          respectively. The Company fully depreciated the remaining carrying value
          of the
          network infrastructure rendered unusable amounting to $1.6, $0.4 and $0.1,
          on an
          original cost basis, for the years ended December 31, 2006, 2005 and 2004,
          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. No impairment losses were recorded for the years ended
          December 31, 2006, 2005 and 2004.
 
 ***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 in leased facilities and the removal
          of
          certain fiber and conduit systems. Considerable management judgment is
          required
          in estimating these obligations. Important assumptions include estimates
          of
          asset retirement costs, the timing of future asset retirement activities
          and the
          likelihood of contractual asset retirement provisions being enforced. Changes
          in
          these assumptions based on future information could result in adjustments
          to
          these estimated liabilities.
 
 Asset
          retirement obligations are generally recorded as “other long-term liabilities,”
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 $5.6
          and
          $5.4 at December 31, 2006 and 2005, respectively, of which for both years
          $3.1 was included in “Accrued expenses,” and $2.5 and $2.3, 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, 2006, 2005 and 2004.
 
 ***Income
          Taxes***
  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.
 
 ***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 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.
  40
 **ABOVENET,
          INC. AND SUBSIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
          millions, except share and per share information)**
 
 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,****2006**
                
                **2005**
                
                **2004**Dividend
                    yield
                
                
                —
                
                
                —
                
                
                —Expected
                    volatility
                
                
                80.00
                %
                
                80.00
                %
                
                80.00
                %Risk-free
                    interest rate
                
                
                4.89
                %
                
                3.99
                %
                
                3.61
                %Expected
                    life (years)
                
                
                5.00
                
                
                4.00
                
                
                4.00Weighted
                    average fair value of options granted
                
                $
                31.16
                
                $
                16.25
                
                $
                21.11
 
 ***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” and Note 2, **** “Basis
          of
          Presentation and Significant Accounting Policies” 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 stock 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
          6,945,
          1,229 and 5,101, in 2006, 2005 and 2004, respectively.
 
 ***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.
 
 ***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 & 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 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. The Company’s
          subsidiaries in the U.K. have a similar plan which matches up to 5% of
          U.K.
          employee contributions. Matched amounts vest based upon an employee’s length of
          service.
 
 The
          Company contributed $0.7, $0.6 and $0.6 for the years ended December 31,
          2006, 2005 and 2004, respectively, net of forfeitures for its obligations
          under
          these plans.
  41
 **ABOVENET,
          INC. AND SUBSIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
          millions, except share and per share information)**
 
 ***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 tax recognized in an enterprise’s financial statements in
          accordance with SFAS No. 109, “Accounting for Income Taxes.” 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. This Interpretation is effective
          for fiscal years beginning after December 15, 2006. The Company is
          currently evaluating the impact of adopting Interpretation
          No. 48.
 
 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, (“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. EITF No. 06-3 will be effective for our quarterly
          reporting period ended March 31, 2007 and there will be no impact on our
          financial position or results of operations. The Company’s 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”). SFAS No.157 clarifies that the fair value
          is the amount that would be exchanged to sell an asset or transfer a liability
          in an orderly transaction between market participants. This statement also
          requires that a fair value measurement technique include an adjustment
          for risks
          inherent in a particular valuation technique and/or the risks inherent
          in the
          inputs to the model if market participants would also include such an
          adjustment. The provisions of SFAS No. 157 are effective for fiscal periods
          beginning after November 15, 2007 and are to be applied prospectively. The
          Company is currently evaluating the impact of adopting SFAS
          No. 157.
 
 In
          September 2006, the staff of the SEC issued Staff Accounting Bulletin
          (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when
          Quantifying Misstatements in Current Year Financial Statements.” SAB
          No. 108 provides guidance on the consideration of the effects of prior year
          misstatements in quantifying current year misstatements for the purpose
          of
          determining whether the current year’s financial statements are materially
          misstated. SAB No. 108 is effective for fiscal years ending after
          November 15, 2006. The Company adopted the provisions of SAB No. 108
          as of December 31, 2006, as required. The adoption of SAB No. 108 did
          not have a material impact on the Company’s consolidated financial position,
          results of operations or cash flows.
 
 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 the Company’s consolidated financial position, results of
          operations or cash flows.
 
 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.
 
 ***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,****2006**
                
                **2005**Federal
                    and state income tax deposits
                
                $
                3.1
                
                $
                —Prepaid
                    property taxes
                
                
                2.2
                
                
                2.9Prepaid
                    rent
                
                
                1.8
                
                
                2.1Prepaid
                    insurance
                
                
                1.1
                
                
                1.2Prepaid
                    right-of-way charges
                
                
                0.8
                
                
                1.5Prepaid
                    maintenance
                
                
                0.6
                
                
                0.9Preference
                    payments receivable
                
                
                —
                
                
                0.9Other
                    receivables
                
                
                0.9
                
                
                1.0Other
                    prepaids
                
                
                0.8
                
                
                0.5Total
                
                $
                11.3
                
                $
                11.0
  42
 **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,****2006**
                
                **2005**Land
                    and building
                
                $
                0.3
                
                $
                6.5Leasehold
                    improvements
                
                
                1.8
                
                
                4.2Furniture,
                    fixtures and equipment
                
                
                15.3
                
                
                11.9Network
                    infrastructure assets, including transmission equipment
                
                
                413.1
                
                
                377.4Total
                    property and equipment
                
                
                430.5
                
                
                400.0Accumulated
                    depreciation and amortization
                
                
                (131.3
                )
                
                (94.8
                )Property
                    and equipment, net
                
                $
                299.2
                
                $
                305.2
 
 Included
          in network infrastructure assets were certain assets and equipment, including
          transmission equipment, held in inventory for future use, which had an
          original
          cost of $46.6 and $55.3, accumulated depreciation of $28.9 and $27.8, and
          net
          carrying values of $17.7 and $27.5 at December 31, 2006 and 2005,
          respectively.
 
 Depreciation
          and amortization expense related to property and equipment of continuing
          operations for the years ended December 31, 2006, 2005 and 2004 was
          approximately $47.2, $43.1, and $40.8 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 consists of the following:
  **December 31,****2006**
                
                **2005**Accrued
                    transaction taxes, including related interest
                
                $
                20.0
                
                $
                16.7Accrued
                    payroll, bonuses and employee benefits
                
                
                9.0
                
                
                9.3Accrued
                    capital expenditures
                
                
                5.4
                
                
                6.4Accrued
                    conduit, right-of-way and occupancy expenses
                
                
                3.8
                
                
                3.5Accrued
                    telecommunication costs
                
                
                3.6
                
                
                1.7Asset
                    retirement obligations
                
                
                3.1
                
                
                3.1Accrued
                    property tax
                
                
                2.7
                
                
                2.0Current
                    portion of deferred fair market value rent liability
                
                
                1.7
                
                
                4.2Accrued
                    accounting and auditing fees
                
                
                1.5
                
                
                0.8Accrued
                    state and local income and franchise taxes payable
                
                
                1.1
                
                
                —Accrued
                    other professional fees, including directors fees
                
                
                1.1
                
                
                2.0Accrued
                    repairs and maintenance
                
                
                0.9
                
                
                1.5Accrued
                    lease termination obligation
                
                
                0.7
                
                
                0.6Accrued
                    utilities
                
                
                0.2
                
                
                0.8Accrued
                    reorganization costs
                
                
                0.1
                
                
                0.7Accrued
                    SEC investigation expense
                
                
                0.1
                
                
                0.3Capital
                    lease obligation
                
                
                0.1
                
                
                0.1Other
                
                
                1.5
                
                
                1.4Total
                
                $
                56.6
                
                $
                55.1
  43
 **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, 2006, 2005 and 2004 are as
          follows:
 
 **Years
                    Ended December 31,****2006**
                
                **2005**
                
                **2004**Current
                    - State
                
                $
                —
                
                $
                0.4
                
                $
                0.5Total
                    Income Tax Provision
                
                $
                —
                
                $
                0.4
                
                $
                0.5
 
 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,****2006**
                
                **2005**Deferred
                    Tax Assets:Property
                    and Equipment
                
                $
                591.1
                
                $
                521.2Net
                    Operating Loss (“NOL”) Carryforwards
                
                
                275.5
                
                
                271.2Accruals
                    and Reserves
                
                
                7.4
                
                
                19.9Rent
                
                
                2.1
                
                
                13.4Deferred
                    Compensation
                
                
                6.1
                
                
                4.7Other
                
                
                36.4
                
                
                28.0Total
                    Deferred Tax Assets
                
                
                918.6
                
                
                858.4Valuation
                    Allowance
                
                
                (809.6
                )
                
                (729.2
                )Net
                    Deferred Tax Assets
                
                
                109.0
                
                
                129.2Deferred
                    Revenue
                
                
                (109.0
                )
                
                (129.2
                )Total
                
                $
                —
                
                $
                —
 
 **Years
                    Ended December 31,****2006**
                
                **2005**
                
                **2004**Income
                    (loss) from continuing operations before income taxes:Domestic
                
                $
                41.0
                
                $
                (13.1
                )
                $
                (32.4
                )Foreign
                
                
                2.4
                
                
                5.9
                
                
                (3.8
                )Total
                
                $
                43.4
                
                $
                (7.2
                )
                $
                (36.2
                )Rate
                    Reconciliation:Tax
                    at statutory rate
                
                
                35.0
                %
                
                (35.0
                )%
                
                (35.0
                )%State
                    income tax, net of federal benefit
                
                
                —
                %
                
                3.6
                %
                
                0.9
                %Valuation
                    allowance
                
                
                (35.5
                )%
                
                33.2
                %
                
                35.0
                %Permanent
                    items
                
                
                0.5
                %
                
                3.8
                %
                
                0.5
                %Tax
                    provision
                
                
                —
                %
                
                5.6
                %
                
                1.4
                %
 
 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 Emergence 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, 2006, the Company has domestic NOL carryforwards of $559.0 and
          foreign NOL carryforwards of $169.8. 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 $370.0 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. In management’s opinion, adequate provision for income
          taxes has been made for all open years in accordance with SFAS No. 5,
“Accounting for Contingencies.”
  44
 **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,****2006**
                
                **2005**
                
                **2004**Revenue
                
                $
                1.0
                
                $
                1.7
                
                $
                2.8Costs
                    of revenue
                
                
                0.7
                
                
                1.6
                
                
                1.6Selling,
                    general and administrative expenses
                
                
                0.9
                
                
                0.8
                
                
                2.1Operating
                    loss
                
                
                (0.6
                )
                
                (0.7
                )
                
                (0.9
                )Other
                    income (expense)
                
                
                (0.3
                )
                
                (0.1
                )
                
                —Income
                    (loss) from discontinued operations before dispositions
                
                
                (0.9
                )
                
                (0.8
                )
                
                (0.9
                )Gain
                    (loss) on disposition of discontinued operations
                
                
                3.9
                
                
                —
                
                
                (0.2
                )Net
                    income (loss) from discontinued operations
                
                $
                3.0
                
                $
                (0.8
                )
                $
                (1.1
                )
 
 **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.
          As a
          result of the Company’s net losses for the years ended December 31, 2005
          and 2004, diluted loss per common share is the same as basic loss per common
          share because the inclusion of the dilutive securities would be anti-dilutive
          for each of the periods presented herein. Total weighted average shares
          utilized
          in computing basic net income (loss) per common share were 10,669,365,
          10,596,244 and 10,550,249 for the years ended December 31, 2006, 2005, and
          2004, respectively. Total weighted average shares utilized in computing
          dilutive
          net income (loss) per common share were 11,794,279, 10,596,244 and 10,550,249
          for the years ended December 31, 2006, 2005, and 2004, respectively.
          Dilutive securities include stock options, restricted stock units and stock
          warrants. Due to the Company’s net losses, potentially dilutive securities
          totaling 565,240, and 760,053 for the years ended December 31, 2005 and
          2004, respectively, were excluded from the calculation of income per share
          as
          they were anti-dilutive. For the year ended December 31, 2006, there were
          no potentially dilutive securities excluded from the calculation of income
          per
          common share.
  45
 **ABOVENET,
          INC. AND SUBSIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
          millions, except share and per share information)**
 
 **NOTE
          9: STOCK-BASED COMPENSATION**
 
 Stock-based
          expenses for each period relate 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, 2006, the Company had 158,723
          shares available for future awards under the 2003 Stock Incentive Plan.
          Stock-based compensation is recorded in costs of revenue and selling general
          and
          administrative expenses based upon the allocation of payroll
          expense.
 
 ***Stock
          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 ratably on each of the first,
          second and third anniversaries 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 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. During the year
          ended
          December 31, 2004, the Company awarded options to purchase 148,485 shares,
          each of which have a ten year life and vest ratably on each of the first,
          second
          and third anniversaries of the date of the grant and had original exercise
          prices ranging from $30.00 to 36.50 per share.
 
 The
          Company recognized non-cash stock-based compensation expense amounting
          to $1.5,
          $2.2 and $3.3 for the years ended December 31, 2006, 2005 and 2004
          respectively, with respect to stock options granted, which had an effect
          of
          decreasing net income by $0.14 per basic common share, and by $0.13 per
          diluted
          common share for the year ended December 31, 2006, and increasing net loss
          by $0.21 and $0.31per basic and diluted common share for the years ended
          December 31, 2005 and 2004, respectively.
 
 Information
          regarding options to purchase common stock granted and outstanding for
          the years
          ended December 31, 2006, 2005 and 2004 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, 2004
                
                
                432,600
                
                $
                22.22
                
                
                
                
                $
                14.32Granted
                
                
                148,485
                
                $
                34.81
                
                
                
                
                $
                21.11Forfeited
                
                
                (100,820
                )
                $
                23.67
                
                
                
                
                $
                15.07Balance
                    as of December 31, 2004
                
                
                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
                
                $
                16.1
                
                $
                16.65Vested
                    as of December 31, 2006
                
                
                372,419
                
                $
                24.32
                
                
                
                
                $
                15.35Exercisable
                    as of December 31,2006
                
                
                372,419
                
                $
                24.32
                
                $
                13.3
                
                $
                15.35
 
 The
          fair
          value of vested options to purchase common stock was as follows for the
          years
          ended December 31:
 
 **Number
                    of Options**
                  **to
                    Purchase Common**
                  **Stock
                    Vested**
                
                **Total
                    Fair**
                  **Value
                    of Vested Shares**2006
                
                
                372,419
                
                $
                5.72005
                
                
                254,081
                
                $
                3.82004
                
                
                112,043
                
                $
                1.6
 
 The
          aggregate fair value of options to purchase shares of common stock that
          vested
          during the years ended December 31, 2006, 2005 and 2004 was $1.9 (118,338),
          $2.2
          (142,038) and $1.6 (112,043), respectively.
  46
 **ABOVENET,
          INC. AND SUBSIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
          millions, except share and per share information)**
 
 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, 2006
                
                
                271,339
                
                $
                16.85Granted
                
                
                26,800
                
                $
                31.16Forfeited
                
                
                (74,703
                )
                $
                17.17Vested
                
                
                (118,338
                )
                $
                15.97Unvested
                    options, December 31, 2006
                
                
                105,098
                
                $
                21.26
 
 At
          December 31, 2006, 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 2007 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, 2006:
 
 **Exercise
                    Prices**
                
                **Options
                    Outstanding**
                
                **Weighted
                    Average Remaining Contractual Life (Years)**
                
                **Weighted
                    Average Exercise Price**
                  **Per
                    Share**
                
                **Options**
                  **Exercisable**
                
                **Weighted
                    Average Remaining Contractual Life (Years)**
                
                **Weighted
                    Average Exercise Price**
                  **Per
                    Share**$20.95
                
                
                263,565
                
                
                6.7
                
                $
                20.95
                
                
                263,565
                
                
                6.7
                
                $
                20.95$25.00
                
                
                59,077
                
                
                8.7
                
                $
                25.00
                
                
                25,595
                
                
                8.7
                
                $
                25.00$30.00
                    - $39.99
                
                
                118,375
                
                
                7.6
                
                $
                33.57
                
                
                74,267
                
                
                7.6
                
                $
                33.85$40.00
                    - $59.00
                
                
                36,500
                
                
                8.7
                
                $
                44.94
                
                
                8,992
                
                
                8.7
                
                $
                42.33Total
                
                
                477,517
                
                
                7.3
                
                $
                26.41
                
                
                372,419
                
                
                7.3
                
                $
                24.32
 
 ***Restricted
          Stock Units***
 
 For
          the
          years ended December 31, 2006, 2005 and 2004 the Company awarded 32,000,
          26,000 and 91,000, respectively, restricted stock units to employees of
          the
          Company under the 2003 Stock Incentive Plan. The restricted stock units
          generally vest ratably on the first, second, third and fourth anniversaries
          of
          the respective 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 the restricted stock unit agreement
          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
          reason 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 2005, the Company issued 41,122
          common
          shares for vested restricted stock units, of which 15,277 shares were purchased
          by the Company.
 
 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 $2.4, $1.8 and $1.6 for the years ended December 31, 2006,
          2005 and 2004, respectively, with respect to restricted stock units awarded,
          which had an effect of decreasing net income by $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 and $0.15 per basic and diluted common
          share
          for the years ended December 31, 2005 and 2004, respectively.
 
 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, 2004
                
                
                297,866
                
                $
                21.31Granted
                
                
                91,000
                
                $
                34.09Forfeited
                
                
                (18,150
                )
                $
                28.09Balance
                    as of December 31, 2004
                
                
                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
                
                $
                26.62
  47
 **ABOVENET,
          INC. AND SUBSIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
          millions, except share and per share information)**
 
 At
          December 31, 2006, the Company had $3.1 of unearned stock-based
          compensation expense associated with the vesting of the restricted stock
          unit
          awards, of which $2.4 (before consideration of forfeitures) is expected
          to be
          incurred in 2007 and the balance in 2008 to 2010.
 
 ***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 stock warrants
          to
          purchase 709,459 shares of common stock at $20.00 per share and seven-year
          stock
          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 Stock warrants for the
          periods presented:
 
 **Five-year**
                  **Stock
                    Warrants**
                
                **Seven-year**
                  **Stock
                    Warrants**
                
                **Weighted
                    Average Warrant**
                  **Exercise
                    Price**Balance
                    as of January 1, 2004
                
                
                709,459
                
                
                834,658
                
                $
                22.16Exercised
                
                
                (2,880
                )
                
                (2,221
                )
                $
                21.74Balance
                    as of December 31, 2004
                
                
                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
                
                $
                22.16
 
 **NOTE
          10: LONG-TERM DEBT**
 
 **A.**
                **Term
                    Loan**
 
 In
          October 2001, the Company entered into a $150 loan agreement (“Senior
          Secured Note”) with a group of lenders, which was secured by a first lien on all
          of the Company’s assets. The Senior Secured Note remained outstanding through
          the bankruptcy period and was paid down to a balance of $94.1 immediately
          prior
          to the Company’s emergence from bankruptcy. In accordance with the Company’s
          Plan of Reorganization, a 16.67% participant in the syndicate of lenders
          forgave
          its portion of the outstanding balance in exchange for shares of the reorganized
          Company and, accordingly, $15.7 of the balance of the Senior Secured Note
          was
          reclassified to debt subject to compromise. Additionally, as part of the
          Plan of
          Reorganization, the Company and lenders entered into a new agreement as
          of
          September 8, 2003, which provided for a $78.4 term loan (“Term Loan”)
          bearing interest at a rate of 11% per annum. The Term Loan which was originally
          scheduled to mature on September 8, 2008, was secured by a first lien on
          all of the assets of the Company, was guaranteed by all of the Company’s
          domestic and certain foreign subsidiaries and contained certain prepayment
          provisions. In December, 2003, the Company completed a $50 rights offering
          and
          used proceeds of $8.4 to reduce the Term Loan. In July 2004, the Company
          utilized proceeds from the sale of certain German operations to repay $0.5
          of
          the Term Loan. Additionally, as part of the Company’s settlement of certain
          litigation, an additional $7.5 principal amount of the Term Loan was forgiven
          and recorded as “Other income” during the year ended December 31, 2004 (see
          Note 11). On August 10, 2004, the Company paid the entire outstanding
          balance of the Term Loan of $62.0, plus accrued interest.
 
 **B.**
                **Obligation
                    under Capital Lease**
 
 The
          Company is obligated under a capital lease for certain indefeasible right
          of
          use, which is included as network infrastructure assets in property and
          equipment, net.
 
 At
          December 31, 2006, future minimum payments under the capital lease are as
          follows:
  2007
                
                $
                0.22008
                
                
                0.32009
                
                
                0.22010
                
                
                0.32011
                
                
                0.2Thereafter
                
                
                1.3Total
                    minimum lease payments
                
                
                2.5Less:
                    amount representing interest
                
                
                (0.9
                )Obligation
                    under capital lease
                
                
                1.6Less:
                    current portion
                
                
                (0.1
                )Total
                    long-term obligation
                
                $
                1.5
  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.”
  48
 **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,****2006**
                
                **2005**
                
                **2004**Gain
                    on settlement or reversal of liabilities
                
                $
                3.2
                **(1)**
                $
                9.0
                **(2)**
                $
                —Gain
                    (loss) on foreign currency
                
                
                2.0
                
                
                (1.2
                )
                
                0.6Losses
                    on dispositions of property and equipment
                
                
                (4.6
                )
                
                —
                
                
                —Gain
                    on leased asset termination
                
                
                0.2
                
                
                3.5
                
                
                —Forgiveness
                    of term loan (see Note 10)
                
                
                —
                
                
                —
                
                
                7.5Other
                
                
                1.3
                
                
                (0.4
                )
                
                1.1Total
                
                $
                2.1
                
                $
                10.9
                
                $
                9.2
  
 **(1)** **** 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.
 
 **(2)** **** 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:
 
 2007
                
                $
                40.92008
                
                
                27.52009
                
                
                24.12010
                
                
                17.02011
                
                
                12.9Thereafter
                
                
                75.0Total
                
                $
                197.4
 
 The
          expenses incurred for the above described obligations for the years ended
          December 31, 2006, 2005 and 2004 in continuing operations were $33.3, $33.3
          and $36.3, respectively, which is net of sublease receipts of $2.0, $1.9
          and
          $0.6 for the years ended December 31, 2006, 2005 and 2004, 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
          $4.2,
          $5.1 and $5.4 in the years ended December 31, 2006, 2005 and 2004,
          respectively, as reductions to rent expense in continuing operations. At
          December 31, 2006 and 2005, the deferred fair value rent liability was
          $5.5 and $33.7, respectively, of which $1.7 and $4.2, respectively, are
          included
          in accrued expenses and $3.8 and $29.5, respectively, are included in other
          long-term liabilities on the related consolidated balance sheets.
 
 At
          December 31, 2006, the Company is committed to construct approximately
          $18.0 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.
 
 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.
 
 We
          are a
          party to a fiber lease agreement with SBC Telecom, Inc. (“SBC”), a
          subsidiary of AT&T, pursuant to which we believe that SBC is obligated to
          lease 40,000 fiber miles of fiber, reducible to 30,000 under certain
          circumstances, for a term of 20 years at a price set forth in the agreement.
          SBC
          disagreed with such interpretation of the agreement and 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. SBC
          also
          alleged that we were in breach of our obligations under such agreement
          and that
          we were unable to assume the agreement upon our emergence from bankruptcy.
          We
          disagreed with SBC’s position. In December 2005, the Bankruptcy Court
          agreed with SBC. 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. We have filed a notice of appeal to the Second Circuit Court of
          Appeals.
          The Company records revenue based upon the reduced fiber miles at the rate
          prescribed in the agreement and which is paid by SBC. (See Note 15, “Subsequent
          Events - Litigation,” for a discussion of certain litigation which was settled
          unfavorably.)
  49
 **ABOVENET,
          INC. AND SUBSIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
          millions, except share and per share information)**
 
 ***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
          13: 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 $0.1 in 2006 and $0.1 in 2005,
          respectively. No amounts were outstanding at each of December 31, 2006 and
          2005. There was no related party activity for the year ended December 31,
          2004. All activity between the parties was conducted as independent arms
          length
          transactions consistent with similar terms and circumstances with any other
          customers or vendors. All accounts between the two parties are settled
          in
          accordance with invoice terms.
 
 **NOTE
          14: 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 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,****2006**
                
                **2005**
                
                **2004**RevenueUnited
                    States
                
                $
                217.6
                
                $
                204.1
                
                $
                174.9United
                    Kingdom
                
                
                20.3
                
                
                16.4
                
                
                13.6Other
                
                
                0.5
                
                
                0.7
                
                
                1.6Eliminations
                
                
                (1.7
                )
                
                (1.5
                )
                
                (0.8
                )Consolidated
                    Worldwide
                
                $
                236.7
                
                $
                219.7
                
                $
                189.3
  **December 31,****2006**
                
                **2005**Long-lived
                    assetsUnited
                    States
                
                $
                272.0
                
                $
                284.3United
                    Kingdom
                
                
                27.0
                
                
                20.6Other
                
                
                0.2
                
                
                0.3Consolidated
                    Worldwide
                
                $
                299.2
                
                $
                305.2
  50
 **ABOVENET,
          INC. AND SUBSIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
          millions, except share and per share information)**
  **NOTE
          15: SUBSEQUENT EVENTS**
 
 ***Restricted
          Stock Units***
 
 On
          December 28, 2007, the Company delivered 303,369 vested restricted stock
          units, which represented all vested restricted stock units at such date,
          to
          certain employees and former employees. The Company purchased an aggregate
          129,816 shares from the employees at $75.00 per share, the closing market
          price
          of the Company’s stock on such date, in order to fund the Company’s estimate of
          the employees’ income tax obligation based upon the highest federal, state and
          local marginal income tax rates. The aggregate value of the shares purchased
          by
          the Company of $9.7 was charged to treasury stock.
 
 ***Litigation***
 
 AboveNet
          Communications UK Limited, t he
          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 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 .
          Additional portions of the disputed duct and fiber were constructed and
          delivered after February 2008. The Company will be required
          to construct the balance of the disputed duct and fiber and deliver it
          to GVN in
          2008 pursuant to a schedule ordered by the court. ACUK has certain repair
          and
          maintenance obligations that it must perform with respect to such duct.
          GVN is
          also seeking to enforce an option requiring ACUK to construct 180 to 200
          chambers for GVN along the network. There is a dispute regarding the scope
          of
          this obligation that will be decided separately through an arbitration
          proceeding. Regardless of the outcome of the arbitration, the Company believes
          that its costs to perform the construction under the option will exceed
          the
          option price payable by GVN. ACUK is also liable for a significant portion
          of
          GVN’s legal expenses incurred as a result of the legal dispute, $1.1 USD of
          which has been paid. In addition, the court has scheduled a trial for
          June 2008 to determine the extent of the damages for which ACUK will be
          liable. The Company believes that the court has ruled that the amount of
          such
          damages should be limited to the purchase price of the duct and fiber of
          $3.5
          USD and that GVN cannot recover certain types of damages excluded by the
          Duct
          Purchase Agreement. GVN has alleged damages of ₤4.9 British pounds sterling by
          arguing that there is no liability limitation with respect to the fiber
          lease,
          and including interest and changes in exchange rates. Although the Company
          cannot determine the precise amount of the damages that ACUK will be required
          to
          pay or the costs it will incur in paying GVN’s legal fees or performing the
          required construction, repair or maintenance, the Company believes that
          the amounts will be material. Such expenses will be accrued at
          December 31, 2007 and included in the Company’s 2007 operating
          results.
 
 ***Bank
          Financing***
 
 On
          February 29, 2008, the Company, excluding certain foreign subsidiaries,
          obtained
          a $60 senior secured credit facility, consisting of an $18 revolving credit
          facility (the “Revolver”) and a $42 term loan facility (the “Term Loan”) ($24 of
          which was drawn at closing and up to $18 of which could be drawn within
          nine
          months of closing at the Company’s option) (collectively, the “Credit
          Facility”). During the six months following the close of the Credit Facility,
          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% of the total amount of the Credit Facility that was
          paid at
          closing. 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.
  51
 **ABOVENET,
          INC. AND
          SUBSIDIARIES**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**
 **(in
          millions, except share and per share information)**
 
 **NOTE
          16. QUARTERLY FINANCIAL DATA (UNAUDITED)**
 
 The
          following tables present the unaudited quarterly results for the years
          ended
          December 31, 2006, and 2005.
  **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
                )
                
                0.1Net
                    (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 reflects 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.
  52
 **ABOVENET,
          INC. AND SUBSIDIARIES**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**
 **(in
          millions, except share and per share information)**
  **2005
                    Quarter Ended****March 31**
                
                **June 30**
                
                **September 30**
                
                **December 31**Revenue
                
                $
                54.0
                
                $
                52.5
                
                $
                59.3
                
                $
                53.9Costs
                    of revenue
                
                
                28.3
                
                
                29.7
                
                
                31.7
                
                
                29.5Selling,
                    general and administrative expenses
                
                
                18.5
                
                
                14.3
                
                
                17.8
                
                
                19.0Depreciation
                    and amortization
                
                
                10.7
                
                
                10.7
                
                
                10.8
                
                
                10.9Operating
                    loss
                
                
                (3.5
                )
                
                (2.2
                )
                
                (1.0
                )
                
                (5.5
                )Other
                    income (expense):Gain
                    on sales of data centers
                
                
                (1.3
                )
                
                —
                
                
                —
                
                
                —Interest
                    income
                
                
                0.2
                
                
                0.3
                
                
                0.4
                
                
                0.4Interest
                    expense
                
                
                (1.7
                )
                
                (1.5
                )
                
                (1.3
                )
                
                (1.4
                )Other
                    income (expense), net
                
                
                10.1
                
                
                3.9
                
                
                (2.1
                )
                
                (1.0
                )Income
                    (loss) from continuing operations before income taxes
                
                
                3.8
                
                
                0.5
                
                
                (4.0
                )
                
                (7.5
                )Provision
                    for income taxes
                
                
                0.1
                
                
                0.1
                
                
                0.1
                
                
                0.1Income
                    (loss) from continuing operations
                
                
                3.7
                
                
                0.4
                
                
                (4.1
                )
                
                (7.6
                )Loss
                    from discontinued operations
                
                
                —
                
                
                (0.1
                )
                
                (0.1
                )
                
                (0.6
                )Net
                    loss from discontinued operations
                
                
                —
                
                
                (0.1
                )
                
                (0.1
                )
                
                (0.6
                )Net
                    income (loss)
                
                $
                3.7
                
                $
                0.3
                
                $
                (4.2
                )
                $
                (8.2
                )Income
                    (loss) per share, basic:Income
                    (loss) per share from continuing operations
                
                $
                0.35
                
                $
                0.04
                
                $
                (0.39
                )
                $
                (0.72
                )Loss
                    per share from discontinued operations
                
                
                —
                
                
                (0.01
                )
                
                (0.01
                )
                
                (0.05
                )Basic
                    income (loss) per share
                
                $
                0.35
                
                $
                0.03
                
                $
                (0.40
                )
                $
                (0.77
                )Weighted
                    average number of common shares
                
                
                10,553,200
                
                
                10,561,352
                
                
                10,586,634
                
                
                10,622,524Income
                    (loss) per share, diluted:Income
                    (loss) per share from continuing operations
                
                $
                0.32
                
                $
                0.04
                
                $
                (0.39
                )
                $
                (0.72
                )Loss
                    per share from discontinued operations
                
                
                —
                
                
                (0.01
                )
                
                (0.01
                )
                
                (0.05
                )Diluted
                    income (loss) per share
                
                $
                0.32
                
                $
                0.03
                
                $
                (0.40
                )
                $
                (0.77
                )Weighted
                    average number of common shares
                
                
                11,362,528
                
                
                11,380,222
                
                
                10,586,634
                
                
                10,622,524
  Fluctuations
          in revenue reported by period were impacted by termination revenue recognized
          by
          quarter as follows:
  Quarter
                    ended March 31, 2005
                
                $
                4.9Quarter
                    ended June 30, 2005
                
                $
                1.0Quarter
                    ended September 30, 2005
                
                $
                5.6Quarter
                    ended December 31, 2005
                
                $
                0.6
  53
 **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.
 
 **ITEM 9A.
          CONTROLS AND PROCEDURES**
  **Evaluation
          of Disclosure Controls and Procedures**
  As
          of
          December 31, 2006, 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, 2006.
  54
 
 **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, 2006 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 2006 financial statements.
 
 The
          Company did not maintain, in all material respects, effective internal
          controls
          over financial reporting as of December 31, 2006. 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, 2006.
  **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, 2006,
            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.
 **Change
              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.
 55
 **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, 2006, 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, 2006 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 2006 financial statements,
          and
          this report does not affect our report dated February 28, 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,
          2006, 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, 2006 and our
          report dated February 28, 2008, except for Notes 2, 15 and 16, which are as
          of May 9, 2008, expressed an unqualified opinion thereon.
 
 /s/     BDO
                    Seidman, LLPNew
                    York, NYFebruary 28,
                    2008
 
 **ITEM 9B.
          OTHER INFORMATION**
  Not
          applicable.
 56
 **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 and the Special
          Independent 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, 52, 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 related 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 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.
 
 **Executive
          Officers**
  The
          following table sets forth the name, age and position of each of our executive
          officers as of December 31, 2006. Our executive officers are appointed
          by and
          serve at the discretion of the Company’s Board of Directors.
  57
 **Name**
                
                **Age**
                
                **Position**William
                    G. LaPerch
                
                52
                
                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
                
                55
                
                Senior
                    Vice President, Sales and MarketingDouglas
                    Jendras
                
                40
                
                Senior
                    Vice President, OperationsJoseph
                    P. Ciavarella
                
                52
                
                Acting
                    Chief Financial OfficerMichael
                    A. Doris
                
                53
                
                Former
                    Senior Vice President and Chief Financial
                    Officer
  Information
          about Mr. LaPerch is set forth above 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 and has been since January 2001, 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 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, 55, 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, 40, 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,
          52, 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 2006. The Board of Directors held 14 meetings in 2006, nine
          of
          which were telephonic and five of which were in-person. 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
          2006,
          the Company had a standing Audit Committee, Compensation Committee, and
          Governance and Nominating Committee. We also had a Special Independent
          Committee
          in 2006, which was disbanded in March 2007. The Audit Committee met eight
          times
          in 2006, all of which were telephonic meetings. The Compensation Committee
          met
          five times in 2006, with two telephonic and three in-person meetings. The
          Governance and Nominating Committee did not meet in 2006. The Strategy
          Committee
          was not formed until September 2007. The Special Independent Committee
          met three
          times in 2006, with two telephonic and one in-person meeting. Each director
          attended 75% or more of the meetings of the Board of Directors and the
          committees on which they served, except for Messrs. Shorten and Postma
          with
          respect to the Special Independent Committee.
  58
 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.
 
 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
          examining those statements. In connection with the preparation of the
          December 31, 2006 financial statements, the Audit Committee
          (i) reviewed and discussed the audited financial statements with
          management; (ii) discussed with the independent auditors the matters
          required to be discussed under generally accepted auditing standards, 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,
          2006, 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 2006, the Compensation
          Committee met five times, with two telephonic and three in-person 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, although it has chosen not
          to do
          so.
 
 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 the 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.
  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.
  59
 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.
  **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. This Committee was disbanded in March 2007.
 
 **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.
 
 **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. The tables below
          in
          Item 11, “Executive Compensation,” summarize the compensation earned by our
          named executive officers in 2006. We believe that the compensation provided
          to
          our named executive officers is reasonable and not excessive.
  In
          setting 2006 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)
                the
                    significant portion of the overall 2006 compensation 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 2006 of the compensation of the named executive officers with
          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.
 
 ***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 2006, 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.
  60
 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. To date,
          the
          Compensation Committee has not retained any outside compensation consultants.
 
 ***Setting
          Named Executive Officer Compensation***
  In
          setting the annual base salary for the named executive officers other than
          the
          Chief Executive Officer in 2006, the Chief Executive Officer recommended
          amounts
          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. No equity compensation was
          granted
          to any named executive officers in 2006. In prior years, equity compensation
          amounts would be recommended by the Chief Executive Officer (except with
          respect
          to his own) and then 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. The employment agreements provide for annual renewal
          of
          such agreements provided that neither the Company nor the named executive
          officer notifies the other a certain number of days prior to the end of
          the then
          current term that it or he plans to terminate such agreement at the end
          of the
          then current term. Other material provisions of the employment agreements
          with
          the named executive officers are described below.
 
 ***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 employment agreements of the
          named
          executive officers 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, 2006 as follows:
  **Name**
                
                **From**
                
                **To**John
                    Jacquay
                
                $
                275,000
                
                $
                290,000Rajiv
                    Datta
                
                $
                241,500
                
                $
                256,500Douglas
                    Jendras
                
                $
                236,250
                
                $
                248,250Michael
                    A. Doris
                
                $
                277,200
                
                $
                327,200
 
 We
          materially increased Mr. Doris’s base salary compensation based on the work Mr.
          Doris performed in connection with working towards completing the issuance
          of
          our financial statements. The increases for the other identified named
          executive
          officers were provided to keep pace with compensation paid to similarly
          situated
          employees at the peer group companies listed above and to reward exceptional
          performance.
 
 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
 
 ***Incentive
          Cash Bonus Plan***
  The
          2006
          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 2006 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
          deducted from EBITDA certain expenses relating to the SEC investigation,
          the
          historical financial statement audits and certain other non-cash expenses,
          including share-based payments. These adjustments totaled $9.2 million
          in 2006.
          The applicable percentages and discretionary amount for the calculation
          of the
          bonus pool were determined based on our surpassing an adjusted EBITDA target
          in
          2006 of $30 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.
 
 Bonus
          payments to employees from the bonus pool are at management’s discretion (or in
          the case of our named executive officers other than Mr. Jacquay, the
          Compensation Committee’s discretion). Employees eligible to participate in our
          sales compensation plan were not eligible to participate in the incentive
          cash
          bonus plan except to the extent that an employee served in both a sales
          and
          non-sales role, in which case his or her bonus pool participation was pro
          rated
          between the two plans.
 
 With
          the
          exception of Mr. Jacquay, the employment agreements with the named executive
          officers 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. Mr.
          Jacquay’s employment agreement for 2006 specified that he was entitled to an
          annual cash bonus of $225,000 in the event that the Company met the bonus
          objective set by the Compensation Committee. As a result, in 2006, $225,000
          of
          Mr. Jacquay’s bonus was non-discretionary and as approved by the Compensation
          Committee, $50,000 was discretionary. All such amounts are included in
          the
          Summary Compensation Table below.
  In
          accordance with the Compensation Committee’s determination, incentive cash
          bonuses for 2006 for most employees were paid on March 15, 2007, except
          for the
          named executive officers and certain other executives, whose bonuses were
          paid
          upon the filing of the Form 8-K dated August 2, 2007, which, among other
          things,
          included our audited consolidated financial statements for each of the
          years
          ended December 31, 2005 and 2004 and for the period from September 8, 2003
          through December 31, 2003.
  61
 Our
          2007
          bonus pool for U.S. based employees was determined based upon adjusted
          EBITDA
          achieved in 2007 (using a similar formula as 2006). Incentive cash bonuses
          for
          2007 were paid in March 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 the 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.
 
 Our
          U.K.
          based employees receive quarterly incentive cash bonuses based upon the
          achievements of the 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. Due
          to the
          limited amount of shares remaining in the 2003 Stock Incentive Plan, in
          late
          2007, the Company suspended granting equity compensation to employees subject
          to
          certain exceptions.
 
 No
          equity
          compensation was granted to any named executive officers in 2006 because
          we
          determined that additional grants were not necessary in light of previous
          grants
          of equity. Equity compensation previously granted to three of our named
          executive officers - Messrs. LaPerch, Doris and Sokota - was determined
          as part
          of our Plan of Reorganization and then approved by the Compensation Committee
          after our emergence from bankruptcy protection in September 2003.
 
 Substantially
          all of Mr. Datta’s equity grants were made in September and December 2003 and in
          May 2004 upon his promotion to Senior Vice President. Substantially all
          of Mr.
          Jendras’ equity grants were made in September 2003 and in May 2004 upon his
          promotion to Senior Vice President. Substantially all Mr. Jacquay’s equity
          grants were made in June 2004 in connection with his hiring by us. Mr.
          Datta,
          Mr. Jendras and Mr. Jacquay were also provided with supplemental grants
          in
          December 2005 to compensate them for issues related to their prior grants.
          The
          amounts of these equity grants were recommended by the Chief Executive
          Officer
          and approved by the Compensation Committee based on the need to be competitive
          with the compensation provided to executives at other companies and to
          properly
          incentivize such named executive officers. On August 7, 2007, each of Messrs.
          Doris, Sokota, Jacquay, Datta and Jendras were granted 10,000 restricted
          stock
          units, which are scheduled to vest on the first anniversary of the date
          of
          grant.
 
 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. Such 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 such
          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. On December 28,
          2007, we delivered 303,369 shares of common stock to certain employees
          and
          former employees, which represented shares underlying all vested restricted
          stock units at such date. We purchased an aggregate 129,816 shares back
          from the
          employees at $75.00 per share, the closing market price of our stock on
          such
          date, in order to provide the employees with funds sufficient to satisfy
          their
          income tax obligations. Generally, we used the highest marginal federal,
          state
          and, where applicable, local income tax rate percentages to set the percentage
          of shares purchased from the employees. 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.
 
 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, for stock options granted
          in
          2006, the options vested on the first anniversary of the grant date. 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.
 
 Stock
          unit grants generally 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. Such grants 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.
  62
 ***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 2006. 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 2006 was
          held in Phoenix, Arizona, 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 are shown in the table below.
          In
          general, in the event of a termination without cause, the named executive
          officers are 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.
 
 We
          believe that the provision of these cash severance and accelerated vesting
          amounts upon the termination of the named executive officers’ employment is
          appropriate and we plan to continue to provide the same or similar benefits
          to
          our named executive officers in the future. We believe that offering these
          severance packages is necessary to be competitive in the industry and to
          attract
          and retain talented executives. Further, we believe that the provision
          of these
          severance amounts provide us greater ability to enforce any post-employment
          restrictions.
 
 ***Post-Employment
          Restrictions***
  Under
          their employment agreements, Messrs. LaPerch, Doris and Sokota have 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 employment agreements, Mr. Datta and Mr. Jendras have 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 employment agreement does not contain any post-employment restrictions
          on his ability to compete with us or to solicit our customers or
          employees.
 
 ***2006
          Chief Executive Officer Total Compensation***
  Mr. LaPerch’s
          total compensation is composed of the same elements as other named executive
          officers. Mr. LaPerch’s annual base salary for 2006 was $500,000 with a
          2006 bonus payment of $265,000. Mr. LaPerch was not granted any equity
          compensation in 2006. In September 2003, Mr. LaPerch was granted options
          to
          purchase 20,000 shares of common stock of the Company at the price of $20.95
          per
          share vesting in three equal amounts over a three year period, with the
          last
          one-third vesting in September 2006. In September 2003, Mr. LaPerch was
          also
          granted 50,000 restricted stock units with 10,000 restricted stock units
          vesting
          in each of September 2003, 2004, 2005, 2006 and 2007. The restricted stock
          units
          were delivered on December 28, 2007, net of shares purchased by the Company.
          Mr. LaPerch’s employment agreement became effective in September 2003 for a
          period of three years, with automatic one year renewals in the event that
          neither he nor the Company provides a notice of termination of the employment
          agreement to the other at least 120 days prior the date of expiration.
          In May
          2007, Mr. LaPerch’s employment agreement was renewed for an additional year to
          September 2008. Additionally, Mr. LaPerch was granted 20,000 restricted
          stock
          units on August 7, 2007. Such restricted stock units vest on the first
          anniversary of the date of grant.
 
 ***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 the
          extent
          that they are in possession of material non-public information. Currently,
          the
          shares of stock issued under our Equity Incentive Plan have not been covered
          by
          a registration statement under the Securities Act of 1933. As a result,
          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 such 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. Although we have not administered compensation
          polices with a goal of complying with the provisions of Section 162(m), the
          compensation paid to our senior executive officers in 2006 did not exceed
          the $1
          million threshold under Section 162(m).
  63
 **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, 2006.
 
 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.
 
 **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 year ended December 31, 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, Director,
                  
                  
                  2006
                  
                  $
                  500,000
                  
                  $
                  265,000
                  
                  $
                  209,500
                  
                  $
                  20,415
                  
                  $
                  —
                  
                  $
                  —
                  
                  $
                  18,777
                  (3)
                  $
                  1,013,692President
                      and Chief Executive OfficerMichael
                      A. Doris,
                  
                  
                  2006
                  
                  
                  318,867
                  
                  
                  125,000
                  
                  
                  172,301
                  
                  
                  16,842
                  
                  
                  —
                  
                  
                  —
                  
                  
                  17,678
                  (4)
                  
                  650,688Former
                      Senior Vice President
                    and
                      Chief Financial Officer(5)Robert
                      Sokota,
                  
                  
                  2006
                  
                  
                  315,000
                  
                  
                  130,000
                  
                  
                  172,301
                  
                  
                  16,842
                  
                  
                  —
                  
                  
                  —
                  
                  
                  16,435
                  (6)
                  
                  650,578Senior
                      Vice President,
                    General
                      Counsel,
                    Chief
                      Administrative Officer
                    and
                      SecretaryJohn
                      Jacquay
                  
                  
                  2006
                  
                  
                  287,500
                  
                  
                  275,000
                  
                  
                  309,900
                  
                  
                  150,022
                  
                  
                  —
                  
                  
                  —
                  
                  
                  18,085
                  (7)
                  
                  1,040,507Senior
                      Vice President,
                    Sales
                      & MarketingRajiv
                      Datta
                  
                  
                  2006
                  
                  
                  254,000
                  
                  
                  160,000
                  
                  
                  183,290
                  
                  
                  24,419
                  
                  
                  —
                  
                  
                  —
                  
                  
                  15,455
                  (8)
                  
                  637,164Senior
                      Vice President
                    Chief
                      Technology OfficerDouglas
                      Jendras
                  
                  
                  2006
                  
                  
                  246,250
                  
                  
                  130,000
                  
                  
                  157,040
                  
                  
                  24,419
                  
                  
                  —
                  
                  
                  —
                  
                  
                  15,350
                  (9)
                  
                  573,059Senior
                      Vice President,
                    Operations
 
 (1)
                No
                    restricted stock units were granted in 2006. 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,
                    2006 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 stock awards were
                    forfeited by the named executive officers in 2006. 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 were granted in 2006. 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,
                    2006 for
                    option awards in accordance with FAS 123R, excluding any estimate
                    for
                    forfeitures. No option awards were forfeited by the named executive
                    officers in 2006. For additional information on the valuation
                    assumptions
                    underlying the value of these awards, see Note 9, “Stock-Based
                    Compensation,”to
                    the accompanying consolidated financial statementsincluded
                    elsewhere in this Annual Report on Form
                    10-K.
 
 (3)
                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.
 
 (4)
                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.(5)
                Mr.
                    Doris’ contract was terminated without cause on March 4,
                    2008.(6)
                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.(7)
                Includes
                    health and welfare benefits of $12,404, life insurance premiums
                    of $3,377,
                    disability premiums of $913, and other of $1,391.(8)
                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.(9)
                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.
  64
 *Employment
          Agreement - William G. LaPerch*
  On
          August
          29, 2003, the Company entered into an employment agreement with Mr. LaPerch
          effective September 8, 2003, amended January 1, 2004 and December 30, 2005,
          providing that he will serve as an executive officer of the Company for
          a term
          expiring on September 8, 2006, which has renewed annually. The agreement
          provided for an annual base salary of $325,000, subject to increase at
          the
          Board's discretion, participation in incentive and bonus plans at the discretion
          of the Board, ten-year options to purchase up to 20,000 shares of the Company’s
          common stock at an exercise price of $20.95 per share, vesting in three
          equal
          annual installments commencing on September 16, 2003, and maintenance of
          a $1
          million life insurance policy payable to beneficiaries named by Mr. LaPerch.
          Mr.
          LaPerch also received 50,000 shares of restricted stock which vested in
          five
          equal annual installments commending September 12, 2003.
  **Grants
          of Plan-Based Award**
  We
          did
          not make any grants under our Equity Incentive Plan of stock option awards
          to
          our named executive officers during the year ended December 31,
          2006.
 
 **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, 2006:
  Option
                      Awards
                  
                  Stock
                      Awards(14)Name
                  
                  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
                  
                  
                  —
                  
                  $
                  —
                  
                  
                  ──
                  
                  $
                  ──50,000
                  (5)(12)
                  
                  ──
                  
                  
                  ──
                  
                  
                  
                  
                  
                  
                  
                  
                  10,000
                  (7)
                  
                  600,000
                  
                  
                  ──
                  
                  
                  ──Michael
                      A. Doris
                  
                  
                  16,500
                  (1)
                  
                  ──
                  
                  
                  ──
                  
                  $
                  20.95
                  
                  
                  09/10/13
                  
                  
                  —
                  
                  
                  —
                  
                  
                  ──
                  
                  
                  ──41,122
                  (5)(12)
                  
                  ──
                  
                  
                  ──
                  
                  
                  
                  
                  
                  
                  
                  
                  8,224
                  (7)
                  
                  493,440
                  
                  
                  ──
                  
                  
                  ──Robert
                      Sokota
                  
                  
                  16,500
                  (1)
                  
                  ──
                  
                  
                  ──
                  
                  $
                  20.95
                  
                  
                  09/10/13
                  
                  
                  —
                  
                  
                  —
                  
                  
                  ──
                  
                  
                  ──41,122
                  (5)(12)
                  
                  ──
                  
                  
                  ──
                  
                  
                  
                  
                  
                  
                  
                  
                  8,224
                  (7)
                  
                  493,440
                  
                  
                  ──
                  
                  
                  ──John
                      Jacquay
                  
                  
                  25,000
                  (2)
                  
                  ──
                  
                  
                  ──
                  
                  $
                  36.50
                  
                  
                  06/01/14
                  
                  
                  8,333
                  (15)
                  
                  499,980
                  
                  
                  ──
                  
                  
                  ──7,000
                  (4)
                  
                  —
                  
                  
                  —
                  
                  $
                  25.00
                  
                  
                  12/19/15
                  
                  
                  2,333
                  (15)
                  
                  139,980
                  
                  
                  —
                  
                  
                  —40,000
                  (6)(12)
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  
                  
                  
                  
                  20,000
                  (8)
                  
                  1,200,000
                  
                  
                  —
                  
                  
                  —Rajiv
                      Datta
                  
                  
                  10,000
                  (1)
                  
                  ──
                  
                  
                  ──
                  
                  $
                  20.95
                  
                  
                  09/12/13
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —4,000
                  (3)
                  
                  —
                  
                  
                  —
                  
                  $
                  36.50
                  
                  
                  05/13/14
                  
                  
                  1,334
                  (16)
                  
                  80,040
                  
                  
                  —
                  
                  
                  —80
                  (13)
                  
                  —
                  
                  
                  —
                  
                  $
                  25.00
                  
                  
                  12/19/15
                  
                  
                  27
                  (16)
                  
                  1,620
                  
                  
                  —
                  
                  
                  —16,000
                  (5)(12)
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  
                  
                  
                  
                  3,200
                  (7)
                  
                  192,000
                  
                  
                  —
                  
                  
                  —6,500
                  (5)(12)
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  
                  
                  
                  
                  1,300
                  (9)
                  
                  78,000
                  
                  
                  —
                  
                  
                  —7,500
                  (5)(12)
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  
                  
                  
                  
                  3,750
                  (10)
                  
                  225,000
                  
                  
                  —
                  
                  
                  —Douglas
                      Jendras
                  
                  
                  10,000
                  (1)
                  
                  ──
                  
                  
                  ──
                  
                  $
                  20.95
                  
                  
                  09/12/13
                  
                  
                  —
                  
                  
                  —
                  
                  
                  ──
                  
                  
                  ──4,000
                  (3)
                  
                  —
                  
                  
                  
                  
                  $
                  36.50
                  
                  
                  05/13/14
                  
                  
                  1,334
                  (16)
                  
                  80,040
                  
                  
                  —
                  
                  
                  —80
                  (13)
                  
                  —
                  
                  
                  —
                  
                  $
                  25.00
                  
                  
                  12/19/15
                  
                  
                  27
                  (16)
                  
                  1,620
                  
                  
                  —
                  
                  
                  —16,000
                  (5)(12)
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  
                  
                  
                  
                  3,200
                  (7)
                  
                  192,000
                  
                  
                  —
                  
                  
                  —10,000
                  (5)(12)
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  
                  
                  
                  
                  5,000
                  (11)
                  
                  300,000
                  
                  
                  —
                  
                  
                  —
  (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.
  65
 (5)
                Represents
                    restricted stock units, which were granted on December 19, 2005
                    and vested
                    ratably, one-fifth on the date of grant, and one-fifth on each
                    anniversary
                    of the date of grant.
 
 (6)
                Represents
                    restricted stock units, which were granted on May 13, 2004 and
                    vest
                    ratably, one-fourth on each of the first four anniversaries of
                    the date of
                    grant.
 
 (7)
                These
                    restricted stock units vested September 12,
                    2007.
 
 (8)
                10,000
                    of these restricted stock units vested June 1,
                    2007.
 
 (9)
                These
                    restricted stock units vested December 19,
                    2007.
 
 (10)
                1,875
                    of these restricted stock units vested May 13,
                    2007.
 
 (11)
                2,500
                    of these restricted stock units vested May 13,
                    2007.
 
 (12)
                On
                    December 28, 2007, we delivered shares with respect to vested
                    restricted
                    stock units to recipients 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
 
 (13)
                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.
 
 (14)
                The
                    table excludes restricted stock units granted August 7, 2007
                    to Mr.
                    LaPerch (20,000), Mr. Doris (10,000), Mr. Sokota (10,000), Mr.
                    Datta
                    (10,000), Mr. Jacquay (10,000) and Mr. Jendras (10,000) which
                    vest on the
                    first anniversary of the date of
                    grant.
 
 (15)
                These
                    options vested on June 1, 2007.
 
 (16)
                These
                    options vested on May 13, 2007.
 
 **Option
          Exercises and Stock Vested During Fiscal 2006**
  There
          were no options exercised by any of the Company's named executive officers,
          and
          no delivery of vested stock awarded pursuant to restricted stock units
          held by
          the Company's named executive officers during the year ended December 31,
          2006.
 
 **Pension
          Benefits - Fiscal 2006**
  There
          were no pension benefits earned by the Company's named executive officers
          in the
          year ended December 31, 2006.
 
 **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.
  66
 **Potential
          Payments Upon Termination or Change of Control**
  ***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, 2006.
  Executive
                    Benefits upon
                  Payments
                    Upon Separation
                
                Expiration
                    of Employment Agreement
                  ($)
                
                Voluntary
                    Termination on 12/31/06
                  ($)
                
                For
                    Cause Termination on 12/31/06
                  ($)
                
                Without
                    Cause Termination on 12/31/06
                  ($)
                
                Change-in-Control
                    and Termination on 12/31/06
                  ($)
                
                Disability
                    on 12/31/06
                  ($)
                
                Death
                    on 12/31/06
                  ($)(a)
                
                (b)
                
                (b)
                
                (d)
                
                (e)
                
                (f)
                
                (h)
                
                (i)***Compensation******:***Cash
                    Severance - Salary and Bonus
                
                $
                —
                
                $
                —
                
                $
                —
                
                $
                765,000
                (1)
                $
                765,000
                (1)
                $
                265,000
                
                $
                265,000Stock
                    Options(2)
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —Restricted
                    Stock(3)
                
                
                —
                
                
                —
                
                
                —
                
                
                600,000
                
                
                300,000
                
                
                600,000
                
                
                600,000Benefits
                    and Perquisites
                
                
                —
                
                
                —
                
                
                —
                
                
                13,254
                
                
                13,254
                
                
                —
                
                
                —Life
                    Insurance
                
                
                —
                
                
                —
                
                
                —
                
                
                2,821
                (4)
                
                2,821
                (4)
                
                —
                
                
                1,000,000
                (5)**Total**
                
                $
                —
                
                $
                —
                
                $
                —
                
                $
                1,381,075
                
                $
                1,081,075
                
                $
                865,000
                
                $
                1,865,000
 
 (1)
                Represents
                    one year of severance at Mr. LaPerch’s 2006 annual base salary plus his
                    2006 bonus of $265,000.(2)
                All
                    options to purchase common stock granted to Mr. LaPerch were
                    vested as of
                    December 31, 2006.(3)
                Pursuant
                    to the terms of the stock unit agreement, Mr. LaPerch’s unvested
                    restricted stock units would become 100% vested if 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, 2006 closing common stock
                    market price
                    of $60.00 per share ($60.00 x 10,000 shares = $600,000 at 100%
                    vesting and
                    $60.00 x 5,000 shares = $300,000 at 50% vesting).(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, 2006.
  Executive
                    Benefits upon
                  Payments
                    Upon Separation
                
                Expiration
                    of Employment Agreement
                  ($)
                
                Voluntary
                    Termination on 12/31/06
                  ($)
                
                For
                    Cause Termination on 12/31/06
                  ($)
                
                Without
                    Cause Termination on 12/31/06
                  ($)(6)
                
                Change-in-Control
                    and Termination on 12/31/06
                  ($)
                
                Disability
                    on 12/31/06
                  ($)
                
                Death
                    on 12/31/06
                  ($)(a)
                
                (b)
                
                (b)
                
                (d)
                
                (e)
                
                (f)
                
                (h)
                
                (i)***Compensation******:***Cash
                    Severance - Salary and Bonus
                
                $
                —
                
                $
                —
                
                $
                —
                
                $
                443,867
                (1)
                $
                443,867
                (1)
                $
                125,000
                
                $
                125,000Stock
                    Options(2)
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —Restricted
                    Stock(3)
                
                
                —
                
                
                —
                
                
                —
                
                
                493,440
                
                
                246,720
                
                
                493,440
                
                
                493,440Benefits
                    and Perquisites
                
                
                —
                
                
                —
                
                
                —
                
                
                12,678
                
                
                12,678
                
                
                —
                
                
                —Life
                    Insurance
                
                
                —
                
                
                —
                
                
                —
                
                
                2,821
                (4)
                
                2,821
                (4)
                
                —
                
                
                1,000,000
                (5)**Total**
                
                $
                —
                
                $
                —
                
                $
                —
                
                $
                952,806
                
                $
                706,086
                
                $
                618,440
                
                $
                1,618,440
  (1)
                  Represents
                      one year of severance at Mr. Doris’ 2006 annual base salary plus his 2006
                      bonus of $125,000.
 
 (2)
                  All
                      options to purchase common stock granted to Mr. Doris were
                      vested as of
                      December 31, 2006.
 
 (3)
                  Pursuant
                      to the terms of the stock unit agreement, Mr. Doris’ unvested restricted
                      stock units would become 100% vested if 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, 2006 closing common stock market price
                      of $60.00
                      per share ($60.00 x 8,224 shares = $493,440 at 100% vesting
                      and $60.00 x
                      4,112 shares = $246,720 at 50% vesting).
  67
 (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 the 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.
  ***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, 2006.
  Executive
                    Benefits upon
                  Payments
                    Upon Separation
                
                Expiration
                    of Employment Agreement
                  ($)
                
                Voluntary
                    Termination on 12/31/06
                  ($)
                
                For
                    Cause Termination on 12/31/06
                  ($)
                
                Without
                    Cause Termination on 12/31/06
                  ($)
                
                Change-in-Control
                    and Termination on 12/31/06
                  ($)
                
                Disability
                    on 12/31/06
                  ($)
                
                Death
                    on 12/31/06
                  ($)(a)
                
                (b)
                
                (b)
                
                (d)
                
                (e)
                
                (f)
                
                (h)
                
                (i)***Compensation******:***Cash
                    Severance - Salary and Bonus
                
                $
                —
                
                $
                —
                
                $
                —
                
                $
                445,000
                (1)
                $
                445,000
                (1)
                $
                130,000
                
                $
                130,000Stock
                    Options(2)
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —Restricted
                    Stock(3)
                
                
                —
                
                
                —
                
                
                —
                
                
                493,440
                
                
                246,720
                
                
                493,440
                
                
                493,440Benefits
                    and Perquisites
                
                
                —
                
                
                —
                
                
                —
                
                
                12,915
                
                
                12,915
                
                
                —
                
                
                —Life
                    Insurance
                
                
                —
                
                
                —
                
                
                —
                
                
                1,151
                (4)
                
                1,151
                (4)
                
                —
                
                
                1,000,000
                (5)**Total**
                
                $
                —
                
                $
                —
                
                $
                —
                
                $
                952,506
                
                $
                705,786
                
                $
                623,440
                
                $
                1,623,440
 
 (1)
                Represents
                    one year of severance at Mr. Sokota’s 2006 annual base salary plus his
                    2006 bonus of $130,000.
 
 (2)
                All
                    options to purchase common stock granted to Mr. Sokota were vested
                    as of
                    December 31, 2006.
 
 (3)
                Pursuant
                    to the terms of the stock unit agreement, Mr. Sokota’s unvested restricted
                    stock units would become 100% vested if 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, 2006 closing common stock market price
                    of $60.00
                    per share ($60.00 x 8,224 shares = $493,440 at 100% vesting and
                    $60.00 x
                    4,112 shares = $246,720 at 50%
                    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.
  68
 ***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,
          2006.
  Executive
                    Benefits upon
                  Payments
                    Upon Separation
                
                Expiration
                    of Employment Agreement
                  ($)
                
                Voluntary
                    Termination on 12/31/06
                  ($)
                
                For
                    Cause Termination on 12/31/06
                  ($)
                
                Without
                    Cause Termination on 12/31/06
                  ($)
                
                Change-in-Control
                    and Termination on 12/31/06
                  ($)
                
                Disability
                    on 12/31/06
                  ($)
                
                Death
                    on 12/31/06
                  ($)(a)
                
                (b)
                
                (b)
                
                (d)
                
                (e)
                
                (f)
                
                (h)
                
                (i)***Compensation******:***Cash
                    Severance - Salary and Bonus
                
                $
                —
                
                $
                —
                
                $
                —
                
                $
                287,500
                (1)
                $
                562,500
                (2)
                $
                —
                
                $
                —Stock
                    Options(3)
                
                
                —
                
                
                —
                
                
                —
                
                
                277,481
                
                
                138,740
                
                
                277,481
                
                
                277,481Restricted
                    Stock(4)
                
                
                —
                
                
                —
                
                
                —
                
                
                1,200,000
                
                
                600,000
                
                
                1,200,000
                
                
                1,200,000Benefits
                    and Perquisites
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —Life
                    Insurance
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                1,000,000
                (5)**Total**
                
                $
                —
                
                $
                —
                
                $
                —
                
                $
                1,764,981
                
                $
                1,301,240
                
                $
                1,477,481
                
                $
                2,477,481
 
 (1)
                Represents
                    one year of severance at Mr. Jacquay’s 2006 annual base salary.
 
 (2)
                Represents
                    one year of severance at Mr. Jacquay’s 2006 annual base salary plus his
                    2006 bonus of $275,000. 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)
                Pursuant
                    to the terms of the stock option agreement, Mr. Jacquay’s unvested stock
                    options would become 100% vested if terminated without cause
                    or for
                    disability or death and 50% vested upon a change-in-control.
                    The options
                    are valued in the above table at the difference between the market
                    price
                    at December 31, 2006 ($60.00 per share) and the exercise prices
                    as
                    follows:
 
 Grant
                    Date
                
                Unvested
                    Options at
                  December
                    31, 2006
                
                Market
                    Price at
                  December
                    31, 2006
                
                Exercise
                    Price
                
                Value
                    at 100%
                
                Value
                    at 50%June
                    1, 2004
                
                
                8,333
                
                $
                60.00
                
                $
                36.50
                
                $
                195,826
                
                $
                97,913December
                    19, 2005
                
                
                2,333
                
                $
                60.00
                
                $
                25.00
                
                
                81,655
                
                
                40,827$
                277,481
                
                $
                138,740
 
 (4)
                Pursuant
                    to the terms of the stock unit agreement, Mr. Jacquay’s unvested
                    restricted stock units would become 100% vested if 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, 2006 closing common stock
                    market price
                    of $60.00 per share ($60.00 x 20,000 shares = $1,200,000 at 100%
                    vesting
                    and $60.00 x 10,000 shares = $600,000 at 50% vesting).
 
 (5)
                Upon
                    his death, Mr. Jacquay’s beneficiary would receive the proceeds of a
                    $1,000,000 life insurance policy.
 
 ***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,
          2006.
  Executive
                    Benefits upon
                  Payments
                    Upon Separation
                
                Expiration
                    of Employment Agreement
                  ($)
                
                Voluntary
                    Termination on 12/31/06
                  ($)
                
                For
                    Cause Termination on 12/31/06
                  ($)
                
                Without
                    Cause Termination on 12/31/06
                  ($)
                
                Change-in-Control
                    and Termination on 12/31/06
                  ($)
                
                Disability
                    on 12/31/06
                  ($)
                
                Death
                    on 12/31/06
                  ($)(a)
                
                (b)
                
                (b)
                
                (d)
                
                (e)
                
                (f)
                
                (h)
                
                (i)***Compensation******:***Cash
                    Severance - Salary and Bonus
                
                $
                —
                
                $
                —
                
                $
                —
                
                $
                329,333
                (1)
                $
                329,333
                (1)
                $
                —
                
                $
                —Stock
                    Options(2)
                
                
                —
                
                
                —
                
                
                —
                
                
                24,221
                
                
                32,294
                
                
                24,221
                
                
                32,294Restricted
                    Stock(3)
                
                
                —
                
                
                —
                
                
                —
                
                
                371,280
                
                
                495,000
                
                
                371,280
                
                
                495,000Benefits
                    and Perquisites
                
                
                —
                
                
                —
                
                
                —
                
                
                8,201
                
                
                8,201
                
                
                —
                
                
                —Life
                    Insurance
                
                
                —
                
                
                —
                
                
                —
                
                
                676
                (4)
                
                676
                (4)
                
                —
                
                
                1,000,000
                (5)**Total**
                
                $
                —
                
                $
                —
                
                $
                —
                
                $
                733,711
                
                $
                865,504
                
                $
                395,501
                
                $
                1,527,294
 
 (1)
                Represents
                    eight months of severance based upon Mr. Datta’s 2006 annual base salary
                    plus his 2006 bonus of $160,000.
 
 (2)
                Pursuant
                    to terms of the stock option agreement, Mr. Datta’s unvested stock options
                    would become 100% vested if terminated without cause within one
                    year of a
                    change-in-control or death and 75% vested if terminated without
                    cause or
                    for disability. The options are valued in the above table at
                    the
                    difference between the market price at December 31, 2006 ($60.00
                    per
                    share) and the exercise prices as
                    follows:
  69
 Grant
                    Date
                
                Unvested
                    Options at
                  December
                    31, 2006
                
                Market
                    Price at
                  December
                    31, 2006
                
                Exercise
                    Price
                
                Value
                    at 100%
                
                Value
                    at 75%June
                    1, 2004
                
                
                1,334
                
                $
                60.00
                
                $
                36.50
                
                $
                31,349
                
                $
                23,512December
                    19, 2005
                
                
                27
                
                $
                60.00
                
                $
                25.00
                
                
                945
                
                
                709$
                32,294
                
                $
                24,221
 
 (3)
                Pursuant
                    to the terms of the 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 terminated without cause or for disability. The
                    shares
                    underlying the restricted stock units have been valued in the
                    above table
                    using the December 31, 2006 closing common stock market price
                    of $60.00
                    per share ($60.00 x 8,250 shares = $495,000 at 100% vesting and
                    $60.00 x
                    6,188 shares = $371,280 at 75%
                    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,
          2006.
  Executive
                    Benefits upon
                  Payments
                    Upon Separation
                
                Expiration
                    of Employment Agreement
                  ($)
                
                Voluntary
                    Termination on 12/31/06
                  ($)
                
                For
                    Cause Termination on 12/31/06
                  ($)
                
                Without
                    Cause Termination on 12/31/06
                  ($)
                
                Change-in-Control
                    and Termination on 12/31/06
                  ($)
                
                Disability
                    on 12/31/06
                  ($)
                
                Death
                    on 12/31/06
                  ($)(a)
                
                (b)
                
                (b)
                
                (d)
                
                (e)
                
                (f)
                
                (h)
                
                (i)***Compensation******:***Cash
                    Severance - Salary and Bonus
                
                $
                —
                
                $
                —
                
                $
                —
                
                $
                253,125
                (1)
                $
                253,125
                (1)
                $
                —
                
                $
                —Stock
                    Options(2)
                
                
                —
                
                
                —
                
                
                —
                
                
                16,148
                
                
                32,294
                
                
                16,148
                
                
                32,294Restricted
                    Stock(3)
                
                
                —
                
                
                —
                
                
                —
                
                
                246,000
                
                
                492,000
                
                
                246,000
                
                
                492,000Benefits
                    and Perquisites
                
                
                —
                
                
                —
                
                
                —
                
                
                6,098
                
                
                6,098
                
                
                —
                
                
                —Life
                    Insurance
                
                
                —
                
                
                —
                
                
                —
                
                
                507
                (4)
                
                507
                (4)
                
                —
                
                
                1,000,000
                (5)**Total**
                
                $
                —
                
                $
                —
                
                $
                —
                
                $
                521,878
                
                $
                784,024
                
                $
                262,148
                
                $
                1,524,294
 
 (1)
                Represents
                    six months of severance based upon Mr. Jendras’ 2006 annual base salary
                    plus his 2006 bonus of $130,000.
 
 (2)
                Pursuant
                    to the terms of the stock option agreement, Mr. Jendras’ unvested stock
                    options would become 100% vested if terminated without cause
                    within one
                    year of a change-in-control or death and 50% vested if terminated
                    without
                    cause or for disability. The options are valued in the above
                    table at the
                    difference between the market price at December 31, 2006 ($60.00
                    per
                    share) and the exercise prices as
                    follows:
 
 Grant
                    Date
                
                Unvested
                    Options at
                  December
                    31, 2006
                
                Market
                    Price at
                  December
                    31, 2006
                
                Exercise
                    Price
                
                Value
                    at 100%
                
                Value
                    at 50%June
                    1, 2004
                
                
                1,334
                
                $
                60.00
                
                $
                36.50
                
                $
                31,349
                
                $
                15,675December
                    19,2005
                
                
                27
                
                $
                60.00
                
                $
                25.00
                
                
                945
                
                
                473$
                32,294
                
                $
                16,148
 
 (3)
                Pursuant
                    to the terms of the stock unit agreement, Mr. Jendras’ unvested restricted
                    stock units would become 100% vested upon a change-in-control
                    or death and
                    50% vested if terminated without cause or for disability. The
                    shares
                    underlying the restricted stock units have been valued in the
                    above table
                    using the December 31, 2006 closing common stock market price
                    of $60.00
                    per share ($60.00 x 8,200 shares = $492,000 at 100% vesting and
                    $60.00 x
                    4,100 shares = $246,000 at 50%
                    vesting).
 
 (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.
  70
 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 a quarterly retainer of $20,000 payable
          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
          Franklin Mutual Advisers, LLC, holding shares in the Company.
 
 **Director
          Summary Compensation Table**
  The
          following table summarizes the compensation paid to our non-employee directors
          for the fiscal year ended December 31, 2006:
  Name
                  
                  Fees
                      Earned or Paid in Cash
                    ($)
                  
                  Stock
                      Awards ($)(4)
                  
                  Option
                      Awards ($)(5)
                  
                  Non-Equity
                      Incentive Plan Compensation
                    ($)
                  
                  Change
                      in Pension Value and Nonqualified Deferred Compensation
                      Earnings($)
                  
                  All
                      Other Compensation
                    ($)
                  
                  Total
                    ($)Jeffrey
                      Brodsky
                  
                  $
                  238,500
                  (1)(2)
                  $
                  —
                  
                  $
                  3,062
                  
                  $
                  —
                  
                  $
                  —
                  
                  $
                  —
                  
                  $
                  241,562Michael
                      J. Embler
                  
                  
                  84,500
                  (1)
                  
                  —
                  
                  
                  3,062
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  87,562Richard
                      Postma
                  
                  
                  103,000
                  (1)
                  
                  —
                  
                  
                  3,062
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  106,062Richard
                      Shorten, Jr.
                  
                  
                  91,000
                  (1)
                  
                  —
                  
                  
                  3,062
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  94,062Stuart
                      Subotnick
                  
                  
                  88,500
                  (1)
                  
                  —
                  
                  
                  3,062
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  91,562Dennis
                      O’Connell
                  
                  
                  41,032
                  (1)(3)
                  
                  —
                  
                  
                  3,062
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  44,094$
                  646,532
                  
                  $
                  —
                  
                  $
                  18,372
                  
                  $
                  —
                  
                  $
                  —
                  
                  $
                  —
                  
                  $
                  664,904
  (1)
                Includes
                    $60,000 annual service retainer plus meeting attendance
                    fees.(2)
                Includes
                    $100,000 awarded to Mr. Brodsky in March 2006 for past services,
                    $30,000
                    for services performed as Chairman of the Board and $10,000 for
                    services
                    performed as Chairman of the Audit Committee.(3)
                Mr.
                    O’Connell resigned his position on the Board of Directors in May
                    2006.(4)
                On
                    August 7, 2007, each of Messrs. Brodsky, Embler, Postma, Shorten
                    and
                    Subotnick was granted 7,000 restricted stock units, which vest
                    on the
                    first anniversary of date of grant.(5)
                These
                    amounts do not reflect actual value realized by the recipient.
                    No value
                    was realized by any directors in 2006. 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,
                    2006 for option awards originally granted in 2003 in accordance
                    with FAS
                    123R, excluding any estimate for forfeitures. No option awards
                    were
                    granted in 2006. No stock awards were forfeited by the non-employee
                    directors in 2006. For additional information on the valuation
                    assumptions
                    underlying the value of these awards, see Note 9, “Stock-Based
                    Compensation,”to
                    the accompanying consolidated financial statementsincluded
                    elsewhere in this Annual Report on Form
                    10-K.
 
 **Compensation
          Committee Interlocks and Insider Participation**
  During
          2006, 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 2006, 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.
 
 **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 Commission (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 Commission
          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 years ended December 31, 2006, all filings required by our executive
          officers, directors and greater than 10% beneficial owners under Section
          16(a)
          were timely with the exception of one late Form 4 filed in 2006 for each
          of
          Messrs. Jacquay, Datta and Jendras, and one late Form 3/A filed by Franklin
          Mutual Advisers, LLC in 2006.
  71
 **ITEM
          12.**  **SECURITY
          OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
          MATTERS**
  The
          following table sets forth, as of April 30, 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 April 30,
          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
                
                2,461,229
                (2)
                22.6
                %Fiber
                    LLC
                  2300
                    Carillow Point
                  Kirkland,
                    WA 98033
                
                1,514,191
                (3)
                14.2
                %JGD
                    Management Corp. and affiliated persons
                  c/o
                    York Capital Management
                  767
                    Fifth Avenue, 17thFloor
                  New
                    York, NY 10153
                
                1,606,652
                (4)
                14.7
                %Kluge
                    Trust
                  c/o
                    Metromedia Company
                  810
                    7thAvenue, 29thFloor
                  New
                    York, NY 10019
                
                1,220,304
                (5)
                11.4
                %Stonehill
                    Capital Management LLC and affiliated persons
                  805
                    Third Avenue, 30thFloor
                  New
                    York, NY 10022
                
                845,203
                (6)
                7.9
                %Jeffrey
                    Brodsky
                
                3,000
                (7)
                *Michael
                    Embler
                
                —
                (2)
                    (7)
                *Richard
                    Postma
                
                3,000
                (7)
                *Richard
                    Shorten, Jr.
                
                3,000
                (7)
                *Stuart
                    Subotnick
                
                3,000
                (7)
                *Dennis
                    O’Connell
                
                3,000
                (8)
                *William
                    G. LaPerch
                
                48,825
                (9)
                *Michael
                    A. Doris
                
                50,207
                (10)
                *Robert
                    Sokota
                
                39,541
                (11)
                *****John
                    Jacquay
                
                59,988
                (12)
                *Rajiv
                    Datta
                
                31,713
                (13)
                *Douglas
                    Jendras
                
                30,128
                (14)
                *Joseph
                    P. Ciavarella
                
                —
                
                *All
                    directors and executive officers as a group (thirteen
                    persons)
                
                275,402
                (15)
                2.5
                %
  *Less
          than 1%
  (1)
                The
                    applicable percentage of beneficial ownership is based on 10,700,592
                    shares of common stock outstanding as of April 30, 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 April 30, 2008.
  72
 (2)
                Includes
                    2,282,912 shares of common stock, five year warrants to purchase
                    80,551
                    shares of common stock at $20 per share and seven year warrants
                    to
                    purchase 94,766 shares of common stock at $24 per share.  Also
                    includes options to purchase 3,000 shares of common stock granted
                    to Mr.
                    Embler, which he holds as a nominee of Franklin Mutual Advisors,
                    LLC
                    (“FMA”) and disclaims any beneficial ownership.  Excludes 7,000
                    restricted stock units granted to Mr. Embler on August 7, 2007,
                    which vest
                    on the first anniversary of the date of grant 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.  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.
 
 (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. 5)
                    filed by
                    JGD Management Corp. (“JGD”) with the Securities and Exchange Commission
                    on February 14, 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) 371,382 shares of
                    common stock and warrants to purchase 10,406 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) 203,810 shares of common stock and warrants to purchase
                    64,533 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) 1,172
                    shares of common stock directly owned by York Long Enhanced Fund,
                    L.P.
                    (“York Long Enhanced”) and (ix) 39,790 shares of common stock and warrants
                    to purchase 3,072 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
                    1,171,978 shares of common stock, five year warrants to purchase
                    22,204
                    shares of common stock at $20 per share and seven year warrants
                    to
                    purchase 26,122 shares of common stock at $24 per share.Mr.
                    Subotnick, a member of the Board of Directors of the Company
                    and a trustee
                    of the Kluge Trust, disclaims beneficial ownership of the shares
                    owned by
                    the Kluge Trust.
  (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)
                Excludes
                    7,000 restricted stock units granted on August 7, 2007, which
                    are
                    scheduled to vest on the first anniversary of the date of
                    grant.
  (8)
                Mr.
                    O’Connell resigned his position on the Board of Directors in May
                    2006.
 
 (9)
                Includes
                    28,825 shares underlying restricted stock units delivered on
                    December 28,
                    2007 and fully vested and exercisable options to purchase 20,000
                    shares of
                    common stock. Excludes 20,000 restricted stock units granted
                    on August 7,
                    2007, which vest one year from the date of
                    grant.
 
 (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 and fully vested and exercisable options to purchase 16,500
                    shares of
                    common stock. Excludes 10,000 restricted stock units granted
                    on August 7,
                    2007, which vest one year from the date of
                    grant.
 
 (12)
                Includes
                    17,988 shares underlying restricted stock units delivered on
                    December 28,
                    2007, fully vested and exercisable options to purchase 32,000
                    shares of
                    common stock and 10,000 restricted stock units, which vest on
                    June 1,
                    2008. Excludes 10,000 restricted stock units granted on August
                    7, 2007,
                    which vest one year from the date of
                    grant.
 
 (13)
                Includes
                    15,758 shares underlying restricted stock units delivered on
                    December 28,
                    2007, fully vested and exercisable options to purchase 14,080
                    shares of
                    common stock and 1,875 restricted stock units, which vest on
                    June 1, 2008.
                    Excludes 10,000 restricted stock units granted on August 7, 2007,
                    which
                    vest one year from the date of
                    grant.
 
 (14)
                Includes
                    13,548 shares underlying restricted stock units delivered on
                    December 28,
                    2007, fully vested and exercisable options to purchase 14,080
                    shares of
                    common stock and 2,500 restricted stock units, which vest on
                    June 1, 2008.
                    Excludes 10,000 restricted stock units granted on August 7, 2007,
                    which
                    vest one year from the date of
                    grant.
 
 (15)
                Includes
                    122,867 shares underlying restricted stock units delivered on
                    December 28,
                    2007, 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 14,375 restricted
                    stock units, which vest on June 1, 2008. Excludes 88,000 restricted
                    stock
                    units granted on August 7, 2007, which vest one year from the
                    date of
                    grant.
  73
 **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, 2006.
  Plan
                    category
                
                Number
                    of Securities to be Issued Upon Exercise of Outstanding Options
                    and
                    Restricted Stock Units(1)
                
                Weighted
                    Average Exercise Price of Outstanding Options and Restricted
                    Stock
                    Units(1)
                
                Number
                    of Securities Remaining Available for Future Issuance Under Equity
                    Compensation Plan (Excluding Securities Reflected in the First
                    Column)(2)Equity
                    compensation plan approved by security holders
                
                
                —
                
                $
                —
                
                
                —Equity
                    compensation plan not approved by security holders
                
                
                865,111
                
                
                26.41
                
                
                158,723Total
                
                
                865,111
                
                $
                26.41
                
                
                158,723
 
 (1)
                Includes
                    387,594 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.(2)
                The
                    above table excludes warrants granted to creditors as part of
                    settled
                    bankruptcy claims as follows:
 
 Weighted
                    Average
                  Exercise
                    Price
                
                Total
                    Warrants Issued
                
                Warrants
                    Exercised as of December 31, 2006
                
                Unexercised
                    Warrants Outstanding
                  at
                    December 31, 2006Five
                    year stock purchase warrants
                
                $
                20.00
                
                
                709,459
                
                
                6,712
                
                
                702,747Seven
                    year stock purchase warrants
                
                $
                24.00
                
                
                834,658
                
                
                6,563
                
                
                828,095
 
 **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
          revenues.
 
 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 for $15,225 in 2004,
          $104,150
          in 2005 and $111,360 in 2006. In addition, we signed a new order with US
          Signal
          in December 2006 pursuant to which we will provide an additional $12,000
          per
          month of dark fiber services to US Signal. Our transactions with US Signal
          have
          been approved or ratified by the Board of Directors (without Mr. Postma
          participating) and are priced consistently with our pricing for other customers.
          Mr. Postma had no involvement in the negotiation of these fiber services
          agreements.
 
 In
          determining the independence of Mr. Subotnick, the Board took into account
          that
          we provided co-location services to Metromedia Connections, Inc., a company
          with
          which Mr. Subotnick has an indirect ownership interest and management role.
          In
          connection with providing those services, Metromedia Connections, Inc.
          paid us
          $65,877 in 2005. There were no payments made in 2006.
 
 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 for professional services rendered for the Company by BDO Seidman,
          LLP
          through February 29, 2008 for the years ended December 31, 2006 and 2005
          were:
  **2006**
                
                **2005**Audit
                    Fees
                
                $
                3,122,802
                
                $
                1,461,733
                *Audit
                    Related Fees
                
                
                —
                
                
                —Tax
                    Fees
                
                
                23,100
                
                
                —All
                    Other Fees
                
                
                2,000
                
                
                —Total
                
                $
                3,147,902
                
                $
                1,461,733
 
 *  Represents
          a pro-rated amount of the audit fees incurred for the 2003 to 2005 period
          estimated for 2005.
  74
 The
          table
          above represents fees incurred with respect to the relevant year. We recognize
          audit fees in our operating results as the services are provided. Below
          is a
          schedule of the fees incurred by the Company by year for the respective
          audit
          periods. The information for 2008 is for services rendered through February
          28,
          2008.
  **Year
                    Incurred****2006**
                
                **2007**
                
                **2008**
                
                **Total**Audit
                    Fees 2003 to 2005
                
                $
                1,955,490
                
                $
                3,891,443
                
                $
                —
                
                $
                5,846,933Audit
                    Fees 2006
                
                
                192,900
                
                
                1,772,182
                
                
                1,157,720
                
                
                3,122,802Audit
                    Fees 2007
                
                
                —
                
                
                320,000
                
                
                —
                
                
                320,000Tax
                    Fees
                
                
                23,100
                
                
                388,930
                
                
                —
                
                
                412,030All
                    Other Fees
                
                
                2,000
                
                
                10,850
                
                
                —
                
                
                12,850Total
                
                $
                2,173,490
                
                $
                6,383,405
                
                $
                1,157,720
                
                $
                9,714,615
 
 ***Audit
          Fees.*** As
          discussed in Item 9, “Changes In and Disagreements With Accountants on
          Accounting and Financial Disclosure,” in August 2006, BDO Seidman, LLP 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.
          The
          Audit Fees for the years ended December 31, 2006 and 2005, 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,
          2006 and
          2005.
 
 ***Tax
          Fees.*** Tax Fees
          for the years ended December 31, 2006 and 2005 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, 2006 and 2005. ****
 
 ***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 audit 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.
  75
 **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 February 28, 2008, except for Notes
          2, 15
          and 16, which are as of May 9, 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, NYMay
                    9, 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****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**2004**Reserve
                    for uncollectible accounts and sales credits
                
                $
                1.0
                
                $
                0.5
                
                $
                —
                
                $
                (0.2
                )
                $
                1.3Deferred
                    tax valuation allowance
                
                $
                699.7
                
                $
                57.7
                
                $
                —
                
                $
                —
                
                $
                757.4
 
 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.
  76
 **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).4.1
                
                Form
                    of Specimen Common Stock Certificate.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.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.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).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.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,
                    2007.10.6
                **
                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,
                    2003.10.7
                *
                2003
                    Incentive Stock Option and Stock Unit Grant Plan.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, 2005.10.9
                *
                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,
                    2005.10.10
                *
                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 Agreementdated
                    as of September 10, 2003, by andbetweenAboveNet,
                    Inc. and William G. LaPerch.10.12
                *
                Stock
                    Option Agreementdated
                    as of September 10, 2003, by andbetweenAboveNet,
                    Inc. and Robert J. Sokota.10.13
                *
                Stock
                    Option Agreementdated
                    as of September 10, 2003, by andbetweenAboveNet,
                    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 Agreementdated
                    as of September 10, 2003, by andbetweenAboveNet,
                    Inc. and William G. LaPerch, including amendments dated as of
                    December 30,
                    2005 and December 30, 2006.
  77
 10.15
                *
                Stock
                    Unit Agreementdated
                    as of September 10, 2003, by andbetweenAboveNet,
                    Inc. and Robert J. Sokota, including amendments dated as of December
                    30,
                    2005 and December 30, 2006.10.16
                *
                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, 2006.10.17
                *
                Employment
                    Agreement dated as of September 12, 2003, by and between AboveNet,
                    Inc.
                    and Rajiv Datta, including amendment dated as of December 30,
                    2005.10.18
                *
                Employment
                    Agreement dated as of September 12, 2003, by and between AboveNet,
                    Inc.
                    and Douglas Jendras, including amendment dated as of December
                    30,
                    2005.10.19
                *
                Stock
                    Option Agreementdated
                    as of September 12, 2003, by andbetweenAboveNet,
                    Inc. and Rajiv Datta.10.20
                *
                Stock
                    Option Agreementdated
                    as of September 12, 2003, by andbetweenAboveNet,
                    Inc. and Douglas M. Jendras.10.21
                *
                Stock
                    Unit Agreementdated
                    as of September 12, 2003, by andbetweenAboveNet,
                    Inc. and Rajiv Datta, including amendments dated as of December
                    30, 2005
                    and December 30, 2006.10.22
                *
                Stock
                    Unit Agreementdated
                    as of September 12, 2003, by andbetweenAboveNet,
                    Inc. and Douglas M. Jendras, including amendments dated as of
                    December 30,
                    2005 and December 30, 2006.10.23
                *
                Stock
                    Unit Agreementdated
                    as of December 19, 2003, by andbetweenAboveNet,
                    Inc. and Rajiv Datta, including amendments dated as of December
                    30, 2005
                    and December 30, 2006.10.24
                *
                Stock
                    Option Agreementdated
                    as of May 13, 2004, by andbetweenAboveNet,
                    Inc. and Rajiv Datta.10.25
                *
                Stock
                    Option Agreementdated
                    as of May 13, 2004, by andbetweenAboveNet,
                    Inc. and Douglas Jendras.10.26
                *
                Stock
                    Unit Agreementdated
                    as of May 13, 2004, by andbetweenAboveNet,
                    Inc. and Rajiv Datta, including amendments dated as of December
                    30, 2005
                    and December 30, 2006.10.27
                *
                Stock
                    Unit Agreementdated
                    as of May 13, 2004, by andbetweenAboveNet,
                    Inc. and Douglas M. Jendras, including amendments dated as of
                    December 30,
                    2005 and December 30, 2006.10.28
                *
                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,
                    2007.10.29
                *
                Stock
                    Option Agreementdated
                    as of June 1, 2004, by andbetweenAboveNet,
                    Inc. and John Jacquay.10.30
                *
                Stock
                    Unit Agreementdated
                    as of June 1, 2004, by andbetweenAboveNet,
                    Inc. and John Jacquay, including amendments dated as of December
                    30, 2005
                    and December 30, 2006.10.31
                *
                Stock
                    Option Agreementdated
                    as of December 19, 2005, by andbetweenAboveNet,
                    Inc. and John Jacquay.10.32
                *
                Stock
                    Option Agreementdated
                    as of December 19, 2005, by andbetweenAboveNet,
                    Inc. and Rajiv Datta.10.33
                *
                Stock
                    Option Agreementdated
                    as of December 19, 2005, by andbetweenAboveNet,
                    Inc. and Douglas Jendras.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.10.36
                *
                Stock
                    Unit Agreement dated as of August 7, 2007, by and between AboveNet,
                    Inc.
                    and Robert Sokota.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 Agreementdated
                    as of August 7, 2007, by andbetweenAboveNet,
                    Inc. and John Jacquay.10.39
                *
                Stock
                    Unit Agreementdated
                    as of August 7, 2007, by andbetweenAboveNet,
                    Inc. and Rajiv Datta.10.40
                *
                Stock
                    Unit Agreementdated
                    as of August 7, 2007, by andbetweenAboveNet,
                    Inc. and Douglas Jendras.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).
  78
 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).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 required for certain portions of this
                    exhibit.
  79
 **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:
                    May 13, 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:
                      May 13, 2008
                By:
                /s/
                    William G. LaPerchWilliam
                    G. LaPerch
                  President,
                    Chief Executive Officer and Director
                  (Principal
                    Executive Officer)
 
 
 Date:
                      May 13, 2008
                By:
                /s/
                    Joseph P. CiavarellaJoseph
                    P. Ciavarella
                  Acting
                    Chief Financial Officer
                  (Principal
                    Financial and Accounting Officer)
 
 
 Date:
                      May 13, 2008
                By:
                /s/
                    Jeffrey BrodskyJeffrey
                    Brodsky
                  Director
 
 
 Date:
                      May 13, 2008
                By:
                /s/
                    Michael J. EmblerMichael
                    J. Embler
                  Director
 
 
 Date:
                      May 13, 2008
                By:
                /s/
                    Richard PostmaRichard
                    Postma
                  Director
 
 
 Date:
                      May 13, 2008
                By:
                /s/
                    Richard Shorten, Jr.Richard
                    Shorten, Jr.
                  Director
 
 
 Date:
                      May 13, 2008
                By:
                /s/
                    Stuart SubotnickStuart
                    Subotnick
                  Director
  80




**EXHIBIT
        LIST**
 
 **Exhibit No.**
              
              **Description
                  of Exhibit**4.1
              
              Form
                  of Specimen Common Stock Certificate.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.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.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.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,
                  2007.10.6
              **
              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,
                  2003.10.7
              *
              2003
                  Incentive Stock Option and Stock Unit Grant Plan.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, 2005.10.9
              *
              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,
                  2005.10.11
              *
              Stock
                  Option Agreementdated
                  as of September 10, 2003, by andbetweenAboveNet,
                  Inc. and William G. LaPerch.10.12
              *
              Stock
                  Option Agreementdated
                  as of September 10, 2003, by andbetweenAboveNet,
                  Inc. and Robert J. Sokota.10.14
              *
              Stock
                  Unit Agreementdated
                  as of September 10, 2003, by andbetweenAboveNet,
                  Inc. and William G. LaPerch, including amendments dated as of December
                  30,
                  2005 and December 30, 2006.10.15
              *
              Stock
                  Unit Agreementdated
                  as of September 10, 2003, by andbetweenAboveNet,
                  Inc. and Robert J. Sokota, including amendments dated as of December
                  30,
                  2005 and December 30, 2006.10.16
              *
              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, 2006.10.17
              *
              Employment
                  Agreement dated as of September 12, 2003, by and between AboveNet,
                  Inc.
                  and Rajiv Datta, including amendment dated as of December 30,
                  2005.10.18
              *
              Employment
                  Agreement dated as of September 12, 2003, by and between AboveNet,
                  Inc.
                  and Douglas Jendras, including amendment dated as of December 30,
                  2005.10.19
              *
              Stock
                  Option Agreementdated
                  as of September 12, 2003, by andbetweenAboveNet,
                  Inc. and Rajiv Datta.10.20
              *
              Stock
                  Option Agreementdated
                  as of September 12, 2003, by andbetweenAboveNet,
                  Inc. and Douglas M. Jendras.10.21
              *
              Stock
                  Unit Agreementdated
                  as of September 12, 2003, by andbetweenAboveNet,
                  Inc. and Rajiv Datta, including amendments dated as of December
                  30, 2005
                  and December 30, 2006.10.22
              *
              Stock
                  Unit Agreementdated
                  as of September 12, 2003, by andbetweenAboveNet,
                  Inc. and Douglas M. Jendras, including amendments dated as of December
                  30,
                  2005 and December 30, 2006.10.23
              *
              Stock
                  Unit Agreementdated
                  as of December 19, 2003, by andbetweenAboveNet,
                  Inc. and Rajiv Datta, including amendments dated as of December
                  30, 2005
                  and December 30, 2006.10.24
              *
              Stock
                  Option Agreementdated
                  as of May 13, 2004, by andbetweenAboveNet,
                  Inc. and Rajiv Datta.10.25
              *
              Stock
                  Option Agreementdated
                  as of May 13, 2004, by andbetweenAboveNet,
                  Inc. and Douglas Jendras.
  
  
 10.26
              *
              Stock
                  Unit Agreementdated
                  as of May 13, 2004, by andbetweenAboveNet,
                  Inc. and Rajiv Datta, including amendments dated as of December
                  30, 2005
                  and December 30, 2006.10.27
              *
              Stock
                  Unit Agreementdated
                  as of May 13, 2004, by andbetweenAboveNet,
                  Inc. and Douglas M. Jendras, including amendments dated as of December
                  30,
                  2005 and December 30, 2006.10.28
              *
              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,
                  2007.10.29
              *
              Stock
                  Option Agreementdated
                  as of June 1, 2004, by andbetweenAboveNet,
                  Inc. and John Jacquay.10.30
              *
              Stock
                  Unit Agreementdated
                  as of June 1, 2004, by andbetweenAboveNet,
                  Inc. and John Jacquay, including amendments dated as of December
                  30, 2005
                  and December 30, 2006.10.31
              *
              Stock
                  Option Agreementdated
                  as of December 19, 2005, by andbetweenAboveNet,
                  Inc. and John Jacquay.10.32
              *
              Stock
                  Option Agreementdated
                  as of December 19, 2005, by andbetweenAboveNet,
                  Inc. and Rajiv Datta.10.33
              *
              Stock
                  Option Agreementdated
                  as of December 19, 2005, by andbetweenAboveNet,
                  Inc. and Douglas Jendras.10.35
              *
              Stock
                  Unit Agreement dated as of August 7, 2007, by and between AboveNet,
                  Inc.
                  and William LaPerch.10.36
              *
              Stock
                  Unit Agreement dated as of August 7, 2007, by and between AboveNet,
                  Inc.
                  and Robert Sokota.10.38
              *
              Stock
                  Unit Agreementdated
                  as of August 7, 2007, by andbetweenAboveNet,
                  Inc. and John Jacquay.10.39
              *
              Stock
                  Unit Agreementdated
                  as of August 7, 2007, by andbetweenAboveNet,
                  Inc. and Rajiv Datta.10.40
              *
              Stock
                  Unit Agreementdated
                  as of August 7, 2007, by andbetweenAboveNet,
                  Inc. and Douglas Jendras.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 required for certain portions of this
                  exhibit.