You should read the following discussion and analysis together with our consolidated condensed financial statements and related notes included in this report. The discussion in this report contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. The cautionary statements made in this report should be read as applying to all related forward-looking statements wherever they appear in this report. Our actual results could differ materially from those discussed here. Factors that could cause or contribute to these differences include those discussed in Item 1A "Risk Factors" in our annual report on Form 10-K for the fiscal year ended December 31, 2007.

General Overview

We are a leading facilities-based provider of low-cost, high-speed Internet access and IP communications services. Our network is specifically designed and optimized to transmit data using IP. IP networks are significantly less expensive to operate and are able to achieve higher performance levels than the traditional circuit-switched networks used by our competitors when providing Internet access services, thus, we believe, giving us cost and performance advantages. We deliver our services to small and medium-sized businesses, communications service providers and other bandwidth-intensive organizations through approximately 17,000 customer connections in North America and Europe. Our primary on-net service is Internet access at a speed of 100 Megabits per second, much faster than typical Internet access currently offered to businesses. We offer this on-net service exclusively through our own facilities, which run all the way to our customers' premises.

Our network is comprised of in-building riser facilities, metropolitan optical fiber networks, metropolitan traffic aggregation points and inter-city transport facilities. The network is physically connected entirely through our facilities to over 1,300 buildings in which we provide our on-net services, including over 940 multi-tenant office buildings. We also provide on-net services in carrier-neutral colocation facilities, data centers and single-tenant office buildings. Because of our integrated network architecture, we are not dependent on local telephone companies to serve our on-net customers. We emphasize the sale of on-net services because we believe we have a competitive advantage in providing these services and our sales of these services generate higher gross profit margins than our off-net and non-core services.

We also provide Internet connectivity to customers that are not located in buildings directly connected to our network. We serve these off-net customers using other carriers' facilities to provide the last mile portion of the link from our customers' premises to our network. We also provide certain non-core services which are legacy services which we acquired and continue to support but do not actively sell.

We believe our key opportunity is provided by our high-capacity network, which provides us with the ability to add a significant number of customers to our network with minimal incremental costs. Our focus is to add customers to our network in a way that maximizes its use and at the same time provides us with a profitable customer mix. We are responding to this opportunity by increasing our sales and marketing efforts including increasing our number of sales representatives. In addition, we may add customers to our network through strategic acquisitions.

We are expanding our network to locations that we believe can be economically integrated and represent significant concentrations of Internet traffic. One of our keys to developing a profitable business will be to carefully match the expense of extending our network to reach new customers with the revenue generated by those customers.

We believe two of the most important trends in our industry are the continued long-term growth in Internet traffic and a decline in Internet access prices. As Internet traffic continues to grow and prices per unit of traffic continue to decline, we believe our ability to load our network and gain market share from less efficient network operators will expand. However, continued erosion in Internet access prices will likely have a negative impact on the rate at which we can increase our revenues and our profitability. In June 2008, we introduced additional volume and term based discounts to certain of our customers in an effort to continue to gain market share and grow our on-net revenues.

The growth in Internet traffic has a more significant impact on our net-centric customers who represent the majority of the traffic on our network and who tend to consume the majority of their allocated bandwidth on their connections. Our corporate customers tend to utilize a small portion of their allocated bandwidth on their connections.

Our on-net service consists of high-speed Internet access and IP connectivity ranging from 0.5 Megabits per second to 10 Gigabits per second of bandwidth. We offer our on-net services to customers located in buildings that are physically connected to our network. Off-net services are sold to businesses that are connected to our network primarily by means of "last mile" access service lines obtained from other carriers, primarily in the form of point-to-point TDM, POS, SDH and/or Carrier Ethernet circuits. Our non-core services, which consist of legacy services of companies whose assets or businesses we have acquired, include managed modem services, voice services (only provided in Toronto, Canada) and point to point private line services. We do not actively market these non-core services and expect the net service revenue associated with them to continue to decline.

Due to our strategic acquisitions of network assets and equipment, we believe we are positioned to grow our revenue base. We continue to purchase and deploy network equipment to parts of our network to maximize the utilization of our assets and to expand our network. Our future capital expenditures will be based primarily on our planned expansion of our network, the addition of on-net buildings and the concentration and growth of our customer base. We plan to continue to expand our network and to increase our number of on-net buildings by approximately 100 buildings by December 31, 2008 from 1,217 buildings at December 31, 2007. We expect our 2008 capital expenditures to be similar to our 2007 capital expenditure rate, or approximately $32.0 million.

Historically, our operating expenses have exceeded our net service revenue, resulting in operating losses. Our operating expenses consist primarily of the following:

† Network operations expenses, which consist primarily of the cost of leased circuits, sites and facilities; telecommunications license agreements, maintenance expenses, and salaries of, and expenses related to, employees who are directly involved with maintenance and operation of our network.

†

† Selling, general and administrative expenses, which consist primarily of salaries, commissions and related benefits paid to our employees and other selling and administrative costs including professional fees and bad debt expenses.

† Depreciation and amortization expenses, which result from the depreciation of our property and equipment, including the assets associated with our network.

† Equity-based compensation expenses that result from the grants of stock options and restricted stock.

Results of Operations

Our management reviews and analyzes several key performance indicators in order to manage our business and assess the quality of and potential variability of our net service revenues and cash flows. These key performance indicators include:

† net service revenues, which are an indicator of our overall business growth and the success of our sales and marketing efforts;

† gross profit, which is an indicator of our service offering mix, competitive pricing pressures and the cost of our network operations;

† growth in our on-net customer base and revenues, which is an indicator of the success of our primarily on-net focused sales efforts;

† growth in our on-net buildings; and

† cash flows.

Three Months Ended September 30, 2007 Compared to the Three Months Ended September 30, 2008

The following summary table presents a comparison of our results of operations for the three months ended September 30, 2007 and 2008 with respect to certain key financial measures. The comparisons illustrated in the table are discussed in greater detail below.

                                                      Three months ended
                                                        September 30,        Percent
                                                       2007         2008     Change
                                                        (in thousands)
Net service revenue                                 $    46,969   $ 54,594      16.2 %
On-net revenue                                           37,646     44,243      17.5 %
Off-net revenue                                           7,757      8,995      16.0 %
Non-core revenue                                          1,566      1,356     (13.4 )%
Network operations expenses (1)                          22,710     24,059       5.9 %
Gross profit (2)                                         24,259     30,535      25.9 %
Selling, general, and administrative expenses (3)        12,512     16,403      31.1 %
Equity-based compensation expense                         3,061      4,023      31.4 %
Depreciation and amortization expenses                   16,627     15,494      (6.8 )%
Gain on lease restructuring                               2,110          -    (100.0 )%
Gain on convertible debt purchase                             -      9,735     100.0 %
Net (loss) income                                        (5,423 )    2,073     138.2 %

(2) Excludes equity-based compensation expenses of $61 and $80 in the three months ended September 30, 2007 and 2008, respectively, which if included would have resulted in a period-to-period change of 25.9%.

(3) Excludes equity-based compensation expenses of $3,000 and $3,943 in the three months ended September 30, 2007 and 2008, respectively, which, if included would have resulted in a period-to-period change of 31.2%.

Net Service Revenue. Our net service revenue increased 16.2% from $47.0 million for the three months ended September 30, 2007 to $54.6 million for the three months ended September 30, 2008. The impact of exchange rates resulted in approximately $1.1 million of this increase in revenues. For the three months ended September 30, 2007 and 2008, on-net, off-net and non-core revenues represented 80.2%, 16.5% and 3.3% and 81.0%, 16.5% and 2.5% of our net service revenues, respectively.

Our on-net revenues increased 17.5% from $37.6 million for the three months ended September 30, 2007 to $44.2 million for the three months ended September 30, 2008. Our on-net revenues increased as we increased the number of our on-net customer connections by 26.7% from approximately 10,500 at September 30, 2007 to approximately 13,300 at September 30, 2008. On-net customer connections increased at a greater rate than on-net revenues due to a decline in the average revenue per on-net customer connection. This decline is partly attributed to a shift in the customer connection mix. Due to the increase in the size of our sales force, we are now able to focus not only on customers who purchase high-bandwidth connections, as we have done historically, but also on customers who purchase lower-bandwidth connections. We expect to continue to focus our sales efforts on a broad mix of customers. Additionally, on-net customers who cancel their service from our installed base of customers, in general, have greater average revenue per connection than new customers. These trends and, to a lesser extent, an increase in customers receiving a discount for purchasing longer term contracts and volume based discounts, resulted in a reduction to our average revenue per on-net connection.

Our off-net revenues increased 16.0% from $7.8 million for the three months ended September 30, 2007 to $9.0 million for the three months ended September 30, 2008. Our off-net customer connections declined 0.8% from approximately 3,020 at September 30, 2007 to approximately 3,000 at September 30, 2008. Off-net customer connections decreased while off-net revenues increased due to an increase in the average revenue per off-net customer connection. Off-net customers who cancel their service, in general, have a lower average revenue per connection than new off-net customers who generally purchase higher-bandwidth connections.

Our non-core revenues decreased 13.4% from $1.6 million for the three months ended September 30, 2007 to $1.4 million for the three months ending September 30, 2008. The number of our non-core customer connections declined 24.4% from approximately 860 at September 30, 2007 to approximately 650 at September 30, 2008. We do not actively market these acquired non-core services and expect that the net service revenue associated with them will continue to decline.

Network Operations Expenses.Our network operations expenses, excluding equity-based compensation expense, increased 5.9% from $22.7 million for the three months ended September 30, 2007 to $24.1 million for the three months ended September 30, 2008. The impact of exchange rates resulted in approximately $0.5 million of this $1.3 million increase in network operations expenses. The remaining increase is primarily attributable to an increase in costs related to our network and facilities expansion activities partly offset by the decline in network operations expenses associated with the decline in our non-core revenues.

Gross Profit. Our gross profit, excluding equity-based compensation expense, increased 25.9% from $24.3 million for the three months ended September 30, 2007 to $30.5 million for the three months ended September 30, 2008. We determine gross profit by subtracting network operation expenses from our net service revenue (excluding equity-based compensation expense) and do not allocate depreciation and amortization expense to our network operations expense. The increase is primarily attributed to the increase in higher gross margin on-net revenues. Our gross profit margin expanded from 51.6% for the three months ended September 30, 2007 to 55.9% for the three months ended September 30, 2008. Our gross profit has benefited from the limited incremental expenses associated with providing service to an increasing number of on-net customers and the decline in non-core revenues which carry a lower gross margin. Our gross profit margin may be impacted by the timing and amounts of disputed circuit costs and the additional costs of expanding our network. These costs include the costs related to our data centers including power costs, additional maintenance costs related to our IRU agreements and cost of living increases related to the costs of operating our existing network. We believe that our gross profit margin will increase as we are allocating the majority of our sales and marketing resources toward obtaining additional on-net customers and as sales of these services generate higher gross profit margins than our off-net and non-core services.

Selling, General, and Administrative Expenses. Our SG&A expenses, excluding equity-based compensation expense, increased 31.1% from $12.5 million for the three months ended September 30, 2007 to $16.4 million for the three months ended September 30, 2008. The impact of exchange rates resulted in approximately $0.4 million of this $3.9 million increase in SG&A expenses. SG&A expenses increased primarily from the increase in salaries and related costs required to support our expanding sales and marketing efforts, a $0.7 million increase in professional fees and a $0.9 million increase in bad debt expense.

Equity-based Compensation Expense.Equity-based compensation expense results from grants of restricted stock and stock options. Equity-based compensation expense increased 31.4% from $3.1 million for the three months ended September 30, 2007 to $4.0 million for

the three months ending September 30, 2008. The increase is primarily attributed to a $0.9 million increase in equity-based compensation expense associated with restricted stock grants made to our employees in January 2008.

Depreciation and Amortization Expenses. Our depreciation and amortization expense decreased 6.8% from $16.6 million for the three months ended September 30, 2007 to $15.5 million for the three months ended September 30, 2008. The decrease is primarily due to the decline in depreciation expense from fully depreciated fixed assets more than offsetting depreciation expense associated with the increase in deployed fixed assets.

Gain on lease restructuring. In September 2007, we entered into a settlement agreement under which we were released from our obligations under a lease agreement for an acquired unused facility. This settlement agreement resulted in a gain of approximately $2.1 million recorded during the three months ended September 30, 2007.

Gains on Purchases of Convertible Senior Notes. In September 2008, we purchased $20.0 million of face value of our Notes for $9.9 million in cash. This transaction resulted in a gain of $9.7 million for the three and nine months ended September 30, 2008. In October 2008, we purchased $86.0 million of face value of our Notes for $37.8 million in cash. This transaction is expected to result in a gain of $46.8 million to be recorded in the three months and year ending December 31, 2008. In the aggregate, we purchased $106.0 million of face value of our Notes for $47.7 million in cash. These transactions will result in a total gain of $56.6 million. After these transactions there is $94.0 million of face value of our Notes outstanding. We may purchase additional Notes.

Buildings On-net. As of September 30, 2007 and 2008, we had a total of 1,189 and 1,301 on-net buildings connected to our network, respectively.

Nine Months Ended September 30, 2007 Compared to the Nine Months Ended September 30, 2008

The following summary table presents a comparison of our results of operations for the nine months ended September 30, 2007 and 2008 with respect to certain key financial measures. The comparisons illustrated in the table are discussed in greater detail below.

                                                      Nine months ended
                                                        September 30,       Percent
                                                      2007        2008      Change
                                                       (in thousands)
Net service revenue                                 $ 135,698   $ 160,564      18.3 %
On-net revenue                                        106,094     131,268      23.7 %
Off-net revenue                                        24,154      25,448       5.4 %
Non-core revenue                                        5,450       3,848     (29.4 )%
Network operations expenses (1)                        65,153      68,969       5.9 %
Gross profit (2)                                       70,545      91,595      29.8 %
Selling, general, and administrative expenses (3)      37,699      46,402      23.1 %
Equity-based compensation expense                       7,146      13,614      90.5 %
Asset impairment                                            -       1,592     100.0 %
Depreciation and amortization expenses                 48,865      47,619      (2.5 )%
Gain on lease restructuring                             2,110           -    (100.0 )%
Gain on convertible debt purchase                           -       9,735     100.0 %
Net loss                                              (24,019 )   (13,020 )    45.8 %

(2) Excludes equity-based compensation expenses of $143 and $248 in the nine months ended September 30, 2007 and 2008, respectively, which if included would have resulted in a period-to-period change of 29.8%.

(3) Excludes equity-based compensation expenses of $7,003 and $13,366 in the nine months ended September 30, 2007 and 2008, respectively, which, if included would have resulted in a period-to-period change of 33.7%.

Net Service Revenue. Our net service revenue increased 18.3% from $135.7 million for the nine months ended September 30, 2007 to $160.6 million for the nine months ended September 30, 2008. The impact of exchange rates resulted in approximately $5.3 million of this increase in revenues. For the nine months ended September 30, 2007 and 2008, on-net, off-net and non-core revenues represented 78.2%, 17.8% and 4.0% and 81.8%, 15.8% and 2.4% of our net service revenues, respectively.

Our on-net revenues increased 23.7% from $106.1 million for the nine months ended September 30, 2007 to $131.3 million for the nine months ended September 30, 2008. Our on-net revenues increased as we increased the number of our on-net customer connections by 26.7% from approximately 10,500 at September 30, 2007 to approximately 13,300 at September 30, 2008. On-net customer connections increased at a greater rate than on-net revenues due to a decline in the average revenue per on-net customer connection. This decline is partly attributed to a shift in the customer connection mix. Due to the increase in the size of our sales force, we are now able to focus not only on customers who purchase high-bandwidth connections, as we have done historically, but also on customers who purchase lower-bandwidth connections. We expect to continue to focus our sales efforts on a broad mix of customers. Additionally, on-net customers who cancel their service from our installed base of customers, in general, have greater average revenue per connection than new customers. These trends and, to a lesser extent, an increase in customers receiving a discount for purchasing longer term contracts and volume based discounts, resulted in a reduction to our average revenue per on-net connection.

Our off-net revenues increased 5.4% from $24.2 million for the nine months ended September 30, 2007 to $25.4 million for the nine months ended September 30, 2008. Our off-net customer connections declined 0.8% from approximately 3,020 at September 30, 2007 to approximately 3,000 at September 30, 2008. Off-net customer connections decreased while off-net revenues increased due to an increase in the average revenue per off-net customer connection. Off-net customers who cancel their service, in general, have a lower average revenue per connection than new off-net customers who generally purchase higher-bandwidth connections.

Our non-core revenues decreased 29.4% from $5.5 million for the nine months ended September 30, 2007 to $3.8 million for the nine months ending September 30, 2008. The number of our non-core customer connections declined 24.4% from approximately 860 at September 30, 2007 to approximately 650 at September 30, 2008. We do not actively market these acquired non-core services and expect that the net service revenue associated with them will continue to decline.

Network Operations Expenses.Our network operations expenses, excluding equity-based compensation expense, increased 5.9% from $65.2 million for the nine months ended September 30, 2007 to $69.0 million for the nine months ended September 30, 2008. The impact of exchange rates resulted in approximately $2.1 million of this $3.8 million increase in network operations expenses. The remaining increase is primarily attributable to an increase in costs related to our network and facilities expansion activities partly offset by the decline in network operations expenses associated with the decline in our non-core revenues.

Gross Profit. Our gross profit, excluding equity-based compensation expense, increased 29.8% from $70.5 million for the nine months ended September 30, 2007 to $91.6 million for the nine months ended September 30, 2008. We determine gross profit by subtracting network operation expenses from our net service revenue (excluding equity-based compensation expense) and do not allocate depreciation and amortization expense to our network operations expense. The increase is primarily attributed to the increase in higher gross margin on-net revenues as a percentage of net service revenue. Our gross profit margin expanded from 52.0% for the nine months ended September 30, 2007 to 57.0% for the nine months ended September 30, 2008. Our gross profit has benefited from the limited incremental expenses associated with providing service to an increasing number of on-net customers and the decline in non-core revenues which carry a lower gross margin. Our gross profit margin may be impacted by the timing and amounts of disputed circuit costs and the additional costs of maintaining and expanding our network. These costs include the costs related to our data centers including power costs, additional maintenance costs related to our IRU agreements and cost of living increases related to the costs of operating our existing network. We believe that our gross profit margin will continue to increase as we are allocating the majority of our sales and marketing resources toward obtaining additional on-net customers and as sales of these services generate higher gross profit margins than our off-net and non-core services.

Selling, General, and Administrative Expenses. Our SG&A expenses, excluding equity-based compensation expense, increased 23.1% from $37.7 million for the nine months ended September 30, 2007 to $46.4 million for the nine months ended September 30, 2008. The impact of exchange rates resulted in approximately $1.7 million of this $8.7 million increase in SG&A expenses. SG&A expenses increased primarily from the increase in salaries and related costs required to support our expanding sales and marketing efforts, a $1.1 million increase in professional fees and a $1.8 million increase in bad debt expense.

Equity-based Compensation Expense.Equity-based compensation expense results from grants of restricted stock and stock options. Equity-based compensation expense increased 90.5% from $7.1 million for the nine months ended September 30, 2007 to $13.6 million for the nine months ending September 30, 2008. The increase is primarily attributed to a $3.6 million increase in equity-based compensation expense associated with restricted stock grants made to our employees in April 2007 and a $2.8 million increase in equity-based compensation expense associated with restricted stock grants made to our employees in January 2008.

Asset Impairment. In the first quarter of 2008, we recorded an impairment charge of $1.6 million related to an IRU asset under a capital lease. The IRU asset was no longer in use and we have obtained alternative dark fiber that serves the related facilities and customers.

Depreciation and Amortization Expenses. Our depreciation and amortization . . .