Summary of TERREMARK WORLDWIDE INC

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

This report contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 based on our current expectations, assumptions, and estimates about us and our industry. These forward-looking statements involve risks and uncertainties. Words such as "believe," "anticipate," "estimate," "expect," "intend," "plan," "will," "may," and other similar expressions identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. All statements other than statements of historical facts, including, among others, statements regarding our future financial position, business strategy, projected levels of growth, projected costs and projected financing needs, are forward-looking statements. Our actual results could differ materially from those anticipated in such forward-looking statements as a result of several important factors including, without limitation, a history of losses, competitive factors, uncertainties inherent in government contracting, concentration of business with a small number of clients, the ability to service debt, substantial leverage, material weaknesses in our internal controls and our disclosure controls, energy costs, the interest rate environment, one-time events and other factors more fully described in "Other Factors Affecting Operating Results" under "Liquidity and Capital Resources" below and elsewhere in this report. The forward-looking statements made in this report relate only to events as of the date on which the statements are made. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely upon forward-looking statements as predictions of future events. Except as required by applicable law, including the securities laws of the United States, and the rules and regulations of the Securities and Exchange Commission, we do not plan and assume no obligation to publicly update or revise any forward-looking statements contained herein after the date of this report, whether as a result of any new information, future events or otherwise. Recent Events
In December 2006, the Board of Directors approved the sale to a third party of 865,202 shares of the Company's treasury stock at the market rate of $6.75 per share. Proceeds received from the sale of this stock amounted to $5,798,484, net of commissions.
On January 5, 2007, we entered into a Purchase Agreement with Credit Suisse, Cayman Islands Branch and Credit Suisse, International providing for the sale of
(i) $10 million aggregate principal amount of our Senior Subordinated Secured Notes due June 30, 2009 to Credit Suisse, Cayman Islands Branch, and (ii) $4 million aggregate principal amount of our 0.5% Senior Subordinated Convertible Notes due June 30, 2009 to Credit Suisse, International to partially fund the Company's previously announced expansion plans. We paid an arrangement fee to Credit Suisse, as consideration for services, in the amount of 145,985 shares of our common stock, which had a value of approximately $1,000,000 based on the then quoted market price of our Common Stock. We also entered into a capital lease facility commitment letter with Credit Suisse for lease financing in the amount of up to $13,250,000 for certain specified properties. In consideration with and for the consent of the holders of our Senior Secured Notes, we also entered in to an Amendment, Consent and Waiver that provides for certain amendments, consents and waivers to the terms of the Purchase Agreement dated December 31, 2004. For more information with respect to these newly-issued notes, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity." Overview We operate Internet exchange points from which we provide colocation, interconnection and managed services to the government and commercial sectors. We deliver our portfolio of services from seven locations in the U.S., Europe and Asia. Our flagship facility, the NAP of the Americas, located in Miami, Florida, is the model for our carrier-neutral Internet exchanges and is designed and built to disaster-resistant standards with maximum security to house mission-critical infrastructure. Our secure presence in Miami, a key gateway to North American, Latin American and European telecommunications networks, has enabled us to establish customer relationships with U.S. federal government agencies, including the

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Department of State and the Department of Defense. We have been awarded sole-source contracts for which only one source of the required services is believed to be available, with the U.S. federal government, which we believe will allow us to both further penetrate the government sector and continue to attract federal information technology providers. As a result of our primarily fixed cost operating model, we believe that incremental customers and revenues will result in improved operating margins and increased profitability.
We generate revenue by providing high quality Internet infrastructure on a platform designed to reduce network connectivity costs. We provide our customers with the following:
• space to house equipment and network facilities in immediate proximity to Internet and communications networks;

• the platform to exchange telecommunications and Internet traffic and access to network-based services; and

• related professional and managed services such as our network operations center, outsourced storage, dedicated hosting and remote monitoring.

We differentiate ourselves from our competitors through the security and strategic location of our facilities and our carrier-neutral model, which provides access to a critical mass of Internet and telecommunications connectivity.
The immediate proximity of our facilities to major fiber routes with access to North America, Latin America and Europe has attracted numerous telecommunications carriers, such as AT&T, Global Crossing, Latin America Nautilus (a business unit of Telecom Italia), Level 3 Communications, Sprint Communications and T-Systems (a business unit of Deutsche Telecom), to colocate their equipment with us in order to better service their customers. This network density, which allows our customers to reduce their connectivity costs, combined with the security of our facilities, has attracted government sector customers, including Blackbird Technologies, the City of Coral Gables, Florida, Miami-Dade County, Florida, SRA International and the United States Southern Command. Additionally, we have had success in attracting content providers and enterprises such as Citrix, CBS Sportsline, Google, IDT, Internap, Miniclip, NTT/ Verio, VeriSign, Bacardi USA, Corporación Andina de Fomento, Florida International University, Intrado, Jackson Memorial Hospital of Miami and Steiner Leisure.
Results of Operations
Results of Operations for the Nine Months Ended December 31, 2006 as Compared to the Nine Months Ended December 31, 2005.
Revenue. The following charts provide certain information with respect to our revenues:

                                          For the Nine Months
                                          Ended December 31,

                                         2006            2005

                     U.S. Operations          84 %            90 %
                     Outside U.S.             16 %            10 %

                                             100 %           100 %

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Revenues consist of:

                                             For the Nine Months Ended December 31,

                                            2006                        2005

   Colocation                          $   29,950,588        43 %   $ 20,138,143        46 %
   Managed and professional services       31,124,212        44 %     17,437,228        40 %
   Exchange point services                  6,458,776         9 %      4,511,790        11 %
   Equipment resales                        2,671,881         4 %      1,420,593         3 %
   Other                                       50,715         0 %          6,190         0 %

                                       $   70,256,172       100 %   $ 43,513,944       100 %

The increase in revenues is mainly due to both an increase in our deployed customer base and an expansion of services to existing customers. Our total customer base increased from 408 customers as of December 31, 2005 to 580 customers as of December 31, 2006. Revenues consist of:
• colocation services, such as licensing of space and provisioning of power;

• exchange point services, such as peering and cross connects; and

• managed and professional services, such as network management, managed web hosting, outsourced network operating center services, network monitoring, procurement and installation of equipment, procurement of connectivity, managed router services, secure information services, technical support and consulting.

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The increase in managed service costs includes a $1.9 million increase in the cost of equipment resales, $1.0 million increase in NAP development costs and a $1.0 million increase in bandwidth costs. The remainder of the increase is primarily the result of an increase in orders from both existing and new customers as reflected by the growth in our customer base and utilization of space, as discussed above. Personnel costs include payroll and share-based compensation, including share-settled liabilities. The increase in personnel costs is mainly due to operations and engineering staffing levels increasing from 162 employees as of December 31, 2005 to 191 employees as of December 31, 2006. This increase is mainly attributed to the hiring of additional personnel necessary under existing and anticipated customer contracts and the expansion of operations in Herndon, Virginia and Santa Clara, California. The increase in power and chilled water costs is mainly due an increase in power utilization and chilled water consumption resulting from our customer and colocation space growth, as well as an increase in the cost of power.
General and Administrative Expenses. General and administrative expenses increased $1.6 million to $12.6 million for the nine months ended December 31, 2006 from $11.0 million for the nine months ended December 31, 2005. General and administrative expenses consist primarily of administrative personnel, professional service fees, travel, rent, and other general corporate expenses. The increase in general and administrative expenses is mainly due to an increase in administrative personnel of $1.3 million. Personnel costs include payroll and share-based compensation, including share-settled liabilities. The increase in administrative personnel is the result of an increase in headcount from 62 employees as of December 31, 2005 to 86 employees as of December 31, 2006. The additional headcount is mainly due to a required expansion of corporate infrastructure, including planning and information systems resources, to manage existing customer base and plan anticipated business growth and maintain a more efficient and effective Sarbanes-Oxley compliance program. We expect our general and administrative expenses to remain between $4.0 million and $4.5 million for the forseeable future.
Sales and Marketing Expenses. Sales and marketing expenses increased $2.3 million to $8.4 million for the nine months ended December 31, 2006 from $6.1 million for the nine months ended December 31, 2005. The most significant components of sales and marketing expenses are payroll, sales commissions and promotional activities. Payroll and sales commissions increased by $1.8 million resulting from an increase in staffing levels consistent with our increase in sales bookings. Our sales and marketing staffing levels increased to 52 employees as of December 31, 2006 from 43 as of December 31, 2005. We anticipate that our sales and marketing expenses will range between $2.0 million and $3.0 million, on a quarterly basis, depending on the variable nature of sales commissions and the timing of our marketing expenses.
Depreciation and Amortization Expenses. Depreciation and amortization expense increased $1.9 million to $8.1 million for the nine months ended December 31, 2006 from $6.2 million for the nine months ended December 31, 2005. The increase is the result of necessary capital expenditures to support our business growth.
Change in Fair Value of Derivatives Embedded within Convertible Debt. Our 9% senior convertible notes due June 15, 2009 contain embedded derivatives that require separate valuation from the senior convertible notes. We recognize these embedded derivatives as a liability in our balance sheet, measure them at their estimated fair value and recognize changes in the estimated fair value of the derivative instruments in earnings. We estimated that the embedded derivatives had a March 31, 2006 estimated fair value of $25.0 million and a December 31, 2006 estimated fair value of $17.7 million. The embedded derivatives derive their value primarily based on changes in the price and volatility of our common stock. The estimated fair value of the embedded derivatives increases as the price of our common stock increases and decreases as the price of our common stock decreases. The closing price of our common stock decreased to $6.72 on December 31, 2006 from $8.50 as of March 31, 2006. As a result, during the nine months ended December 31, 2006, we recognized a gain of $7.2 million from the change in estimated fair value of the embedded derivatives. For the nine months ended December 31, 2005, we recognized a gain of $8.6 million due to the change in value of our embedded derivatives.
Over the life of the senior convertible notes, given the historical volatility of our common stock, changes in the estimated fair value of the embedded derivatives are expected to have a material effect on

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our results of operations. See "Quantitative and Qualitative Disclosures about Market Risk." Furthermore, we have estimated the fair value of these embedded derivatives using a theoretical model based on the historical volatility of our common stock of (90% as of December 31, 2006) over the past twelve months. If a market develops for our senior convertible notes or we are able to find comparable market data, we may be able to use future market data to adjust our historical volatility by other factors such as trading volume. As a result, the estimated fair value of these embedded derivatives could be significantly different. Any such adjustment would be made prospectively.
Interest Expense. Interest expense increased $1.8 million to $20.4 million for the nine months ended December 31, 2006 from $18.6 million for the nine months ended December 31, 2005. This increase is due to the amortization discount on the Senior Convertible Notes. We record amortization using the effective interest method and accordingly the interest expense associated with these Senior Notes will increase as the carrying value increases.
Interest Income. Interest income decreased approximately $500,000 to $852,000 for the nine months ended December 31, 2006 from approximately $1.4 million for the nine months ended December 31, 2005. This decrease was primarily due to a decrease in cash balances.
Net Loss. Net loss for our reportable segments was as follows:

                                           For the Nine Months Ended
                                                 December 31,

                                            2006              2005

               Data center operations   $ (10,690,400 )   $ (15,307,607 )
               Real estate services                 -                 -

                                        $ (10,690,400 )   $ (15,307,607 )

Excluding the impact of the change in fair value of the derivatives, we had a net loss in both periods primarily resulting from insufficient revenues to cover our operating and interest expenses. We will generate net losses until we reach required levels of monthly revenues.
Results of Operations for the Three Months Ended December 31, 2006 as Compared to the Three Months Ended December 31, 2005.
Revenue. The following charts provide certain information with respect to our revenues:

                                         For the Three Months
                                          Ended December 31,

                                         2006            2005

                     U.S. Operations          82 %            86 %
                     Outside U.S.             18 %            14 %

                                             100 %           100 %

Revenues consist of:

                                             For the Three Months Ended December 31,

                                            2006                         2005

   Colocation                          $   11,366,030         46 %   $  7,543,418        40 %
   Managed and professional services       10,839,318         44 %      8,796,015        47 %
   Exchange point services                  2,396,708         10 %      1,768,210         9 %
   Equipment resales                           66,632          0 %        774,101         4 %

                                       $   24,668,688        100 %   $ 18,881,744       100 %

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• exchange point services, such as peering and cross connects; and

Our utilization of total net colocation space increased to 17.4% as of December 31, 2006 from 11.8% as of December 31, 2005. Our utilization of total net colocation space represents the percentage of space billed versus total space available for customers.
The increase in managed and professional services is mainly due to increases of approximately $1.6 million in managed web hosting and $500,000 in additional managed services provided under government contracts offset by a decrease of $700,000 in professional services fees earned related to the design and development of NAPs in the Canary Islands and the Dominican Republic.
Equipment resales may fluctuate quarter over quarter based on customer demand.
The increase in exchange point services is mainly due to an increase in cross-connects billed to customers. Cross-connects billed to customers increased to 5,271 as of December 31, 2006 from 3,724 as of December 31, 2005.
We anticipate an increase in revenue from colocation, exchange point and managed services as we add more customers to our network of NAPs, sell additional services to existing customers and introduce new products and services. We anticipate that the percentage of revenue derived from public sector customers will fluctuate depending on the timing of exercise of expansion options under existing contracts and the rate at which we sell services to the public sector. We anticipate that public sector revenues will continue to represent a significant portion of our revenues for the foreseeable future.
Costs of Revenues. Costs of revenues increased $1.5 million to $13.0 million for the three months ended December 31, 2006 from $11.5 million for the three months ended December 31, 2005. Cost of revenues consist mainly of operations personnel, procurement of connectivity and equipment, technical and colocation space rental costs, electricity, chilled water, insurance, property taxes, and security services. The increase is mainly due to increases of $987,000 in managed services costs, $752,000 in electricity and chilled water costs and $713,000 in personnel costs.
The increase in managed service costs includes a $495,000 increase in bandwidth costs and $432,000 of additional costs under government contracts. The remainder of the increase is primarily the result of an increase in orders from both existing and new customers as reflected by the growth in our customer base and utilization of space as discussed above. Personnel costs include payroll and share-based compensation, including share-settled liabilities. The increase in personnel costs is mainly due operations and engineering staffing levels increasing from 162 employees as of December 31, 2005 to 191 employees as of December 31, 2006. This increase is mainly attributed to the hiring of additional personnel necessary under existing and anticipated customer contracts and the expansion of operations in Herndon, Virginia and Santa Clara, California. The increase in power and chilled water costs is mainly due an increase in power utilization and chilled water consumption as a result of customer and colocation space growth, as well as an increase in the cost of power.
General and Administrative Expenses. General and administrative expenses increased $1.6 million to $4.9 million for the three months ended December 31, 2006 from $3.3 million for the three months ended December 31, 2005. General and administrative expenses consist primarily of administrative personnel, professional service fees, travel, rent, and other general corporate expenses. Personnel costs include payroll

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and share-based compensation, including share-settled liabilities. The increase in general and administrative expenses is due to increases in administrative personnel expenses of $1.2 million and $200,000 in professional services. The increase in administrative personnel is the result of an increase in headcount from 62 employees as of December 31, 2005 to 86 employees as of December 31, 2006. The additional headcount is mainly due to a required expansion of corporate infrastructure, including information systems resources, to manage existing customer base and plan anticipated business growth and maintain a more efficient and effective Sarbanes-Oxley compliance program. The increase in professional services are mainly due to additional Sarbanes Oxley work.
Sales and Marketing Expenses. Sales and marketing expenses increased $800,000 to $3.1 million for the three months ended December 31, 2006 from $2.3 million for the three months ended December 31, 2005. The most significant components of sales and marketing expenses are payroll, sales commissions and promotional activities. Payroll and sales commissions increased by $572,000 mainly due to an increase in staffing levels consistent with our increase in sales bookings. Our sales and marketing staffing levels increased to 52 employees as of December 31, 2006 from 43 as of December 31, 2005. We anticipate that our sales and marketing expenses will range between $2.0 million and $3.0 million, on a quarterly basis, depending on the variable nature of sales commissions and the timing of our marketing expenses.
Depreciation and Amortization Expenses. Depreciation and amortization expense increased approximately $424,000 to $2.7 million for the three months ended December 31, 2006 from $2.3 million for the three months ended December 31, 2005. The variance is the result of the necessary increase in capital expenditures supporting our business growth.
Change in Fair Value of Derivatives Embedded within Convertible Debt. Our 9% senior convertible notes due June 15, 2009 contain embedded derivatives that require separate valuation from the senior convertible notes. We recognize these embedded derivatives as a liability in our balance sheet, measure them at their estimated fair value and recognize changes in the estimated fair value of the derivative instruments in earnings. We estimated that the embedded derivatives had a September 30, 2006 estimated fair value of $12.7 million and a December 31, 2006 estimated fair value of $17.7 million. The embedded derivatives derive their value primarily based on changes in the price and volatility of our common stock. The estimated fair value of the embedded derivatives increases as the price of our common stock increases and decreases as the price of our common stock decreases. The closing price of our common stock increased to $6.72 on December 31, 2006 from $5.55 as of September 30, 2006. As a result, during the three months ended December 31, 2006, we recognized an expense of $5.0 million from the change in estimated fair value of . . .