Credit Facility

        On March 9, 2005,In October 2009, we entered into a $20.0 million revolving line of credit facility with a commercial bank. The credit facility had a floating interest rate of one month LIBOR plus 2.5% per annum, subject to a minimum interest rate of 3.0% and had a commitment fee of 0.3% per annum. There were no borrowings under the revolving facility and we were in compliance with its covenants. The facility expired on April 1, 2007.October 14, 2010.

Second $50.0 Million Senior Secured Notes

        In January 2011, we issued our 8.375% Senior Secured Notes (the "Senior Notes") due February 15, 2018, for an aggregate principal amount of $175.0 million in a private offering for resale to qualified institutional buyers pursuant to SEC Rule 144A. The Senior Notes are secured and bear interest at 8.375% per annum. Interest is payable in cash semiannually in arrears on February 15 and August 15, of each year, beginning on August 15, 2011. We received net proceeds of approximately

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$170.5 million after deducting $4.5 million of issuance costs. We intend to use the net proceeds from the Senior Notes for general corporate purposes and/or repurchases of our common stock or our Convertible Notes or a special dividend to our stockholders.

        The Senior Notes are fully guaranteed on a senior secured basis, jointly and severally, by each of our existing domestic and future material domestic subsidiaries, subject to certain exceptions and permitted liens. Under certain circumstances, subsidiaries may be released from these guarantees without the consent of the holders of the Senior Notes. The Senior Notes and the guarantees are secured by (i) first priority liens on substantially all of our and our guarantors' assets, (ii) all of the equity interests in any of our domestic subsidiaries and (iii) 65% of the equity interests of our first-tier foreign subsidiaries held by us and our guarantors. The Senior Notes and the guarantees represent our and the guarantors' senior secured obligations and effectively rank equally and ratably with all of our and the guarantors' existing and future first lien obligations, to the extent of the value of the collateral securing such indebtedness, subject to permitted liens; are structurally subordinated to any existing and future indebtedness and liabilities of non-guarantor subsidiaries and rank equally in right of payment with all of our and the guarantors' existing and future senior indebtedness.

        The Senior Notes may be redeemed, in whole or in part, at any time prior to February 15, 2015 at a price equal to 100% of the principal amount plus a "make-whole" premium, plus accrued and unpaid interest, if any, to the date of redemption. The Senior Notes are redeemable, in whole or in part, at any time on or after February 15, 2015 at the applicable redemption prices specified under the indenture governing the Senior Notes plus accrued and unpaid interest, if any, to the date of redemption. In addition, we may redeem up to 35% of the Senior Notes before February 15, 2014 with the net cash proceeds from certain equity offerings. If we experience specific kinds of changes of control, we must offer to repurchase all of the Senior Notes at a purchase price of 101% of their principal amount, plus accrued and unpaid interest, if any, to the repurchase date.

        The indenture governing the Senior Notes, among other things, limits our ability and our guarantors' ability to incur indebtedness; to pay dividends or make other distributions; to make certain investments and other restricted payments; to create liens; consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; to incur restrictions on the ability of a subsidiary to pay dividends or make other payments; and to enter into certain transactions with our affiliates.

Common Stock Buyback Program

        In June 2007 we used approximately $50.1 million of the net proceeds from our issuance of our Convertible Notes to repurchase approximately 1.8 million shares of our common stock. In August 2007, our board of directors approved a $50.0 million common stock buyback program. Under the buyback program we are authorized to purchase up toIn June 2008, our board of directors approved an additional $50.0 million of purchases of our common stock under the buyback program to occur prior to December 31, 2008. During2009. In the years ended December 31, 2007, 2008 and 2009, we purchased 445,990approximately 2.2 million, 4.4 million and 0.1 million shares of our common stock, at an average price of $22.19 per sharerespectively, for approximately $9.9$59.9 million, under the program. From January 1, 2008 to February 26, 2008, we purchased 689,000 additional shares of our common stock at an average price of $18.59 per share for approximately $12.8$59.3 million under the program.and $0.7 million, respectively. All purchased common shares were subsequently retired. There were no purchases of common stock in the year ended December 31, 2010.

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Contractual Obligations and Commitments

        The following table summarizes our contractual cash obligations and other commercial commitments as of December 31, 2007.2010 and including our Senior Notes that were issued in January 2011.

(1)

The Senior Convertible Notes are assumed to be outstanding until June 15, 2014 which is the earliest put date and these amounts include interest and principal payment obligations.obligations on the Convertible Notes.

(2)

The $175.0 million Senior Notes were issued in January 2011 and these amounts include interest and principal payment obligations through the maturity date of February 15, 2018.

(3)

These amounts include $225.4 million of operating lease, maintenance, building access and tenant license agreement obligations, reduced by sublease agreements of $0.7 million.obligations.

(3)(4)

As of December 31, 2007,2010, we had committed to additional dark fiber IRU lease agreements totaling approximately $40.4$62.6 million in future payments for fiber lease and maintenance services. These amounts are included in unconditional purchase obligations and are to be paid in periods of up to 20 years beginning once the related fiber is accepted.

        Capital Lease Obligations.    The capital lease obligations above were incurred in connection with IRUs for inter-city and intra-city dark fiber underlying substantial portions of our network. These capital leases are presented on our balance sheet at the net present value of the future minimum lease payments, or $92.6$111.7 million at December 31, 2007.2010. These leases generally have initial terms of 15 to 2520 years.

        Letters of Credit.    We are also party to letters of credit totaling $1.0$0.5 million at December 31, 2007.2010. These obligations are fully secured by our restricted investments, and as a result, are excluded from the contractual cash obligations above.

Future Capital Requirements

        We believe that our cash on hand, cash received from the proceeds of our Senior Notes and cash generated from our operating activities will be adequate to meet our working capital, capital expenditure, debt service, common stock buyback program and other cash requirements if we execute our business plan.

        Any future acquisitions or other significant unplanned costs or cash requirements may require that we raise additional funds through the issuance of debt or equity. We cannot assure you that such financing will be available on terms acceptable to us or our stockholders, or at all. Insufficient funds may require us to delay or scale back the number of buildings and markets that we serve,add to our network, reduce our planned increase in our sales and marketing efforts, suspend or terminate our stock buyback program, or require us to otherwise alter our business plan or take other actions that could have a material adverse effect on our business, results of

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operations and financial condition. If issuing equity securities raises additional funds, substantial dilution to existing stockholders may result.

Off-Balance Sheet Arrangements

        We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

Income taxes

        Due to the uncertainty surrounding the realization of our net deferred tax asset, consisting primarily of net operating loss carry-forwards, we have recorded a valuation allowance for the full amounta substantial majority of our net deferred tax asset. ShouldAs of December 31, 2010, we achieve taxable income, our deferred tax assets may be available to offset future income tax liabilities. We have combined net operating loss carry-forwards of approximately $1.0$1.1 billion. TheThis amount includes federal and state net operating loss carry-forwards forin the United States of approximately $407$376.0 million, expire from 2023net operating loss carry-forwards related to 2027. We haveour Canadian operations of approximately $6.2 million, net operating loss carry-forwards related to our operations in Mexico of approximately $0.8 million and net operating loss carry-forwards related to our European operations of approximately $600 million,$686.6 million. Section 382 of which approximately $108 millionthe Internal Revenue Code in the United States limits the utilization of net operating losses when ownership changes, as defined by that section, occur. We have performed an analysis of our Section 382 ownership changes and have determined that the utilization of certain of our net operating loss carryforwards in the United States may be limited. The net operating loss carryforwards in the United States will expire, beginning in 2016.if unused, between 2022 and 2029. The remaining $492 million of European net operating loss carry-forwards do not expire.related to our Canadian operations expire if unused, between 2015 and 2027. The federal and state net operating loss carry-forwards of Allied Riser Communications Corporation of approximately $183 million are subjectrelated to certain limitations on annual utilization due to the change in ownership as a result of the merger as prescribed by federalour Mexican operations expire if unused, between 2019 and state tax laws. Our other2020. The net operating loss carry-forwards could also be subjectrelated to certain additional limitations on annual utilization if certain changes in ownership have occurred or were to occur as prescribed by the laws in the respective jurisdictions. Should a change in ownership occur, or have occurred, we may be unable to benefit from the full amount of these net operating loss carry-forwards.our European operations include $540.8 million that do not expire and $145.8 million that expire between 2011 and 2026.

Critical Accounting Policies and Significant Estimates

        Our 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 United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

        The accounting policies we believe to be most critical to understanding our financial results and condition or that require complex, significant and subjective management judgments are discussed below.

Revenue Recognition

        We recognize service revenue when the services are performed, evidence of an arrangement exists, the fee is fixed and determinable and collection is probable. Service discounts and incentives offered to certain customers are recorded as a reduction of revenue when granted. Fees billed in connection with customer installations are deferred and recognized ratably over the longer of estimated customer life.life or

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contract term. We determine the estimated customer life using a historical analysis of customer retention.retention and contract terms. If our estimated customer life increases,and contract terms increase, we will recognize installation revenue over a longer period. We expense the direct costs associated with sales as incurred.

Allowances for Sales Credits and Unfulfilled Customer Purchase Obligations

        We have established allowances to account for sales credits and unfulfilled contractual purchase obligations.

•

Our allowance for sales credits is recorded as a reduction to our service revenue to provide for situations when customers are granted a service termination adjustment for amounts billed in advance or a service level agreement credit or discount. This allowance is determined by actual credits granted during the period and an estimate of unprocessed credits.



•

Our allowance for unfulfilled contractual customer purchase obligations is designed to account for the possible non-payment of amounts under agreements that we have with certain of our customers that place minimum purchase obligations on them. Although we vigorously seek payments due pursuant to these purchase obligations, we have historically collected only a small portion of these billed obligations. In order to allow for this, we reduce our gross service revenue by the amount that has been invoiced to these customers. We reduce this allowance and recognize the related service revenue only upon the receipt of cash payments in respect of these invoices. This allowance is determined by the amount of unfulfilled contractual purchase obligations invoiced to our customers and with respect to which we are continuing to seek payment.

Valuation Allowances for Doubtful Accounts Receivable and Deferred Tax Assets

        We have established allowances associated with uncollectible accounts receivable and our deferred tax assets.

•

Our valuation allowance for uncollectible accounts receivable is designed to account for the expense associated with accounts receivable that we estimate will not be collected. We assess the adequacy of this allowance by evaluating general factors, such as the length of time individual receivables are past due, historical collection experience, and changes in the credit-worthiness of our customers. We also assess the ability of specific customers to meet their financial obligations to us and establish specific allowances based on the amount we expect to collect from these customers. If circumstances relating to specific customers change or economic conditions change such that our past collections experience and assessment of the economic environment are no longer appropriate, our estimate of the recoverability of our trade receivables could be impacted.



•

Our valuation allowance for our net deferred tax asset reflects the uncertainty surrounding the realization of our net operating loss carry-forwards and our other deferred tax assets. For federal and state tax purposes, our net operating loss carry-forwards, including those that we have generated through our operations and those acquired in the Allied Riser merger could be subject to significant limitations on annual use. To reflect for thisthe uncertainty and the uncertainty

of future taxable income we have recorded a valuation allowance for the full amountsignificant majority of our net deferred tax asset.

Impairment At each balance sheet date, we assess the likelihood that we will be able to realize our deferred tax assets. We consider all available positive and negative evidence in assessing the need for a valuation allowance. As of Long-Lived Assets

        We reviewDecember 31, 2008, we determined that a full valuation allowance against our long-liveddeferred tax assets including property and equipment, and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount should be addressed pursuantwas necessary primarily due to the Financial Accounting Standards Board's (FASB) Statementeffect of Financial Accounting Standards (SFAS) No. 144,Accounting for the Impairment or Disposalhistorical operating losses. At December 31, 2009, we concluded that it was more likely than not that we would be able to realize certain of Long-Lived Assets. Pursuant to SFAS No. 144, impairment is determined by comparing the carrying valueour Canadian deferred tax assets primarily as a result of these long-lived assets to our estimate of expected future undiscounted cash flows expectedtaxable income related to result fromour Canadian operations. Accordingly, we reduced the usevaluation allowance recording an income tax benefit of the assets. In the event that there are changes$1.5 million in the planned useyear ended December 31, 2009. At December 31, 2010, we concluded that it was more likely than not that we would be able to

realize the remainder of our long-livedCanadian deferred tax assets. Accordingly, we reduced the remaining valuation allowance related to our Canadian deferred tax assets or our expected future undiscounted cash flows are reduced significantly, our assessmentrecording an income tax benefit of our ability to recover$1.5 million in the carrying value of these assets under SFAS No. 144 could change. No impairment existed atyear ended December 31, 2006 or 2007.

Convertible Senior Notes

        We evaluated the embedded conversion option2010. As of December 31, 2010, we maintained a full valuation allowance against our 1.00% Convertible Senior Notes (the "Notes") in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", EITF Issue No. 00-19 "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in a Company's Own Stock" and EITF Issue No. 01-6 "The Meaningother deferred tax assets consisting primarily of Indexed to a Company's Own Stock." We concluded that the embedded conversion option contained within the Notes should not be accounted for separately because the conversion option is indexed to our common stock and would be classified within stockholders' equity, if issued on a standalone basis.net operating loss carryforwards.

        We evaluated the terms of the Notes for a beneficial conversion feature in accordance with EITF No. 98-5, "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios" and EITF No. 00-27, "Application of Issue 98-5 to Certain Convertible Instruments." We concluded that there was no beneficial conversion feature at the commitment date based on the conversion rate of the Notes relative to the commitment date stock price. We will continue to evaluate potential future beneficial conversion charges based upon potential future triggering conversion events.

Equity-based Compensation

        Generally weWe grant options for shares of our common stock to all newcertain of our employees with a strike price equal to the market value at the grant date. We grant shares of restricted stock to our senior management team board of directors and to certain employees who have met our service requirements on the grant date.other employees. We determine the fair value of grants of restricted stock by the closing trading price of our common stock on the grant date. We determine the fair value of grants of options for shares of common stock by the closing trading price of our common stock on the grant date using the Black-Scholes method. Grants of shares of restricted stock and options for common stock generally vest over periods ranging from immediate vestingthree to over a four-year period.four-years. In April 2010, we granted 0.2 million restricted shares that are subject to certain performance conditions. We record equity-based compensation expense related to the performance conditions when it is considered probable that the conditions will be met. Compensation expense for all awards is recognized ratably over the service period.

        Effective January 1, 2006, we adopted FASB Statement No. 123(R),Share-Based Payment ("Statement 123(R)"), using the modified-prospective-transition method.        The adoption of Statement 123(R)accounting for equity-based compensation expense requires us to make additional estimates and judgments that affect our financial statements. These estimates include the following which impact the amount of compensation expense recorded under Statement 123(R).following.

Expected Dividend Yield—We have never declared or paid dividends and have no plans to do so in the foreseeable future.

Expected Volatility—We use the historical volatility since our June 2005 public offering to estimatefor a period commensurate with the expected volatility because less than 3% of our fully diluted shares were publicly traded before that date.term.

Risk-Free Interest Rate—We use the zero coupon U.S. Treasury rate during the quarter having a term that most closely resembles the expected term of the option.

Expected Term of the Option—We estimate the expected life of the option term by analyzing historical stock option exercises and other relevant data.

Forfeiture Rates—We estimate the forfeiture rate based on historical data with further consideration given to the class of employees to whom the options or shares were granted.

Other Accounting Policies

        We record assets and liabilities under capital leases at the lesser of the present value of the aggregate future minimum lease payments or the fair value of the assets under lease. We establish the number of renewal option periods used in determining the lease term, if any, based upon our assessment at the inception of the lease of the number of option periods that are reasonably assured in accordance with SFAS No. 13Accounting for Leases.assured. We estimate the fair value of leased assets using market data for similar assets.

        We capitalize the direct costs incurred prior to an asset being ready for service. These costs include costs under the related construction contract and the compensation costs of employees directly involved with construction activities. Our capitalization of these costs is based upon estimates of time for our employees involved in construction activities.

        We estimate our litigation accruals based upon our estimate of the expected outcome after consultation with legal counsel.

        We estimate our accruals for disputed leased circuit obligations based upon the nature and age of the dispute. Our network costs are impacted by the timing and amounts of disputed circuit costs. We




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generally record these disputed amounts when billed by the vendor and reverse these amounts when the vendor credit has been received or the dispute has otherwise been resolved.

        We estimate the useful lives of our property and equipment based upon historical usage with consideration given to technological changes and trends in the industry that could impact the asset utilization. We establish the number of renewal option periods used in determining the lease term, if any, for amortizing leasehold improvements based upon our assessment at the inception of the lease of the number of option periods that are reasonably assured in accordance with SFAS No. 13Accounting for Leases.assured.

Recent Accounting Pronouncements

Recent Accounting Pronouncements—to be Adopted

        In September 2006,2009, the FASB issued SFAS No. 157, "Fair Value Measurements"Accounting Standards Update ("SFAS 157"ASU"). SFAS 157 defines 2009-13, Multiple Element Arrangements. ASU 2009-13 addresses the determination of when the individual deliverables included in a multiple arrangement may be treated as separate units of accounting. ASU 2009-13 also modifies the manner in which the transaction consideration is allocated across separately identified deliverables and establishes definitions for determining fair value establishes a framework for measuring fair valueof elements in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. In February 2008, the FASB issued FSP No. 157-1, "Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13" and FSP No. 157-2, "Effective Date of FASB Statement No. 157" as amendments to SFAS 157, which exclude lease transactions from the scope of SFAS 157 and also defer the effective date of the adoption of SFAS 157 for non-financial assets and non-financial liabilities that are nonrecurring. The provisions of SFAS 157 are effective for the fiscal year beginningan arrangement. This standard must be adopted by us no later than January 1, 2008, except for certain non-financial assets and liabilities for which the effective date has been deferred to January 1, 2009.2011. The adoption of SFAS 157 and its related






pronouncements arethis standard update is not expected to have a material effectimpact on our consolidated financial position, results of operations or cash flows.statements.

        In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 permits entities to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 will be effective for the first fiscal year that begins after November 15, 2007. We will not adopt the alternative provided in this statement.

        In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. ("FIN") 48, "Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109." FIN No. 48 requires that management determine whether a tax position is more likely than not to be sustained upon examination based on the technical merits of the position. Once it is determined that a position meets this recognition threshold, the position is measured to determine the amount of benefit to be recognized in the financial statements. We adopted the provisions of FIN No. 48 on January 1, 2007. As of the date of adoption of FIN No. 48, we did not have any accrued interest or penalties associated with any unrecognized tax positions, and there was no interest expense or expense associated with penalties recognized during the year ended December 31, 2007. The adoption of FIN No. 48 did not have a material effect on our results of operations or financial position.

        In June 2006, the Emerging Issues Task Force of the Financial Accounting Standards Board (the "EITF") reached a conclusion on EITF Issue No. 06-3 "How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement." The scope of EITF Issue No. 06-3 includes any tax assessed by a governmental authority that is both imposed on and concurrent with a specific revenue-producing transaction between a seller and a customer, and may include, but is not limited to, sales, use, value added, and some excise taxes. The EITF Issue No. 06-3 requires that the presentation of taxes on either a gross basis (included in revenues and costs) or a net basis (excluded from revenues) and is an accounting policy decision that should be disclosed. We collect services and value added taxes from customers and record these amounts on a net basis, which is within the scope of EITF Issue No. 06-3. EITF Issue No. 06-3 applied to financial reports for interim and annual reporting periods beginning after December 15, 2006. The adoption of EITF Issue No. 06-3 did not have an impact on our results of operations or our financial position.

        In December 2007, the FASB issued SFAS No. 141R, "Business Combinations". SFAS 141R requires the acquiring entity in a business combination to record all assets acquired and liabilities assumed at their respective acquisition-date fair values, changes the recognition of assets acquired and liabilities assumed arising from contingencies, changes the recognition and measurement of contingent consideration, and requires the expensing of acquisition-related costs as incurred. SFAS 141R also requires additional disclosure of information surrounding a business combination, such that users of the entity's financial statements can fully understand the nature and financial impact of the business combination. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. An entity may not apply it before that date. The provisions of SFAS 141R will only impact us if we are party to a business combination after the pronouncement has been adopted.




ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


        We are exposed to certain market risks. These risks, which include interest rate risk and foreign currency exchange risk, arise in the normal course of business rather than from trading activities.

Interest Rate Risk

        Our cash flow exposure due to changes in interest rates related to our debt is limited as our 1.00% $200.0 million Convertible Notes and Senior Notes (the "Notes") have a fixed interest rate.rates. The fair value of theour Convertible Notes may increase or decrease for various reasons, including fluctuations in the market price of our common stock, fluctuations in market interest rates and fluctuations in general economic conditions. Based upon the quoted market price at December 31, 2007,2010, the fair value of our Convertible Notes was approximately $184.0$78.4 million.

        Our interest income is sensitive to changes in the general level of interest rates. However, based upon the nature and current level of our investments, which are primarily money market funds included in cash and cash equivalents, we believe that there is no material interest rate exposure related to our investments.

Senior Secured Notes

        In January 2011, we issued our 8.375% Senior Notes due February 15, 2018, for an aggregate principal amount of $175.0 million in a private offering for resale to qualified institutional buyers pursuant to SEC Rule 144A. The Senior Notes are secured and bear interest at a fixed rate of 8.375% per annum. Interest is payable in cash semiannually in arrears on February 15 and August 15, of each year, beginning on August 15, 2011. We received net proceeds of approximately $170.5 million after deducting $4.5 million of issuance costs. We will incur approximately $15.3 million of additional annual interest expense related to the issuance of the Senior Notes. This includes $14.7 million from the interest on the Senior Notes and $0.6 million from the amortization of the costs related to the Senior Notes.




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Foreign Currency Exchange Risk

        Our European and Canadian operations outside of the U.S. expose us to potentially unfavorable adverse movements in foreign currency rate changes. We have not entered into forward exchange contracts related to our foreign currency exposure. While we record financial results and assets and liabilities from our European and Canadianinternational operations in euros and the Canadian dollar, respectively,functional currency, which is generally the local currency, these results are reflected in our consolidated financial statements in U.S. dollars. The assets and liabilities associated with our European and Canadian operations are translated into U.S. dollars and reflected in our consolidated financial statements in U.S. dollars. Therefore, our reported results are exposed to fluctuations in the exchange rates between the U.S. dollar and the eurolocal currencies, in particular the Euro and the Canadian dollar. In addition, we fund the euro-based operating expenses and associatedcertain cash flow requirements of our Europeaninternational operations including IRU and expansion related obligations, in U.S. dollars. Accordingly, in the event that the euro strengthenslocal currencies strengthen versus the U.S. dollar to a greater extent than planned the revenues, expenses and cash flowsflow requirements associated with our Europeaninternational operations may be significantly higher in U.S.-dollar terms than planned. Changes in foreign currency rates could adversely affect our operating results.




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ITEM 8.    INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


		Page
Report of Independent Registered Public Accounting Firm		4142
Consolidated Balance Sheets as of December 31, 20062009 and 20072010		4243
Consolidated Statements of Operations for the Years Ended December 31, 2005,2008, December 31, 20062009 and December 31, 20072010		4344
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 2005,2008, December 31, 20062009 and December 31, 20072010		4445
Consolidated Statements of Cash Flows for the Years Ended December 31, 2005,2008, December 31, 20062009 and December 31, 20072010		46
Notes to Consolidated Financial Statements		47




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Report of Independent Registered Public Accounting Firm


The Board of Directors and Stockholders of Cogent Communications Group, Inc.

        We have audited the accompanying consolidated balance sheets of Cogent Communications Group, Inc. and subsidiaries (the "Company") as of December 31, 20062009 and 2007,2010, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2007.2010. Our audits also included the financial statement schedule listed in the index at 15(a) 2. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

        We conducted our audits 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 the 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cogent Communications Group, Inc. and subsidiaries at December 31, 20062009 and 2007,2010, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2007,2010, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

        As discussed in Note 1 to the consolidated financial statements, in 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R), Share Based Payment.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Cogent Communications Group, Inc.'s internal control over financial reporting as of December 31, 2007,2010, based on criteria established in Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 200828, 2011 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

		/s/ Ernst & Young LLP

McLean, VA
February 26, 200828, 2011




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COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 20062009 AND 20072010

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)


		2006			2007
Assets
Current assets:
Cash and cash equivalents		$	42,642		$	177,021
Short term investments ($0 and $812 restricted, respectively)			80			812
Accounts receivable, net of allowance for doubtful accounts of $1,233 and $1,159, respectively			20,053			21,760
Prepaid expenses and other current assets			5,339			6,636
Total current assets			68,114			206,229
Property and equipment:
Property and equipment			512,321			561,907
Accumulated depreciation and amortization			(249,053	)		(316,487	)
Total property and equipment, net			263,268			245,420
Intangible assets, net			1,150			165
Deposits and other assets ($1,118 and $306 restricted, respectively)			4,344			3,511
Total assets		$	336,876		$	455,325
Liabilities and stockholders' equity
Current liabilities:
Accounts payable		$	9,096		$	12,868
Accrued and other current liabilities			11,779			12,891
Convertible subordinated notes, net of discount of $1,213			8,978			—
Current maturities, capital lease obligations			6,027			7,717
Total current liabilities			35,880			33,476
Capital lease obligations, net of current maturities			82,019			84,857
Convertible senior notes, net of discount of $4,133			—			195,867
Other long term liabilities			3,345			2,295
Total liabilities			121,244			316,495
Commitments and contingencies
Stockholders' equity:
Common stock, $0.001 par value; 75,000,000 shares authorized; 48,928,108 and 47,929,874 shares issued and outstanding, respectively			49			48
Additional paid-in capital			478,140			430,402
Stock purchase warrants			764			764
Accumulated other comprehensive income—foreign currency translation adjustment			1,638			3,600
Accumulated deficit			(264,959	)		(295,984	)
Total stockholders' equity			215,632			138,830
Total liabilities and stockholders' equity		$	336,876		$	455,325

		2009			2010
Assets
Current assets:
Cash and cash equivalents		$	55,929		$	56,283
Accounts receivable, net of allowance for doubtful accounts of $2,516 and $2,464, respectively			22,877			23,702
Prepaid expenses and other current assets			8,045			8,654
Total current assets			86,851			88,639
Property and equipment:
Property and equipment			695,437			759,901
Accumulated depreciation and amortization			(431,653	)		(479,446	)
Total property and equipment, net			263,784			280,455
Deposits and other assets ($469 and $462 restricted, respectively)			4,360			7,009
Total assets		$	354,995		$	376,103
Liabilities and stockholders' equity
Current liabilities:
Accounts payable		$	12,781		$	15,979
Accrued and other current liabilities			17,609			19,538
Current maturities, capital lease obligations			5,643			6,143
Total current liabilities			36,033			41,660
Capital lease obligations, net of current maturities			104,021			105,562
Convertible senior notes, net of discount of $25,708 and $20,758, respectively			66,270			71,220
Other long term liabilities			4,187			5,860
Total liabilities			210,511			224,302
Commitments and contingencies
Stockholders' equity:
Common stock, $0.001 par value; 75,000,000 shares authorized; 44,853,974 and 45,838,510 shares issued and outstanding, respectively			45			46
Additional paid-in capital			475,158			482,737
Accumulated other comprehensive income—foreign currency translation adjustment			1,976			1,044
Accumulated deficit			(332,695	)		(332,026	)
Total stockholders' equity			144,484			151,801
Total liabilities and stockholders' equity		$	354,995		$	376,103

The accompanying notes are an integral part of these consolidated balance sheets.




Table of Contents



COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2005,2008, DECEMBER 31, 20062009 AND DECEMBER 31, 20072010

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)


		2005			2006			2007
Service revenue, net		$	135,213		$	149,071		$	185,663
Operating expenses:
Network operations (including $399, $315 and $208 of equity-based compensation expense, respectively, exclusive of amounts shown separately)			86,193			80,421			87,756
Selling, general, and administrative (including $12,906, $10,194 and $10,176 of equity-based compensation expense, and $4,574, $2,584 and $2,005 of bad debt expense, respectively)			54,250			56,787			62,187
Lease restructuring charge			1,319			—			—
Depreciation and amortization			55,600			58,414			65,638
Total operating expenses			197,362			195,622			215,581
Operating loss			(62,149	)		(46,551	)		(29,918	)
Gain—Cisco credit facility			842			—			—
Gains—lease obligation restructurings			844			255			2,110
Gains—disposition of assets			3,372			254			95
Interest income and other			1,320			2,969			6,914
Interest expense			(11,747	)		(10,684	)		(10,226	)
Net loss		$	(67,518	)	$	(53,757	)	$	(31,025	)
Net loss per common share:
Basic and diluted net loss per common share		$	(1.96	)	$	(1.16	)	$	(0.65	)
Weighted-average common shares—basic and diluted			34,439,937			46,343,372			47,800,159

The accompanying notes are an integral part of these consolidated statements.




COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005 DECEMBER 31, 2006 AND DECEMBER 31, 2007
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

			Common Stock																	Preferred Stock—F					Preferred Stock—G					Preferred Stock—H					Preferred Stock—I
								Additional Paid-in Capital			Deferred Compensation						Stock Purchase Warrants
			Shares		Amount									Treasury Stock						Shares		Amount			Shares		Amount			Shares		Amount			Shares		Amount
Balance at December 31, 2004			827,487			1			236,692			(22,533	)		(90	)		764		11,000			10,904		41,021			40,778		45,821			44,309		2,575			2,545
Total, December 31, 2004
	Forfeitures of shares granted to employees		(23,069	)		—			(686	)		697			—			—		—			—		—			—		(14	)		(11	)	—			—
	Equity-based compensation		—			—			—			13,306			—			—		—			—		—			—		—			—		—			—
	Foreign currency translation		—			—			—			—			—			—		—			—		—			—		—			—		—			—
	Issuances of common stock, net		11,719,231			11			64,712			(1,150	)		—			—		—			—		—			—		—			—		—			—
	Conversion of preferred stock into common stock		31,569,003			32			139,782			—			—			—		(11,000	)		(10,904	)	(41,021	)		(40,778	)	(45,807	)		(44,298	)	(2,575	)		(2,545	)
	Net loss		—			—			—			—			—			—		—			—		—			—		—			—		—			—
Balance at December 31, 2005			44,092,652			44			440,500			(9,680	)		(90	)		764		—			—		—			—		—			—		—			—
Total, December 31, 2005
	Forfeitures of shares granted to employees		(646	)		—			—			—			—			—		—			—		—			—		—			—		—			—
	Adoption of SFAS 123(R)—reclassification of deferred compensation		—			—			(9,680	)		9,680			—			—		—			—		—			—		—			—		—			—
	Equity-based compensation		—			—			10,509			—			—			—		—			—		—			—		—			—		—			—
	Foreign currency translation		—			—			—			—			—			—		—			—		—			—		—			—		—			—
	Issuances of common stock, net		4,732,500			5			36,474			—			—			—		—			—		—			—		—			—		—			—
	Exercises of options		103,602			—			427			—			—			—
	Treasury stock retirement		—			—			(90	)		—			90			—
	Net loss		—			—			—			—			—			—		—			—		—			—		—			—		—			—
Balance at December 31, 2006			48,928,108			49			478,140			—			—			764		—			—		—			—		—			—		—			—
Total, December 31, 2006
	Forfeitures of shares granted to employees		(22,659	)		—			—			—			—			—		—			—		—			—		—			—		—			—
	Equity-based compensation		—			—			11,105			—			—			—		—			—		—			—		—			—		—			—
	Foreign currency translation		—			—			—			—			—			—		—			—		—			—		—			—		—			—
	Issuances of common stock, net		1,033,404			1			—			—			—			—		—			—		—			—		—			—		—			—
	Exercises of options		216,311			—			1,103			—			—			—		—			—		—			—		—			—		—			—
	Common stock purchases and retirement		(2,225,290	)		(2	)		(59,946	)		—			—			—		—			—		—			—		—			—		—			—
	Net loss		—			—			—			—			—			—		—			—		—			—		—			—		—			—
Balance at December 31, 2007			47,929,874		$	48		$	430,402		$	—		$	—		$	764		—		$	—		—		$	—		—		$	—		—		$	—
Total, December 31, 2007

The accompanying notes are an integral part of these consolidated statements.




		2008			2009			2010
Service revenue		$	215,489		$	235,807		$	263,416
Operating expenses:
Network operations (including $328, $172 and $370 of equity-based compensation expense, respectively, exclusive of amounts shown separately)			93,055			102,775			119,023
Selling, general, and administrative (including $17,548, $8,435 and $6,267 of equity-based compensation expense, respectively)			80,465			76,905			72,060
Asset impairments			1,592			—			594
Depreciation and amortization			62,589			59,913			56,524
Total operating expenses			237,701			239,593			248,201
Operating (loss) income			(22,212	)		(3,786	)		15,215
Gains—purchases of convertible senior notes			23,075			—			—
Interest income and other			4,025			1,108			959
Interest expense			(18,574	)		(15,720	)		(16,682	)
Loss before income taxes			(13,686	)		(18,398	)		(508	)
Income tax (provision) benefit			(1,536	)		1,247			1,177
Net (loss) income		$	(15,222	)	$	(17,151	)	$	669
Basic net (loss) income per common share		$	(0.34	)	$	(0.39	)	$	0.01
Weighted-average common shares—basic			44,563,727			44,028,736			44,633,878
Diluted net (loss) income per common share		$	(0.34	)	$	(0.39	)	$	0.01
Weighted-average common shares—diluted			44,563,727			44,028,736			44,790,753

COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2005 DECEMBER 31, 2006 AND DECEMBER 31, 2007
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

			Preferred Stock—J					Preferred Stock—K					Preferred Stock—L					Preferred Stock—M
																							Foreign Currency Translation Adjustment			Accumulated Deficit			Total Stockholder's Equity			Comprehensive Loss
			Shares		Amount			Shares		Amount			Shares		Amount			Shares		Amount
Balance at December 31, 2004			3,891			19,421		2,600			2,588		185			927		3,701			18,353			1,515			(143,684	)		212,490
Total, Year Ended December 31, 2004																																	(88,773	)
	Forfeitures of shares granted to employees		—			—		—			—		—			—		—			—			—			—			—			—
	Equity-based compensation		—			—		—			—		—			—		—			—			—			—			13,306			—
	Foreign currency translation		—			—		—			—		—			—		—			—			(850	)		—			(850	)		(850	)
	Issuances of common stock, net		—			—		—			—		—			—		—			—			—			—			63,573			—
	Conversion of preferred stock into common stock		(3,891	)		(19,421	)	(2,600	)		(2,588	)	(185	)		(927	)	(3,701	)		(18,353	)		—			—			—			—
	Net loss		—			—		—			—		—			—		—			—			—			(67,518	)		(67,518	)		(67,518	)
Balance at December 31, 2005			—			—		—			—		—			—		—			—			665			(211,202	)		221,001
Total, Year Ended December 31, 2005																																	(68,368	)
	Forfeitures of shares granted to employees		—			—		—			—		—			—		—			—			—			—			—			—
	Adoption of SFAS 123(R)—reclassification of deferred compensation		—			—		—			—		—			—		—			—			—			—			—			—
	Equity-based compensation		—			—		—			—		—			—		—			—			—			—			10,509			—
	Foreign currency translation		—			—		—			—		—			—		—			—			973			—			973			973
	Issuances of common stock, net		—			—		—			—		—			—		—			—			—			—			36,479			—
	Exercises of options		—			—		—			—		—			—		—			—			—			—			427			—
	Treasury stock retirement		—			—		—			—		—			—		—			—			—			—			—			—
	Net loss		—			—		—			—		—			—		—			—			—			(53,757	)		(53,757	)		(53,757	)
Balance at December 31, 2006			—			—		—			—		—			—		—			—			1,638			(264,959	)		215,632
Total, Year Ended December 31, 2006																																	(52,784	)
	Forfeitures of shares granted to employees		—			—		—			—		—			—		—			—			—			—			—			—
	Equity-based compensation		—			—		—			—		—			—		—			—			—			—			11,105			—
	Foreign currency translation		—			—		—			—		—			—		—			—			1,962			—			1,962			1,962
	Issuances of common stock, net		—			—		—			—		—			—		—			—			—			—			1			—
	Exercises of options		—			—		—			—		—			—		—			—			—			—			1,103			—
	Common stock purchases and retirement		—			—		—			—		—			—		—			—			—			—			(59,948	)		—
	Net loss		—			—		—			—		—			—		—			—			—			(31,025	)		(31,025	)		(31,025	)
Balance at December 31, 2007			—		$	—		—		$	—		—		$	—		—		$	—		$	3,600		$	(295,984	)	$	138,830
Total, Year Ended December 31, 2007																																$	(29,063	)

The accompanying notes are an integral part of these consolidated statements.




Table of Contents



COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2008 DECEMBER 31, 2009 AND DECEMBER 31, 2010

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)


		Common Stock												Foreign Currency Translation Adjustment
								Additional Paid-in Capital			Stock Purchase Warrants						Accumulated Deficit			Total Stockholder's Equity			Comprehensive Loss
		Shares			Amount
Balance at December 31, 2007			47,929,874		$	48		$	505,335		$	764		$	3,600		$	(300,322	)	$	209,425
Total, December 31, 2007																							$	(33,401	)
Forfeitures of shares granted to employees			(17,596	)		—			—			—			—			—			—			—
Equity-based compensation			—			—			18,901			—			—			—			18,901			—
Foreign currency translation			—			—			—			—			(3,028	)		—			(3,028	)		(3,028	)
Issuances of common stock, net			715,610			—			—			—			—			—			—			—
Exercises of options			63,931			—			148			—			—			—			148			—
Common stock purchases and retirement			(4,372,870	)		(4	)		(59,270	)		—			—			—			(59,274	)		—
Net loss			—			—			—			—			—			(15,222	)		(15,222	)		(15,222	)
Balance at December 31, 2008			44,318,949		$	44		$	465,114		$	764		$	572		$	(315,544	)	$	150,950
Total, December 31, 2008																							$	(18,250	)
Forfeitures of shares granted to employees			(4,532	)		—			—			—			—			—			—			—
Equity-based compensation			—			—			9,654			—			—			—			9,654			—
Foreign currency translation			—			—			—			—			1,404			—			1,404			1,404
Issuances of common stock, net			25,008			—			—			—			—			—			—			—
Expiration of warrants			—			—			764			(764	)		—			—			—			—
Exercises of options			644,174			1			356			—			—			—			357
Common stock purchases and retirement			(129,625	)		—			(730	)		—			—			—			(730	)		—
Net loss			—			—			—			—			—			(17,151	)		(17,151	)		(17,151	)
Balance at December 31, 2009			44,853,974		$	45		$	475,158		$	—		$	1,976		$	(332,695	)	$	144,484
Total, December 31, 2009																							$	(15,747	)
Forfeitures of shares granted to employees			(61,800	)		—			—			—			—			—			—			—
Equity-based compensation			—			—			7,305			—			—			—			7,305			—
Foreign currency translation			—			—			—			—			(932	)		—			(932	)		(932	)
Issuances of common stock, net			999,500			1			—			—			—			—			1			—
Exercises of options			46,836			—			274			—			—			—			274
Net income			—			—			—			—			—			669			669			669
Balance at December 31, 2010			45,838,510		$	46		$	482,737		$	—		$	1,044		$	(332,026	)	$	151,801
Total, December 31, 2010																							$	(263	)

The accompanying notes are an integral part of these consolidated statements.




Table of Contents


COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2005,2008, DECEMBER 31, 20062009 AND DECEMBER 31, 20072010

(IN THOUSANDS)


			2005			2006			2007
Cash flows from operating activities:
Net loss			$	(67,518	)	$	(53,757	)	$	(31,025	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
	Depreciation and amortization			55,600			58,414			65,638
	Amortization of debt discount—convertible notes			1,548			2,265			1,576
	Equity-based compensation expense (net of amounts capitalized)			13,305			10,509			10,384
	Gains—Cisco credit facility			(842	)		—			—
	Gains—lease restructurings dispositions of assets and other, net			(3,983	)		(540	)		(2,853	)
Changes in assets and liabilities:
	Accounts receivable			(3,645	)		(2,758	)		(399	)
	Prepaid expenses and other current assets			34			(1,321	)		(679	)
	Deposits and other assets			(3,700	)		563			1,003
	Accounts payable, accrued liabilities and other long-term liabilities			139			(8,090	)		4,985
	Net cash (used in) provided by operating activities			(9,062	)		5,285			48,630
Cash flows from investing activities:
Purchases of property and equipment				(17,342	)		(21,526	)		(30,389	)
Purchases of intangible assets				(129	)		(100	)		—
(Purchases) maturities of short term investments				(774	)		1,203			(732	)
Purchase of fiber optic network in Germany				(932	)		—			—
Proceeds from asset sales				5,122			945			257
Net cash used in investing activities				(14,055	)		(19,478	)		(30,864	)
Cash flows from financing activities:
Proceeds from issuance of senior convertible notes, net				—			—			195,147
Purchases of common stock				—			—			(59,949	)
Repayment of convertible subordinated notes				—			—			(10,187	)
Proceeds from sales of common stock, net				63,723			36,479			—
Repayment of capital lease obligations				(6,899	)		(9,861	)		(9,809	)
Proceeds from exercises of common stock options				—			427			1,103
Proceeds from issuance of subordinated note				10,000			—			—
Repayment of subordinated note				(10,000	)		—			—
Repayment of Cisco note				(17,000	)		—			—
Borrowings under credit facility				10,000			—			—
Repayments under credit facility				(10,000	)		—			—
											��
Net cash provided by financing activities				39,824			27,045			116,305
Effect of exchange rate changes on cash				(668	)		(93	)		308
Net increase in cash and cash equivalents				16,039			12,759			134,379
Cash and cash equivalents, beginning of year				13,844			29,883			42,642
Cash and cash equivalents, end of year			$	29,883		$	42,642		$	177,021
Supplemental disclosures of cash flow information:
Cash paid for interest			$	12,598		$	12,235		$	9,248
Non-cash financing activities—
Capital lease obligations incurred				1,213			2,087			11,498

			2008			2009			2010
Cash flows from operating activities:
Net (loss) income			$	(15,222	)	$	(17,151	)	$	669
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
	Depreciation and amortization			62,589			59,913			56,524
	Asset impairment			1,592			—			594
	Amortization of debt discount—convertible notes			8,049			4,545			4,950
	Equity-based compensation expense (net of amounts capitalized)			17,876			8,607			6,637
	Gains—purchases of senior convertible notes			(23,075	)		—			—
	Gains—dispositions of assets and other, net			(138	)		(219	)		(208	)
Changes in assets and liabilities:
	Accounts receivable			(1,273	)		(138	)		(1,603	)
	Prepaid expenses and other current assets			495			(1,464	)		(883	)
	Deposits and other assets			(537	)		(292	)		(2,698	)
	Accounts payable, accrued liabilities and other long-term liabilities			3,980			3,143			7,495
	Net cash provided by operating activities			54,336			56,944			71,477
Cash flows from investing activities:
Purchases of property and equipment				(33,510	)		(49,507	)		(52,757	)
Maturities of short-term investments				750			62			—
Purchase of other assets				—			(246	)		—
Proceeds from asset sales				221			338			530
Net cash used in investing activities				(32,539	)		(49,353	)		(52,227	)
Cash flows from financing activities:
Purchases of convertible senior notes				(48,553	)		—			—
Repayment of capital lease obligations				(17,959	)		(23,167	)		(19,148	)
Purchases of common stock				(59,273	)		(730	)		—
Proceeds from exercises of common stock options				147			357			274
Net cash used in financing activities				(125,638	)		(23,540	)		(18,874	)
Effect of exchange rate changes on cash				(1,889	)		587			(22	)
Net (decrease) increase in cash and cash equivalents				(105,730	)		(15,362	)		354
Cash and cash equivalents, beginning of year				177,021			71,291			55,929
Cash and cash equivalents, end of year			$	71,291		$	55,929		$	56,283
Supplemental disclosures of cash flow information:
Cash paid for interest			$	10,669		$	10,420		$	11,925
Cash paid for income taxes				1,720			253			303
Non-cash financing activities—
	Capital lease obligations incurred			32,398			27,803			23,291

The accompanying notes are an integral part of these consolidated statements.




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COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



DECEMBER 31, 2005, 20062008, 2009 and 20072010


1. Description of the business and summary of significant accounting policies:

Description of business

        Cogent Communications Group, Inc. (the "Company") is a Delaware corporation and is headquartered in Washington, DC. The Company is a facilities-based provider of low-cost, high-speed Internet access and Internet Protocol ("IP") communications services. The Company's network is specifically designed and optimized to transmit data using IP. The Company delivers its services to small and medium-sized businesses, communications service providers and other bandwidth-intensive organizations through approximately 15,000 customer connections in North America and Europe.

        The Company offers on-net Internet access services exclusively through its own facilities, which run all the way to its customers' premises. Because of its integrated network architecture, the Company is not dependent on local telephone companies to serve its on-net customers. The Company provides on-net Internet access to its net centric customers which include certain bandwidth-intensive users such as universities, other Internet service providers, telephone companies, cable television companies and commercial content providers at speeds up to 10 Gigabits per second. These customers generally receive service in colocation facilities and the Company's data centers. The Company also offers Internet access services to its corporate customers in multi-tenant office buildings typically serving law firms, financial services firms, advertising and marketing firms and other professional services businesses. The Company operates data centers throughout North America and Europe that allow customers to collocate their equipment and access the Company's network.

        In addition to providing on-net services, the Company also provides Internet connectivity to customers that are not located in buildings directly connected to its network. The Company serves these off-net corporate customers using other carriers' facilities to provide the "last mile" portion of the link from its customers' premises to the Company's network. The Company also provides certain non-core services that resulted from acquisitions. The Company continues to support but does not actively sell these non-core services.

        The Company has created its network by acquiring optical fiber from underlying carriers and directly connecting Internet routers to this optical fiber. Through 2004, the Company expanded its network through several acquisitions of financially distressed companies or their assets. Since then, it has primarily focused on the growth of its on-net Internet access services.

Summary of Significant Accounting Policiessignificant accounting policies

Principles of consolidation

        The consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles and include the accounts of the Company and all of its wholly owned and majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Reclassification

        Certain previously reported December 31, 2006 balance sheet amounts have been reclassified in order to be consistent with the December 31, 2007 presentation.




COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2005, 2006 and 2007

Use of estimates

        The preparation of consolidated financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates.




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COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2009 and 2010

1. Description of the business and summary of significant accounting policies: (Continued)

Revenue recognition and allowance for doubtful accounts

        The Company recognizes revenue in accordance with Staff Accounting Bulletin No. 104, "Revenue Recognition." The Company's service offerings consist of telecommunications services provided under month-to-month or annual contractsservices. Fixed fees are billed monthly in advance.advance and usage fees are billed monthly in arrears. Net revenues from telecommunication services are recognized when the services are performed, evidence of an arrangement exists, the fee is fixed and determinable and collection is probable. The probability of collection is determined by an analysis of a new customer's credit history and historical payment patterns for existing customers. Service discounts and incentives related to telecommunication services are recorded as a reduction of revenue when granted. Fees billed in connection with customer installations are deferred and recognized ratably over the longer of the contract term or the estimated customer life which is determined by a historical analysis of customer retention.retention and the contract term. The Company expenses the direct costs associated with sales as incurred.

        The Company invoices certain customers for amounts contractually due for unfulfilled minimum contractual obligations and recognizes a corresponding sales allowance equal to this revenuethe amount invoiced resulting in the recognition of no net revenue at the time the customer is billed. The Company vigorously seeks payment of these amounts. The Company recognizes net revenue as these billings are collected in cash.collected.

        The Company establishes a valuationan allowance for doubtful accounts and other sales credit adjustments. Valuation allowancesadjustments related to its trade receivables. Trade receivables are recorded at the invoiced amount and can bear interest. Allowances for sales credits are established through a reduction of revenue, while valuation allowances for doubtful accounts are established through a charge to selling, general, and administrative expenses. The Company assesses the adequacy of these reserves by evaluating general factors, such as the length of time individual receivables are past due, and historical collection experience, and changes in the credit worthiness of its customers. The Company also assesses the ability of specific customers to meet their financial obligations and establishes specific allowances related to these customers. If circumstances relating to specific customers change or economic conditions change such that the Company's past collection experience and assessment of the economic environment are no longer appropriate, the Company's estimate of the recoverability of its trade receivables could be impacted. Accounts receivable balances are written-off against the allowance for doubtful accounts after all means of collection have been exhausted and the potential for recovery is considered remote. The Company recognized bad debt expense, net of recoveries, of approximately $4.6 million, $4.9 million and $4.3 million for the years ended December 31, 2008, 2009 and 2010, respectively.

Network operations

        Network operations expenses include costs associated with service delivery, network management, and customer support. This includes the costs of personnel and related operating expenses associated with these activities, network facilities costs, fiber and equipment maintenance fees, leased circuit costs, and access fees paid to building owners. The Company estimates its accruals for any disputed leased circuit obligations based upon the nature and age of the dispute. Network operations costs are impacted by the timing and amounts of disputed circuit costs. The Company generally records these disputed amounts when billed by the vendor and reverses these amounts when the vendor credit has been received or the dispute has otherwise been resolved. The Company does not allocate depreciation and amortization expense to its network operations expense.




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COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2005, 20062008, 2009 and 20072010

1. Description of the business and summary of significant accounting policies: (Continued)

Foreign currency translation adjustment and comprehensive income (loss)

        The functional currency of Cogent Canada is the Canadian dollar. The functional currency of Cogent Europe is the euro. The consolidated financial statements of Cogent Canada, and Cogent Europe,the Company's non-U.S. operations are translated into U.S. dollars using the period-end foreign currency exchange rates for assets and liabilities and the average foreign currency exchange rates for revenues and expenses. Gains and losses on translation of the accounts of the Company's non-U.S. operations are accumulated and reported as a component of other comprehensive income (loss)loss in stockholders' equity.

        Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting of Comprehensive Income" requires "comprehensive income" and the components of "other comprehensive income" to be reported in the financial statements and/or notes thereto. The Company's only components of "other comprehensive income"loss" are currency translation adjustments for all periods presented.

Financial instruments

        The Company considers all highly liquid investments with an original maturity of three months or less at purchase to be cash equivalents. The Company determines the appropriate classification of its investments at the time of purchase and evaluates such designation at each balance sheet date. At December 31, 2006 and 2007, the Company's investments consisted of money market accounts (included in cash equivalents) and certificates of deposit.

        At December 31, 20062009 and 2007,December 31, 2010, the carrying amount of cash and cash equivalents, short-term investments, accounts receivable, prepaid and other current assets, accounts payable, and accrued expenses approximated fair value because of the short-term nature of these instruments. The Company measures its cash equivalents at fair value based upon quoted (Level 1) market prices and at amortized cost, which approximates fair value. Based upon the quoted (Level 1) market price at December 31, 2007,2010, the fair value of the Company's $200.0$92.0 million convertible senior notes was approximately $184.0$78.4 million.

Short-term investments

        Short-term investments consist of certificates of deposit with original maturities beyond three months, but less than twelve months. Such short-term investments are carried at amortized cost, which approximates fair value due to the short period of time to maturity. Investments underlying the Company's cash equivalents and short-term investments are classified as "held-to-maturity" in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities."

        The Company was party to letters of credit totaling approximately $1.0$0.4 million as of December 31, 20062009 and $0.5 million as of December 31, 2007.2010. These letters of credit are secured by certificates of deposit ofinvestments totaling approximately $1.1$0.5 million at December 31, 20062009 and December 31, 2007,2010, that are restricted and included in short-term investments and other assets.

CreditConcentration of credit risk

        The Company's assets that are exposed to credit risk consist of its cash and cash equivalents, short-term investments, other assets and accounts receivable. As of December 31, 20062009 and 2007, approximately $37.4 million (4 funds) and $171.9 million (7 funds) of2010, the Company's cash equivalents were invested in demand deposit accounts, overnight investments and money market funds. The largest individual investment amount in an individual fund was $30.9$11.1 million at December 31, 20062009 (demand deposit account) and $50.7$16.7 million at December 31, 2007.2010 (overnight investment). The Company places its cash equivalents and short-term investments in instruments that meet high-quality credit standards as specified in the Company's investment policy guidelines. Accounts receivable are due from customers located in major




COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2005, 2006 and 2007




metropolitan areas in the United States, Europe, Canada and Canada.Mexico. Receivables from the Company's net centric (wholesale) customers and customers obtained through business combinations are subject to a higher degree of credit risk than other customers.

        The Company relies upon an equipment vendor for the majority of its network equipment and is also dependent upon third-party fiber providers for providing its services to its customers.

Property and equipment

        Property and equipment are recorded at cost and depreciated once deployed using the straight-line method over the estimated useful lives of the assets. Useful lives are determined based on historical usage with consideration given to technological changes and trends in the industry that could impact




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COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2009 and 2010

1. Description of the business and summary of significant accounting policies: (Continued)




the asset utilization. System infrastructure costs include the capitalized compensation costs of employees directly involved with construction activities and costs incurred by third party contractors. Assets and liabilities under capital leases are recorded at the lesser of the present value of the aggregate future minimum lease payments or the fair value of the assets under lease. Leasehold improvements include costs associated with building improvements. The Company determines the number of renewal option periods, if any, included in the lease term for purposes of amortizing leasehold improvements based upon its assessment at the inception of the lease of the number of option periods that are reasonably assured in accordance with SFAS No. 13 "Accounting for Leases."assured. Expenditures for maintenance and repairs are expensed as incurred.

        Depreciation and amortization periods are as follows:

Type of asset		Depreciation or amortization period
Indefeasible rights of use (IRUs)		Shorter of useful life or IRU lease agreement; generally 15 to 20 years, beginning when the IRU is ready for use
Network equipment		3 to 8 years
Leasehold improvements		Shorter of lease term or useful life
Software		5 years
Owned buildings		40 years
Office and other equipment		3 to 7 years
System infrastructure		5 to 10 years

Long-lived assets

        The Company's long-lived assets include property and equipment and identifiable intangible assets. These long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount shouldmay not be addressed pursuant to SFAS No. 144, "Accounting for therecoverable. Impairment or Disposal of Long-Lived Assets." Pursuant to SFAS No. 144, impairment is determined by comparing the carrying value of these long-lived assets to management's probability weighted estimate of the future undiscounted cash flows expected to result from the use of the assets. In the event an impairment exists, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the asset, which would be determined by using quoted market prices or valuation techniques such as the discounted present value of expected future cash flows, appraisals, or other pricing models. Management believes that no such impairment existed as of December 31, 2006 or 2007. In the event there are changes in the planned use of the Company's long-term assets or the Company's expected future undiscounted cash flows are reduced significantly, the Company's assessment of its ability to recover the carrying value of these assets under SFAS No. 144 could change.

Asset retirement obligations

        The Company's asset retirement obligations consist of restoration requirements for certain leased facilities. The Company recognizes a liability for the present value of the estimated fair value of contractual obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset in the period incurred. The present value of the fair value of the obligation is also capitalized as property, plant and equipment and then amortized over the estimated remaining useful life of the associated asset.




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COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2005, 20062008, 2009 and 20072010

Asset retirement obligations1. Description of the business and summary of significant accounting policies: (Continued)




        In accordance with SFAS No. 143, "Accounting for Asset Retirement Obligations,"Increases to the fair value of a liability for an asset retirement obligation isliability due to the passage of time are recognized within selling, general and administrative expenses in the periodCompany's consolidated statements of operations. Changes in which it is incurred if a reasonable estimatethe liability due to revisions to estimates of fair value can be made. The associated asset retirement costsfuture cash flows are capitalized as part ofrecognized by increasing or decreasing the liability with the offset adjusting the carrying amount of the related long-lived asset. The Company records changes in the liability for an asset retirement obligation due to passage of time using the effective interest rate method. The interest rate used to measure that change is the credit-adjusted risk-free rate that existed when the liability was initially measured.

Convertible Senior NotesEquity-based compensation

        The Company evaluatedrecognizes compensation expense for its share-based payments granted to its employees based on their grant date fair values with the embedded conversion optionexpense being recognized on a straight-line basis over the requisite service period. The Company begins recording equity-based compensation expense related to its performance awards when it is probable that the performance conditions will be met. Equity-based compensation expense is recognized in the statement of its 1.00% Convertible Senior Notes (the "Notes") in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", EITF Issue No. 00-19 "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settledoperations in a Company's Own Stock"manner consistent with the classification of the employee's salary and EITF Issue No. 01-6 "The Meaningother compensation. See Note 8 for additional information related to share-based payments.

Debt with conversion options

        On January 1, 2009, the Company adopted the provisions of IndexedAccounting Standards Codification ("ASC") ASC 470-20, Debt, "Debt with Conversion and Other Options" ("ASC 470-20"). ASC 470-20 clarified the accounting for convertible debt instruments that may be settled in cash (including partial cash settlement) upon conversion. ASC 470-20 requires issuers to account separately for the liability and equity components of certain convertible debt instruments in a Company's Own Stock." The Company concludedmanner that reflects the embedded conversion option contained withinissuer's nonconvertible debt borrowing rate when interest cost is recognized. ASC 470-20 requires bifurcation of a component of the Notes should notdebt, classification of that component in equity and the amortization of the resulting discount on the debt to be accounted for separately because the conversion option is indexed torecognized as part of interest expense in the Company's common stock and would be classified within stockholders' equity, if issued on a standalone basis.consolidated statements of operations.

        The Company also evaluatedestimated the termsfair value of convertible notes on the Notes forissuance date and on each purchase date. The fair value that was assigned to the liability component of convertible notes was determined using interest rates of similar debt that excluded a beneficial conversion feature in accordance with EITF No. 98-5, "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios" and EITF No. 00-27, "Application of Issue 98-5 to Certain Convertible Instruments." The Company concludedthen applying that there was no beneficial conversion feature at the commitment date based on the conversioneffective interest rate of the Notes relative to the commitment date stock price. The Company continuescash flows associated with the convertible notes to evaluate potential future beneficial conversion charges based upon potential future triggering conversion events.calculate the present value.

Income taxes

        The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109,Company's deferred tax assets or liabilities are computed based upon the differences between financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. Deferred income tax expense or benefits are based upon the changes in the assets or liability from period to period. At each balance sheet date, the Company assesses the likelihood that it will be able to realize its deferred tax assets. The Company considers all available positive and negative evidence in assessing the need for a valuation allowance. The Company will reduce its valuation allowance if the Company concludes that it is more likely than not that it would be able to realize its deferred tax assets.

        In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. ("FIN") 48, "Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109." FIN No. 48 requires that management determineManagement determines whether a tax position is more likely than not to be sustained upon examination based on the technical merits of the position. Once it is determined that a position meets




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COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2009 and 2010

1. Description of the business and summary of significant accounting policies: (Continued)




this recognition threshold, the position is measured to determine the amount of benefit to be recognized in the financial statements. The Company adopted the provisions of FIN No. 48 on January 1, 2007. As a result of adopting FIN No. 48, the Company did not recognize any previously unrecognized tax positions. The adoption of FIN No. 48 did not have a material effect on the Company's results of operations or financial position. The Company's policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. There was no interest expense or expense associated with penalties recognized during the year ended December 31, 2007.




COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2005, 2006 and 2007

        The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is subject to U.S. federal tax and state tax examinations for years from 20042005 to 2007.2010. The Company is subject to tax examinations in its foreign jurisdictions generally for years from 20012000 to 2007.2010. Management does not believe there will be any material changes in its unrecognized tax positions over the next 12 months.

Equity-based compensation

        Prior to January 1, 2006, the Company accounted for its equity-based compensation under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("Opinion 25"), and related Interpretations, as permitted by SFAS No. 123, "Accounting for Stock-Based Compensation." Effective January 1, 2006, the Company adopted SFAS No. 123(R), "Share-Based Payment", using the modified-prospective transition method.

        Under the modified-prospective transition method, compensation cost recognized includes: (a) compensation cost for all equity-based payments granted prior to but not yet vested as of January 1, 2006, based on the grant date fair value, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value. Results for prior periods have not been restated. As a result of adopting SFAS No. 123(R), the Company's net loss for the year ended December 31, 2006, was approximately $0.7 million greater than if it had continued to account for share-based compensation under Opinion 25. Upon the adoption of SFAS No. 123(R), $9.7 million of deferred compensation was offset against additional paid-in-capital.

        Pro forma information regarding net loss and net loss per share is required by SFAS No. 123 and, in periods prior to January 1, 2006, had been determined as if the Company had accounted for its employee stock options under the fair value method. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model.

        The following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123 for the year ended December 31, 2005 (in thousands except per share amounts):

		Year Ended December 31, 2005
Net loss available to common shareholders, as reported		$	(67,518	)
Add: equity-based compensation expense included in reported net loss, net of related tax effects			13,305
Deduct: total stock-based employee compensation expense determined under fair value based method, net of related tax effects			(13,918	)
Pro forma—net loss available to common shareholders		$	(68,131	)
Loss per share available to common shareholders, as reported—basic and diluted		$	(1.96	)
Pro forma loss per share available to common shareholders—basic and diluted		$	(1.98	)

        The weighted-average per share grant date fair value of options for common stock was $4.95 in 2005, $6.16 in 2006 and $12.27 in 2007.




COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2005, 2006 and 2007

        The following assumptions were used for determining the fair value of options granted in the three years ended December 31, 2007:

		Year Ended December 31, 2005		Year Ended December 31, 2006		Year Ended December 31, 2007
Dividend yield		0.0	%	0.0	%	0.0	%
Expected volatility—average		159.8	%	58.2	%	55.1	%
Risk-free interest rate—average		4.1	%	4.8	%	4.5	%
Expected life of the option term (in years)		5.0		5.0		5.9

Basic and diluted net loss(loss) income per common share

        Net lossBasic earnings per share is presented in accordance with the provisions of SFAS No. 128 "Earnings per Share." SFAS No. 128 requires a presentation of basic EPS and diluted EPS. Basic EPS("EPS") excludes dilution for common stock equivalents and is computed by dividing net income or loss(loss) available to common stockholders by the weighted-average number of common shares outstanding for the period, adjusted, using the if-converted method, for the effect of common stock equivalents arising from the assumed conversion of participating convertible securities, if dilutive.period. Diluted net loss per common shareEPS is based on the weighted-average number of shares of common stock outstanding during each period, adjusted for the effect of common stock equivalents, arising fromif dilutive.

        Shares of restricted stock are included in the assumed exercisecomputation of basic EPS as they vest and are included in diluted EPS, to the extent they are dilutive, determined using the treasury stock options, warrants,method. As of December 31, 2008, 2009 and 2010, 1.7 million, 0.4 million and 0.4 million unvested shares of restricted common stock, respectively, are not included in the conversioncomputation of debt, preferred stock and participating convertible securities, if dilutive.diluted (loss) income per share, as the effect would be anti-dilutive.

        Using the "if-converted" method, the shares issuable upon conversion of the Company's 1.00% Convertible Senior Notes (the "Notes""Convertible Notes") were anti-dilutive for the yearyears ended December 31, 2007.2008, 2009 and 2010. Accordingly, theirthe impact has been excluded from the computation of diluted loss per share.EPS computations. The Convertible Notes are convertible into shares of the Company's Commoncommon stock at an initial conversion price of $49.18 per share, yielding 4.11.9 million common shares at December 31, 2008, 2009 and 2010, subject to certain adjustments set forth in the indenture. Common

        The Company computes the dilutive effect of outstanding options using the treasury stock equivalents have also been excluded from the net loss per share calculations for all periods presented because their effect would be anti-dilutive.

method. For the years ended December 31, 2005, 20062008, 2009 and 20072010 options to purchase 1.21.1 million, 1.20.4 million shares and 1.10.2 million shares of common stock, respectively, at weighted-average exercise prices of $2.68, $2.73$5.65 and $5.75$12.59 and $17.84 per share, respectively, are not included in the computation of diluted earningsloss per share as they arethe effect would be anti-dilutive. Unvested restricted stock is not included in

        The following details the computationdetermination of earnings per share until vested. For the yearsdiluted weighted average shares for the year ended December 31, 2005, 2006 and 2007, 0.3 million shares, 0.4 million shares and 1.2 million shares of unvested restricted stock, respectively, are not included in the computation of basic earnings per share and will be included as this stock vests.2010:

Recent accounting pronouncements

        In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. In February 2008, the FASB issued FSP No. 157-1, "Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13" and FSP No. 157-2, "Effective Date of FASB Statement No. 157" as amendments to SFAS 157, which exclude lease transactions from the scope of SFAS 157 and also defer the effective date of the adoption of SFAS 157 for non-financial

		Year Ended December 31, 2010
Weighted average common shares outstanding—basic			44,633,878
Dilutive effect of stock options			76,336
Dilutive effect of restricted stock			80,539
Weighted average shares—diluted			44,790,753




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COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2005, 20062008, 2009 and 2007




assets and non-financial liabilities that are nonrecurring. The provisions of SFAS 157 are effective for the fiscal year beginning January 1, 2008, except for certain non-financial assets and liabilities for which the effective date has been deferred to January 1, 2009. The adoption of SFAS 157 and its related pronouncements are not expected to have a material effect on the Company's consolidated financial position, results of operations or cash flows.

        In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 permits entities to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 will be effective for the first fiscal year that begins after November 15, 2007. The Company will not adopt the alternative provided in this statement.

        In June 2006, the Emerging Issues Task Force of the Financial Accounting Standards Board (the "EITF") reached a conclusion on EITF Issue No. 06-3 "How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement." The scope of EITF Issue No. 06-3 includes any tax assessed by a governmental authority that is both imposed on and concurrent with a specific revenue-producing transaction between a seller and a customer, and may include, but is not limited to, sales, use, value added, and some excise taxes. EITF Issue No. 06-3 requires that the presentation of taxes on either a gross basis (included in revenues and costs) or a net basis (excluded from revenues) and is an accounting policy decision that should be disclosed. The Company collects services and value added taxes from customers and records these amounts on a net basis, which is within the scope of EITF Issue No. 06-3. EITF Issue No. 06-3 applied to financial reports for interim and annual reporting periods beginning after December 15, 2006. The adoption of EITF Issue No. 06-3 did not have any impact on the Company's results of operations or financial position.

        In December 2007, the FASB issued SFAS No. 141R, "Business Combinations". SFAS 141R requires the acquiring entity in a business combination to record all assets acquired and liabilities assumed at their respective acquisition-date fair values, changes the recognition of assets acquired and liabilities assumed arising from contingencies, changes the recognition and measurement of contingent consideration, and requires the expensing of acquisition-related costs as incurred. SFAS No. 141R also requires additional disclosure of information surrounding a business combination, such that users of the entity's financial statements can fully understand the nature and financial impact of the business combination. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. An entity may not apply it before that date. The provisions of SFAS No. 141R will only impact us if the Company is party to a business combination after the pronouncement has been adopted.




COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2005, 2006 and 20072010

2. Property and equipment:

        Property and equipment consisted of the following (in thousands):

		December 31,
		2006			2007
Owned assets:
Network equipment		$	244,688		$	267,538
Leasehold improvements			68,452			75,865
System infrastructure			38,670			42,344
Software			7,800			7,867
Office and other equipment			7,395			8,720
Buildings			1,418			1,623
Land			125			139
			368,548			404,096
Less—Accumulated depreciation and amortization			(213,625	)		(272,321	)
			154,923			131,775
Assets under capital leases:
IRUs			143,773			157,811
Less—Accumulated depreciation and amortization			(35,428	)		(44,166	)
			108,345			113,645
Property and equipment, net		$	263,268		$	245,420

		December 31,
		2009			2010
Owned assets:
Network equipment		$	319,178		$	342,146
Leasehold improvements			92,567			102,975
System infrastructure			51,134			57,314
Software			8,827			8,982
Office and other equipment			7,554			9,354
Building			1,591			1,471
Land			135			125
			480,986			522,367
Less—Accumulated depreciation and amortization			(365,288	)		(401,435	)
			115,698			120,932
Assets under capital leases:
IRUs			214,451			237,534
Less—Accumulated depreciation and amortization			(66,365	)		(78,011	)
			148,086			159,523
Property and equipment, net		$	263,784		$	280,455

        Depreciation and amortization expense related to property and equipment and capital leases was $53.7$62.6 million, $56.8$59.6 million and $64.5$56.5 million, for the years ended December 31, 2005, 20062008, 2009 and 2007,2010, respectively.

Asset sales

        In 2005, the Company sold a building and land for net proceeds of $5.1 million. This transaction resulted in a gain of approximately $3.9 million. In 2006, the Company sold another building and land for net proceeds of $0.8 million. This transaction resulted in a gain of approximately $0.3 million.

Capitalized labor and relatedconstruction costs

        The Company capitalizes the compensation cost of employees directly involved with its construction activities. In 2005, 20062008, 2009 and 2007,2010, the Company capitalized compensation costcosts of $2.2$4.1 million, $2.1$4.5 million and $3.5$5.9 million respectively. These amounts are included in system infrastructure costs.

3.     Accrued and other current liabilities:

Paris office lease—restructuring chargeAsset impairments

        In 2004,During the French subsidiaryfirst quarter of Cogent Europe re-located its Paris headquarters. The estimated net present value of the remaining lease obligation, net of estimated sublease income, was recorded as a lease restructuring charge in 2004. In 2005,2008, the Company revised its estimateidentified an impaired IRU asset that resulted in an asset impairment charge of $1.6 million. The impaired IRU asset was no longer in use and the Company obtained alternative dark fiber that serves the related facilities and customers. As of December 31, 2010, the Company's balance sheet includes a capital lease liability including accrued interest totaling $2.7 million related to this IRU as the requirements for sublease incomethe extinguishment of such liability have not been met and payments with the vendor are in dispute.

        In the three months ended March 31, 2010 the Company recorded an impairment charge for certain property and equipment that were no longer in use totaling $0.6 million.




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COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2005, 20062008, 2009 and 2007




estimated that the net present value of the remaining lease obligation increased by approximately $1.3 million and recorded an additional lease restructuring charge. A reconciliation of the amounts related to these contract termination costs is as follows (in thousands):

Lease restructuring accrual
Balance—December 31, 2004		$	1,611
Amortization of discount			144
Charged to costs—2005			1,319
Effect of exchange rates			(236	)
Amounts paid			(1,286	)
Balance—December 31, 2005			1,552
Effect of exchange rates			40
Amortization of discount			114
Amounts paid			(1,313	)
Balance—December 31, 2006			393
Amortization of discount			7
Amounts paid			(400	)
Balance—December 31, 2007		$	—

Acquired lease obligations

        In December 2004, the Company accrued for the net present value of estimated cash flows for amounts related to leases of abandoned facilities acquired in an acquisition. In 2005, the Company revised its estimate for sublease income and estimated that the net present value of the remaining lease obligation increased by approximately $1.6 million and recorded a corresponding increase to the acquired intangible assets. In August 2006, the Company placed one of these facilities into service and reversed the associated liability resulting in an increase to other income of approximately $0.4 million. In September 2007, the Company entered into a settlement agreement under which the Company was released from its obligation under one of the facility leases. This settlement agreement resulted in a gain of approximately $2.1 million recorded as a gain on lease restructurings in the accompanying




COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES2010

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)3. Accrued and other liabilities:

DECEMBER 31, 2005, 2006 and 2007




consolidated statement of operations for the year ended December 31, 2007. A reconciliation of the amounts related to these contract termination costs is as follows (in thousands):

Acquired unused lease obligations
Assumed obligation—balance December 31, 2004		$	1,894
Increase to obligation—2005			1,563
Amortization of discount			105
Amounts paid			(842	)
Balance—December 31, 2005			2,720
Amortization of discount			154
Facility placed into service			(395	)
Amounts paid			(725	)
Balance—December 31, 2006			1,754
Amortization of discount			82
Settlement amount			(1,325	)
Amounts paid			(441	)
Balance—December 31, 2007 (included in accrued and other current liabilities)		$	70

Asset retirement obligations

        The Company provides for asset retirement obligations for certain points of presence in its networks. A reconciliation of the amounts related to these obligations as follows (in thousands):

Asset retirement obligations
Balance—December 31, 2004		$	1,202
Effect of exchange rates			(128	)
Amortization of discount			45
Amounts paid			(274	)
Balance—December 31, 2005			845
Effect of exchange rates			101
Amortization of discount			40
Balance—December 31, 2006			986
Effect of exchange rates			119
Amortization of discount			47
Balance—December 31, 2007 (recorded as other long term liabilities)		$	1,152

        Accrued and other current liabilities as of December 31 consist of the following (in thousands):

		2006			2007
General operating expenditures		$	5,993		$	4,976
Lease restructuring accrual			393			—
Acquired unused lease obligations			512			70
Deferred revenue—short term			1,265			1,642
Payroll and benefits			1,465			2,634
Taxes—non-income based			585			985
Interest			1,566			2,584
Total		$	11,779		$	12,891

		2009			2010
Operating accruals		$	7,682		$	8,499
Deferred revenue—current portion			3,220			3,893
Payroll and benefits			2,325			2,155
Taxes—non-income based			646			1,448
Interest			3,736			3,543
Total		$	17,609		$	19,538

Asset retirement obligations

        In the first quarter of 2010, the Company determined that its estimates of restoration costs for its leased facility asset retirement obligations were too high based on current costs to restore and changes in the expected timing of the payment of those costs due to the extensions of lease terms. As a result, in the first quarter of 2010, the Company revised its estimates of the cash flows that it believes will be required to settle its leased facility asset retirement obligations at the end of the respective lease terms, which resulted in a reduction to the Company's asset retirement obligation liability. As a result of the revisions in the estimated amount and timing of cash flows for its asset retirement obligations, in the three months ended March 31, 2010, the Company reduced its asset retirement obligation liability by $0.9 million with an offsetting reduction to depreciation and amortization of $0.7 million and selling, general and administrative expenses of $0.2 million.

        A reconciliation of the amounts related to these obligations is as follows (in thousands):

Asset retirement obligations
Balance—December 31, 2007		$	1,152
Effect of exchange rates			(49	)
Amortization of discount			53
Balance—December 31, 2008			1,156
Effect of exchange rates			20
Amortization of discount			32
Balance—December 31, 2009			1,208
Effect of exchange rates			(77	)
Revision to estimated obligation			(909	)
Amortization of discount			11
Balance—December 31, 2010 (recorded as other long term liabilities)		$	233




4.     Intangible assets:Table of Contents

        Intangible assets as of December
COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, consist of the following (in thousands):

		2006			2007
Peering arrangements		$	16,440		$	16,440
Customer contracts			12,435			12,545
Trade name			1,764			1,764
Non-compete agreements			431			431
Licenses			615			711
Total			31,685			31,891
Less—accumulated amortization			(30,535	)		(31,726	)
Intangible assets, net		$	1,150		$	165

        Intangible assets are being amortized over periods ranging from 12 to 60 months. Intangible assets are amortized on a straight-line basis or using an accelerated method consistent with expected cash flows from the related assets. Amortization expense for the years ended December 31, 2005, 20062008, 2009 and 2007 was approximately $2.0 million, $1.6 million and $1.1 million, respectively. Future amortization expense related to intangible assets of $0.2 million is expected to be recognized through the year ending December 31, 2009.2010

5.4. Long-term debt and credit facility:debt:

Convertible Senior Notessenior notes

        In June 2007, the Company issued 1.00%its Convertible Senior Notes (the "Notes") due June 15, 2027, for an aggregate principal amount of $200.0 million in a private offering for resale to qualified institutional buyers pursuant to SEC Rule 144A. The Convertible Notes mature on June 15, 2027, are unsecured, and bear interest at 1.00% per annum. The Convertible Notes will rank equally with any future senior debt and senior to any future subordinated debt and will be effectively subordinated to all existing and future liabilities of the Company's subsidiaries and to any secured debt the Company may issue, to the extent of the value of the collateral. Interest is payable in cash semiannually in arrears on June 15 and December 15, of each year, beginning on December 15, 2007. The Company received net proceeds from the issuance of the Convertible Notes of approximately $195.1 million, after deducting the original issue discount of 2.25% and issuance costs. The Company used $10.6 million of the proceeds to repay principal and accrued interest on its existing convertible subordinated notes on June 15, 2007 and used approximately $50.1 million of the net proceeds to repurchase approximately 1.8 million shares of its common stock concurrently with the Notes offering. These 1.8 million common shares were subsequently retired. The discount and other issuance costs are being amortized to interest expense using the effective interest method through June 15, 2014, which is the earliest put date. The Company intends to use the remaining proceeds for general corporate purposes and to fund the common stock buyback program discussed in Note 8.

Conversion Processprocess and Other Termsother terms of the Convertible Notes

        The Convertible Notes are convertible into shares of the Company's common stock at an initial conversion price of $49.18 per share, or 20.3355 shares for each $1,000 principal amount of Convertible Notes, subject to adjustment for certain events as set forth in the indenture. Depending upon the price of the Company's common stock at the time of conversion, holders of the Convertible Notes will receive additional shares of the Company's common stock. Upon conversion of the Convertible Notes, the Company will have the right to deliver shares of its common stock, cash or a combination of cash and shares of its common stock. The Convertible Notes are convertible (i) during any fiscal quarter after the fiscal quarter ending September 30, 2007, if the closing sale price of the Company's common stock for 20 or more trading days in a period of 30






consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter exceeds 130% of the conversion price in effect on the last trading day of the immediately preceding fiscal quarter, or (ii) specified corporate transactions occur, or (iii) the trading price of the Convertible Notes falls below a certain threshold, or (iv) if the Company calls the Convertible Notes for redemption, or (v) on or after April 15, 2027, until maturity. In addition, following specified corporate transactions, the Company will increase the conversion rate for holders who elect to convert notes in connection with such corporate transactions, provided that in no event may the shares issued upon conversion, as a result of adjustment or otherwise, result in the issuance of more than 35.5872 common shares per $1,000 principal amount or approximately 7.1 million common shares.amount. The Convertible Notes include an "Irrevocable Election of Settlement" whereby the Company may choose, in its sole discretion, and without the consent of the holders of the Convertible Notes, to waive its right to settle the conversion feature in either cash or stock or in any combination at its option.

The Convertible Notes may be redeemed by the Company at any time after June 20, 2014 at a redemption price of 100% of the principal amount plus accrued interest. Holders of the Convertible Notes have the right to require the Company to repurchase for cash all or some of their notes on June 15, 2014, 2017 and 2022 and upon the occurrence of certain designated events at a redemption price of 100% of the principal amount plus accrued interest.

Registration Rightsrights

        Under the terms of the Convertible Notes, the Company is required to use reasonable efforts to file and maintain a shelf registration statement with the SEC covering the resale of the Convertible




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COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2009 and 2010

4. Long-term debt: (Continued)




Notes and the common stock issuable on conversion of the Convertible Notes. If the Company fails to meet these terms, the Company will be required to pay special interest on the Convertible Notes in the amount of 0.25% for the first 90 days after the occurrence of the failure to meet and 0.50% thereafter. In addition to the special interest, additional interest of 0.25% per annum will accrue in the event of default, as defined in the indenture. The Company filed a shelf registration statement registering the Convertible Notes and common stock issuable upon conversion of the Convertible Notes in July 2007.

        The Company separately accounted for the debt and equity components of its Convertible Subordinated Notes—Allied RiserNotes in a manner that reflected its nonconvertible debt (unsecured debt) borrowing rate. The debt and equity components for the Convertible Notes were as follows (in thousands):

		December 31,
		2009			2010
Principal amount of convertible senior notes		$	91,978		$	91,978
Unamortized discount			(25,708	)		(20,758	)
Net carrying amount			66,270			71,220
Additional paid-in capital			74,933			74,933

        The Company's $10.2 million 7.50% convertible subordinated notes were recorded at their fair valueAt December 31, 2010, the unamortized discount had a remaining recognition period of approximately $2.9 million in connection with the Allied Riser merger in 2002.3.5 years. The discount was amortized toamount of interest expense throughrecognized and effective interest rate for the maturity date. The notesyears ended December 31, 2008, 2009 and accrued interest2010 were fully paid in June 2007.as follows (in thousands):

		Year Ended December 31,
		2008			2009			2010
Contractual coupon interest		$	1,785		$	920		$	920
Amortization of discount and costs on Notes			8,094			4,559			4,964
Interest expense		$	9,879		$	5,497		$	5,884
Effective interest rate			8.7	%		8.7	%		8.7	%

Credit Facility

        The Company had a credit facility with a commercial bank that provides for borrowings up to $20.0 million which matured on April 1, 2007.

Cisco NotePurchases of Convertible Notes

        In June 2005,2008, the Company used a portionpurchased an aggregate of $108.0 million of face value of the proceeds from its June 2005 public offering to repay its $17.0Convertible Notes for $48.6 million amended and restated Cisco note. The note was subject to mandatory prepayment in full upon the completioncash in a series of any equity financing or receipt of loan proceeds in excess of $30.0 million. The repayment of the notetransactions. These transactions resulted in a gain, of $0.8$23.1 million representingfor the amountyear ended December 31, 2008.

Revolving line of credit

        In October 2009, the estimated futureCompany entered into a $20.0 million revolving line of credit facility with a bank. The revolving facility had a floating interest payments.rate of one month LIBOR plus 2.5% per annum, subject to a minimum interest rate of 3.0% and has a commitment fee of 0.3% per annum. There have been no borrowings under the revolving facility and the Company was in compliance with its covenants. The facility expired on October 14, 2010.




6.Table of Contents


COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2009 and 2010

5. Income taxes:

        The provision (benefit) for income taxes is comprised of the following (in thousands):

		2008			2009			2010
Current provision
Federal income tax		$	593		$	—		$	(563	)
State income tax			943			255			724
Foreign income tax			—			—			128
Deferred provision
Foreign income tax			—			(1,502	)		(1,466	)
Total income tax provision (benefit)		$	1,536		$	(1,247	)	$	(1,177	)

        The net deferred tax asset is comprised of the following (in thousands):

		December 31
		2006			2007
Net operating loss carry-forwards		$	319,768		$	344,145
Depreciation			(38,370	)		(26,007	)
Start-up expenditures			2,838			3,160
Deferred compensation			4,783			6,060
Other			(482	)		77
Valuation allowance			(288,537	)		(327,435	)
Net deferred tax asset		$	—		$	—

		December 31,
		2009			2010
Net operating loss carry-forwards		$	359,546		$	340,711
Depreciation			(11,374	)		6,685
Convertible notes			(10,211	)		(7,531	)
Equity-based compensation			1,295			705
Tax credits			2,290			2,748
Accrued liabilities and other			98			3,437
Valuation allowance			(340,132	)		(343,690	)
Net deferred tax asset		$	1,512		$	3,065

        DueAt each balance sheet date, the Company assesses the likelihood that it will be able to the uncertainty surrounding the realization ofrealize its net deferred tax asset,assets. The Company considers all available positive and negative evidence in assessing the need for a valuation allowance. At December 31, 2009, the Company has recorded a valuation allowance for the full amountconcluded that it was more likely than not that it would be able to realize certain of its net deferred tax asset. Should the Company achieve taxable income, its deferred tax assets may be availableprimarily as a result of expected future taxable income related to offset futureits Canadian operations. Accordingly, the Company reduced a portion of its valuation allowance related to these deferred tax assets and recorded an income tax liabilities. Thebenefit of $1.5 million in the year ended December 31, 2009. At December 31, 2010, the Company concluded that it was more likely than not that it would be able to realize the remaining of its Canadian deferred tax assets related to its Canadian operations. Accordingly, the Company reduced the remaining valuation allowance related to these deferred tax assets and recorded an income tax benefit of $1.5 million in the year ended December 31, 2010. As of December 31, 2009 and 2010 the Company maintained a full valuation allowance against its other deferred tax assets consisting primarily of net operating loss carryforwards.

        As of December 31, 2010, the Company has combined net operating loss carry-forwards of approximately $1.0$1.1 billion. TheThis amount includes federal and state net operating loss carry-forwards forin the United States of approximately $407$376.0 million, expire from 2023 to 2027. The Company has net operating loss carry-forwards related to its European, Canadian and Mexican operations of approximately $600$686.6 million, $6.2 million and $0.8 million, respectively. Section 382 of which approximately $108 millionthe Internal Revenue Code in the United States limits the utilization of net operating losses when ownership changes, as defined by that section, occur. The




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COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2009 and 2010

5. Income taxes: (Continued)




Company has performed an analysis of its Section 382 ownership changes and has determined that the utilization of certain of its net operating loss carryforwards in the United States may be limited. The net operating loss carryforwards in the United States will expire, beginning in 2016.if unused, between 2022 and 2029. The remaining $492 million of European net operating loss carry-forwards do not expire.related to the Canadian operations expire if unused, between 2015 and 2027. The federal and state net operating loss carry-forwards of Allied Riser Communications Corporation of approximately $183 million are subject to certain limitations on annual utilization duerelated to the change in ownership as a result of the merger as prescribed by federalMexican operations expire if unused, between 2019 and state tax laws.2020. The Company's net operating loss carry-forwards could alsorelated to the European operations include $540.8 million that do not expire and $145.8 million that expire between 2011 and 2026.

        In the normal course of business the Company takes positions on its tax returns that may be subjectchallenged by taxing authorities. The Company evaluates all uncertain tax positions to certain additional limitations on annual utilization if certain changesassess whether the position will more likely than not be sustained upon examination. If the Company determines that the tax position is more likely than not to be sustained, the Company records the amount of the benefit that is more likely than not to be realized when the tax position is settled. This liability, including accrued interest and penalties, is included in ownership have occurred or were to occur as prescribed by the lawsother long-term liabilities in the respective jurisdictions.accompanying balance sheets and was $0.6 million as of December 31, 2009 and $0.9 million as of December 31, 2010. During the years ended December 31, 2008, 2009 and 2010 the Company recognized approximately $0, $0.1 million and $0.1 million in interest and penalties related to its uncertain tax positions. The Company does not expect the final resolution of tax examinations to have a material impact on the Company's financial results in the next 12 months.

        A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

		2008			2009			2010
Beginning balance of unrecognized tax benefits		$	—		$	504		$	504
Gross increases—tax positions in prior periods			—			—			194
Gross increases—tax positions in current period			504			—			—
Ending balance of unrecognized tax benefits		$	504		$	504		$	698

        The following is a reconciliation of the Federal statutory income tax ratetaxes to the effective rateamounts reported in the financial statements.statements (in thousands).

		2005		2006		2007
Federal income tax benefit at statutory rates		34.0	%	34.0	%	34.0	%
State income tax benefit at statutory rates, net of Federal benefit		4.0		4.0		4.0
Impact of foreign operations		(0.4	)	(0.6	)	(0.8	)
Non-deductible expenses		0.1		7.5		4.7
Change in valuation allowance		(37.7	)	(44.9	)	(41.9	)
Effective income tax rate		—	%	—	%	—	%

			2008			2009			2010
Federal income tax at statutory rates			$	4,790		$	6,439		$	178
Effect of:
	State income tax, net of federal benefit			534			718			(455	)
	State tax credits			—			1,601			17
	Impact of foreign operations			13,960			—			(1,385	)
	Non-deductible expenses			(3,942	)		(1,468	)		(735	)
	Alternative minimum tax			(588	)		—			564
	Change in valuation allowance			(16,290	)		(6,043	)		2,993
Income tax (expense) benefit			$	(1,536	)	$	1,247		$	1,177




7.Table of Contents


COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2009 and 2010

6. Commitments and contingencies:

Capital leases—fiber lease agreements

        The Company has entered into lease agreements with severalnumerous providers forof dark fiber primarily under 15-2515–20 year IRUs with additional renewal terms. These IRUs connect the Company's international backbone fibers with the multi-tenant office buildings and the customers served by the Company. Once the Company has accepted the related fiber route, leases that meet the criteria for






treatment as capital leases are recorded as a capital lease obligation and an IRU asset. The future minimum payments under these agreements are as follows (in thousands):

For the year ending December 31,
2008		$	15,651
2009			12,025
2010			16,894
2011			10,809
2012			10,803
Thereafter			88,523
Total minimum lease obligations			154,705
Less—amounts representing interest			(62,131	)
Present value of minimum lease obligations			92,574
Current maturities			(7,717	)
Capital lease obligations, net of current maturities		$	84,857

Capital lease obligation amendments

        Cogent Spain negotiated modifications to certain of its IRU capital lease obligations. These modifications have generally reduced IRU lease payments and extended the lease terms. A 2005 lease modification resulted in a gain of approximately $0.8 million. A 2006 lease modification resulted in a gain of approximately $0.3 million. These transactions resulted in gains since the differences between the carrying values of the old IRU obligations and the net present values of the new IRU obligations were greater than the carrying values of the related IRU assets.

For the year ending December 31,
2011		$	18,421
2012			16,865
2013			16,469
2014			16,048
2015			16,181
Thereafter			129,478
Total minimum lease obligations			213,462
Less—amounts representing interest			(101,757	)
Present value of minimum lease obligations			111,705
Current maturities			(6,143	)
Capital lease obligations, net of current maturities		$	105,562

Current and potential litigation

        The Company is involved in disputes with certain telephone companies that provide it local circuits or leased optical fibers. The total amount claimed by these vendors is approximately $4.4 million. The Company does not believe any of these amounts are owed to these providers and intends to vigorously defend its position and believes that it has adequately reserved for any potential liability.

        The Company has been made aware of several other companies in its own and in other industries that use the word "Cogent" in their corporate names. One company has informed the Company that it believes the Company's use of the name "Cogent" infringes on its intellectual property rights in that name. If such a challenge is successful, the Company could be required to change its name and lose the value associated with the Cogent name in its markets. Management does not believe such a challenge, if successful, would have a material impact on the Company's business, financial condition or results of operations.

        In the normal course of business the Company is involved in other legal activities and claims. Because such matters are subject to many uncertainties and the outcomes are not predictable with assurance, the liability related to these legal actions and claims cannot be determined with certainty. Management does not believe that such claims and actions will have a material impact on the Company's financial condition or results of operations.

Operating leases, maintenance and tenant license agreements

        The Company leases office space, network equipment sites, and data center facilities under operating leases. The Company also enters into building access agreements with the landlords of multi- tenant office buildings. The Company pays fees for the maintenance of its leased dark fiber and in certain cases the




Table of Contents


COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2009 and 2010

6. Commitments and contingencies: (Continued)




certain cases the Company connects its customers to its network underenters into operating lease commitments for fiber. Future minimum annual payments under these arrangements are as follows (in thousands):

For the year ending December 31,
2008		$	35,145
2009			29,333
2010			25,706
2011			22,696
2012			20,357
Thereafter			92,171
		$	225,408

For the year ending December 31,
2011		$	43,947
2012			32,809
2013			26,125
2014			22,609
2015			19,779
Thereafter			116,228
		$	261,497

        Expenses related to these arrangements was $36.8were $44.9 million in 2005, $33.82008, $49.0 million in 20062009 and $40.5$53.5 million in 2007. The Company has sublet certain office space and facilities. Future minimum payments under these sub-lease agreements are approximately $0.5 million, $0.1 million, and $0.1 million for the years ending December 31, 2008 through December 31, 2010, respectively.2010.

Unconditional purchase obligations

        Unconditional purchase obligations for equipment and services totaled approximately $7.3$10.3 million at December 31, 20072010 and are expected to be fulfilled within one year. As of December 31, 20072010 the Company had committed to additional dark fiber IRU lease agreements totaling approximately $40.4$62.6 million in future payments for fiber lease and maintenance payments to be paid over periods of up to 20 years. These obligations begin when the related fiber is accepted, which is generally expected to occur in 2008.2011. Future minimum payments under these obligations are approximately, $8.4$9.2 million, $1.9$3.0 million, $1.9$3.0 million, $1.9$3.0 million, and $1.9$3.0 million for the years ending December 31, 20082011 to December 31, 20122015, respectively, and approximately $24.4$41.5 million, thereafter. In June 2009, the Company entered into an amended equipment purchase agreement with a vendor. Under the agreement, and prior agreements, the Company is required to purchase equipment totaling approximately $23.2 million through 2011. Approximately $6.4 million remains to be ordered under the agreement.

Defined contribution plan

        The Company sponsors a 401(k) defined contribution plan that, effective in August 2007, provides for a Company match.matching payment. The Company matchmatching payments were approximately $0.3 million for 2007 was approximately $0.1 million2008, 2009 and was2010 and were paid in cash.

8.7. Stockholders' equity:

Authorized shares

        The Company has 75.0 million shares of authorized $0.001 par value common sharesstock and 10,000 authorized but unissued shares of $0.001 par value preferred stock. The holders of common stock are entitled to one vote per common share and, subject to any rights of any series of preferred stock, dividends may be declared and paid on the common stock when determined by the Company's Board of Directors.




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COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2009 and 2010

7. Stockholders' equity: (Continued)

Second $50.0 Million Common Stock Buyback Programstock buybacks

        In August 2007, the Company's board of directors approved a $50.0 million common stock buyback program (the "Buyback Program"). UnderIn June 2008, the Company's board of directors approved an additional $50.0 million of purchases of the Company's common stock under the Buyback Program the Company is authorized to purchase up to $50.0 million of its common stockoccur prior to December 31, 2008. During 20072009. In the years ended December 31, 2008 and 2009, the Company purchased approximately 446,0004.4 million and 0.1 million shares of its common stock, at an average price of $22.19 per sharerespectively, for approximately $9.9 million. From January 1, 2008 to February 26, 2008,$59.3 million and $0.7 million, respectively, under the Company purchased approximately 689,000 additional shares of its common stock at an average price of $18.59 per share for approximately $12.8 million. All purchasedBuyback Program. These common shares were subsequently retired. There were no purchases of the Company's common stock in 2010.




Treasury stock retirementAllied Riser warrants

        In September 2006,connection with the February 2002 merger with Allied Riser, the Company retired its 61,462 shares of treasury stock. As a result, $0.1 million of treasury stock was offset against additional paid-in-capital.

Equity conversion

        In February 2005, holders of the Company's preferred stock elected toassumed warrants issued by Allied Riser that could convert all of their shares of preferred stock into 31.6 millionapproximately 5,200 shares of the Company's common stock. AsDuring the year ended December 31, 2009, these warrants with a result, the Company no longer has outstanding shares of preferred stock. The accounting for this transaction resulted in the elimination of the balances of the Series F through M preferred stock and an increasecarrying amount of approximately $139.8$0.8 million expired resulting in a reduction to warrants and a corresponding increase to additional paid-in-capital.paid-in capital.

Public offerings

        On June 13, 2005, the Company sold 10.0 million shares of common stock at $6.00 per share in a public offering. On June 16, 2005, the underwriters exercised their option to purchase an additional 1.5 million shares of common stock at $6.00 per share. This public offering resulted in net proceeds to the Company of $63.7 million, after underwriting, legal, accounting and printing costs.

        On June 7, 2006, the Company sold 4.35 million shares of common stock at $9.00 per share and certain selling shareholders sold 6.0 million shares of common stock at the same price in a public offering. This public offering resulted in net proceeds to the Company, after underwriting, legal, accounting and printing costs of approximately $36.5 million.

9.8. Stock option and award plan:

Incentive Award Planaward plan

        The compensation committee ofCompany has an award plan, the board of directors adopted and the stockholders approved, the Company's 2004 Incentive Award Plan, as amended (the "Award Plan")., under which grants of restricted stock and options for common stock are made. Stock options granted under the Award Plan generally vest over a four-year period and have a term of ten years. Grants of shares of restricted stock granted under the Award Plan generally vest over periods ranging from immediatethree to four years. Compensation expense for all awards is recognized over the service period. Awards with graded vesting to overterms are recognized on a four-year period.straight line basis. Certain option and share grants provide for accelerated vesting if there is a change in control.control, as defined. For grants of restricted stock, when an employee terminates prior to full vesting the employee retains their vested shares and the employees' unvested shares are returned to the plan. For grants of options for common stock, when an employee terminates prior to full vesting the employee may elect to exercise their vested options for a period of ninety days and any unvested options are returned to the plan. Compensation expense for all awards is recognized ratably over the service period. Shares issued to satisfy awards are provided from the Company's authorized shares. In

        On April 2007,15, 2010, the Company's stockholders approved a 1.3 million increase to the authorized shares in the Award Plan was amendedPlan. In the second quarter of 2010, the Company granted approximately 0.9 million restricted shares to increasecertain of its employees that will vest over a three year period. These restricted shares were valued at approximately $9.6 million and will be recognized as equity-based compensation expense on a straight-line basis over the numberthree year service period. The Company also granted an additional 0.2 million restricted shares that are subject to certain performance conditions based upon the Company's operating metrics for 2010, 2011 and 2012. In November 2010, the performance conditions for 2010 were modified. The Company expects to record approximately $0.5 million of authorizedequity-based compensation expense related to the modified conditions for 2010 through the end of the service period on April 15, 2011 since it is considered probable that the modified performance conditions would be met. The total equity based compensation expense for the




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COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2009 and 2010

8. Stock option and award plan: (Continued)




performance shares by 2.0 million.related to 2011 (if the conditions are met) is approximately $0.9 million and will be recognized over the requisite service period which is approximately one year. As of December 31, 2007,2010, of the 5.87.1 million authorized shares under the Award Plan there were a total of 970,0000.3 million shares available for grant.

        The accounting for equity-based compensation expense requires the Company to make estimates and judgments that affect its financial statements. These estimates include the following.

Expected Dividend Yield—The Company has never declared or paid dividends and has no plans to do so in the foreseeable future.

Expected Volatility—The Company uses its historical volatility for a period commensurate with the expected term.

Risk-Free Interest Rate—The Company uses the zero coupon U.S. Treasury rate during the quarter having a term that most closely resembles the expected term of the option.

Expected Term of the Option—The Company estimates the expected life of the option term by analyzing historical stock option exercises and other relevant data.

Forfeiture Rates—The Company estimates its forfeiture rate based on historical data with further consideration given to the class of employees to whom the options or shares were granted.

        The weighted-average per share grant date fair value of options was $7.20 in 2008, $4.73 in 2009 and $5.44 in 2010. The following assumptions were used for determining the fair value of options granted in the three years ended December 31, 2010:

Black-Scholes Assumptions		Year Ended December 31, 2008			Year Ended December 31, 2009			Year Ended December 31, 2010
Dividend yield			0.0	%		0.0	%		0.0	%
Expected volatility			62.1	%		69.7	%		65.3	%
Risk-free interest rate			2.9	%		2.2	%		1.8	%
Expected life of the option term (in years)			5.3			5.3			5.2




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COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2009 and 2010

8. Stock optionsoption and award plan: (Continued)

        Stock option activity under the Company's Award Plan during the period from December 31, 20062009 to December 31, 2007,2010, was as follows:

		Number of Options		Weighted-average exercise price
Outstanding at December 31, 2006		1,152,976		$	2.73
Granted		244,919		$	21.84
Cancelled		(64,230	)	$	15.19
Exercised—intrinsic value $4.5 million; cash received $1.1 million		(212,811	)	$	5.05
Outstanding at December 31, 2007—$20.4 million intrinsic value and 7.3 years weighted-average remaining contractual term		1,120,854		$	5.75
Exercisable at December 31, 2007—$17.0 million intrinsic value and 6.8 years weighted-average remaining contractual term		757,034		$	1.20
Expected to vest—$18.0 million intrinsic value and 7.0 years weighted-average remaining contractual term		881,156		$	3.36

		Number of Options			Weighted-Average Exercise Price
Outstanding at December 31, 2009			432,046		$	12.58
Granted			42,614		$	9.66
Cancelled			(84,540	)	$	20.16
Exercised—intrinsic value $0.3 million; cash received $0.3 million			(46,836	)	$	5.86
Outstanding at December 31, 2010—$1.6 million intrinsic value and 5.9 years weighted-average remaining contractual term			343,284		$	11.27
Exercisable at December 31, 2010—$1.3 million intrinsic value and 5.2 years weighted-average remaining contractual term			271,669		$	11.38
Expected to vest—$1.5 million intrinsic value and 5.9 years weighted-average remaining contractual term			335,019		$	11.30

        For the years ended December 31, 2008, 2009 and 2010, the Company's employees exercised options for approximately 0.1 million, 0.6 million and 0.1 million common shares, respectively. Stock options outstanding and exercisable under the Award Plan by price range at December 31, 20072010 were as follows:

Range of Exercise Prices		Number Outstanding 12/31/2007		Weighted Average Remaining Contractual Life (years)		Weighted-Average Exercise Price			Number Exercisable As of 12/31/2007		Weighted-Average Exercise Price
$0.00 to $0.01 (granted below market value)		624,782		6.72		$	0.00		611,071		$	0.00
$4.39 to $6.00		241,758		7.01		$	5.55		130.606		$	5.72
$6.20 to $25.46		228,652		9.05		$	19.12		14,463		$	9.25
$25.50 to $33.56		25,662		9.45		$	28.58		894		$	32.00
$0.00 to $33.56		1,120,854		7.32		$	5.75		757,034		$	1.20

        Compensation expense related to stock options and restricted stock was approximately $13.3 million, $10.5 million and $10.4 million for the years ended December 31, 2005, December 31, 2006 and December 31, 2007, respectively. As of December 31, 2007 there was approximately $22.6 million of total unrecognized compensation cost related to non-vested equity-based compensation awards. That cost is expected to be recognized over a weighted average period of approximately twenty-one months. In January 2007 and 2008, the Company granted approximately 51,000 vested shares of common stock to its non-management Directors resulting in approximately $0.9 million and $1.2 million of equity-based compensation expense, respectively. In January 2008, the Company granted approximately 620,000 shares of common stock to certain employees resulting in approximately $14.7 million of equity-based compensation expense to be amortized over the service periods of three to four years.

Range of Exercise Prices		Number Outstanding As of 12/31/2010			Weighted- Average Remaining Contractual Life (years)			Weighted- Average Exercise Price			Number Exercisable As of 12/31/2010			Weighted- Average Exercise Price
$0.00 to $6.00			118,172			4.26		$	5.17			115,109		$	5.19
$6.09 to $10.05			70,080			7.52		$	8.21			35,492		$	7.93
$10.19 to $17.00			42,891			8.08		$	12.14			17,735		$	13.28
$17.38 to $17.38			74,304			5.80		$	17.38			72,816		$	17.38
$19.43 to $33.56			37,837			5.96		$	22.98			30,517		$	23.31
$0.00 to $33.56			343,284			5.93		$	11.27			271,669		$	11.38




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COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2009 and 2010

8. Stock option and award plan: (Continued)

        A summary of the Company's non-vested restricted stock awards as of December 31, 20072010 and the changes during the year ended December 31, 20072010 is as follows:

Non-vested awards		Shares		Weighted-Average Grant Date Fair Value
Non-vested at December 31, 2006		370,480		$	17.66
Granted		1,033,404		$	25.08
Vested		(179,207	)	$	11.36
Forfeited		(22,659	)	$	25.46
Non-vested at December 31, 2007		1,202,018		$	22.64

Non-vested awards		Shares			Weighted-Average Grant Date Fair Value
Non-vested at December 31, 2009			447,099		$	22.72
Granted			1,229,900		$	9.17
Vested			(214,691	)	$	23.22
Forfeited			(83,400	)	$	10.53
Non-vested at December 31, 2010			1,378,908		$	11.09

        The weighted average per share grant date fair value of restricted stock granted to employees was $4.93$22.59 in 2005 (200,0002008 (0.7 million shares), $18.63$6.65 in 2006 (382,5002009 (25,008 shares) and $25.08$9.17 in 2007 (1,033,4042010 (1.2 million shares). The fair value was determined using the quoted market price of the Company's common stock on the date of grant. The fair value of shares of restricted stock vested in the years endingended December 31, 2005, 20062008, 2009 and 20072010 was approximately $6.0$3.6 million, $4.1$10.8 million, and $4.3$2.1 million respectively.

        Equity-based compensation expense related to stock options and restricted stock was approximately $17.9 million, $8.6 million and $6.6 million for the years ended December 31, 2008, 2009, and 2010, respectively. The Company capitalized compensation expense related to stock options and restricted stock of approximately $1.0 million, $1.0 million and $0.7 million for the years ended December 31, 2008, 2009, and 2010, respectively. As of December 31, 2010 there was approximately $11.7 million of total unrecognized compensation cost related to non-vested equity-based compensation awards. That cost is expected to be recognized over a weighted average period of approximately 2 years.

10.9. Related party transactions:

Office lease and equipment purchases

        The Company's headquarters is located in an office building owned by an entity controlled bya partnership (6715 Kenilworth Avenue Partnership). The two owners of the partnership are the Company's Chief Executive Officer.Officer, who has a 51% interest in the partnership and his wife, who has a 49% interest in the partnership. The Company paid $0.4 million in 2005, $0.4 million in 2006 and $0.6 million in 20072008, 2009 and 2010 in rent and related costs (including taxes and utilities) to this entity. Thepartnership under a lease that expires in August 2010.2012. The dollar value of the Company's Chief Executive Officer's interest in the lease payments in 2010 was $0.3 million. The dollar value of his wife's interest in the lease payments in 2010 was $0.3 million. If the Company's Chief Executive Officer's interest is combined with that of his wife then the total dollar value of his interest in the lease payments in 2010 was $0.6 million.

        In 2007,2008, 2009 and 2010, the Company purchased approximately $0.2$0.1 million, $13,000 and $0.1 million of equipment from an equipment vendor. One of the Company's directors is also a director of the equipment vendor.




LNG Holdings SA ("LNG")Table of Contents

        In 2006
COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2009 and 2007, the Company paid approximately $0.2 million and $34,000, respectively, for professional services performed for LNG, a company controlled by the Company's Chief Executive Officer. In 2007, the Company received reimbursement for approximately $0.1 million of professional fees paid for LNG in 2006.2010

11.10. Geographic information:

        Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company has one operating segment. Below are the Company's net revenues and long lived assets by geographic region (in thousands):

		Years Ended December 31,
		2005			2006			2007
Service Revenue, net
North America		$	108,260		$	117,475		$	144,696
Europe			26,953			31,596			40,967
Total		$	135,213		$	149,071		$	185,663

		Years Ended December 31,
		2008			2009			2010
Service Revenue
North America		$	167,316		$	182,606		$	205,052
Europe			48,173			53,201			58,364
Total		$	215,489		$	235,807		$	263,416




		December 31, 2006			December 31, 2007			December 31, 2009			December 31, 2010
Long lived assets, net
North America		$	221,942		$	198,621		$	215,681		$	221,312
Europe			42,476			46,964			48,281			59,252
Total		$	264,418		$	245,585		$	263,962		$	280,564

12.11. Quarterly financial information (unaudited):

		Three months ended
		March 31, 2006			June 30, 2006			September 30, 2006			December 31, 2006
		(in thousands, except share and per share amounts)
Service revenue, net		$	34,447		$	36,155		$	37,954		$	40,515
Network operations, including equity-based compensation expense			20,442			20,177			19,432			20,371
Operating loss			(14,318	)		(13,545	)		(10,645	)		(8,044	)
Gains—asset sales and lease obligations			—			—			255			254
Net loss			(16,441	)		(15,491	)		(11,854	)		(9,971	)
Net loss per common share—basic and diluted			(0.38	)		(0.34	)		(0.24	)		(0.21	)
Weighted-average number of shares outstanding—basic and diluted			43,841,837			45,099,826			48,463,130			48,510,716

		Three months ended
		March 31, 2007			June 30, 2007			September 30, 2007			December 31, 2007
		(in thousands, except share and per share amounts)
Service revenue, net		$	43,621		$	45,108		$	46,969		$	49,965
Network operations, including equity-based compensation expense			21,064			21,502			22,771			22,460
Operating loss			(7,482	)		(7,743	)		(7,941	)		(6,753	)
Gains—asset sales and lease obligations			13			—			2,110			82
Net loss			(9,404	)		(9,192	)		(5,423	)		(7,006	)
Net loss per common share—basic and diluted			(0.19	)		(0.19	)		(0.12	)		(0.15	)
Weighted-average number of shares outstanding—basic and diluted			48,655,385			48,378,853			47,073,070			46,885,843

		Three months ended
		March 31, 2009			June 30, 2009			September 30, 2009			December 31, 2009(1)
		(in thousands, except share and per share amounts)
Service revenue		$	55,076		$	57,991		$	60,229		$	62,511
Network operations, including equity-based compensation expense			24,194			24,558			26,400			27,621
Operating (loss) income			(4,500	)		(1,103	)		458			1,361
Net loss			(8,160	)		(4,453	)		(3,279	)		(1,259	)
Net loss per common share—basic and diluted			(0.19	)		(0.10	)		(0.07	)		(0.03	)
Weighted-average number of shares outstanding—basic and diluted			42,758,372			43,689,747			43,894,098			44,242,791

---

(1)

In the fourth quarter of 2009 the Company recognized a tax benefit. (See Note 5)




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COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2009 and 2010

11. Quarterly financial information (unaudited): (Continued)

		Three months ended
		March 31, 2010(3)			June 30, 2010			September 30, 2010			December 31, 2010(2)
		(in thousands, except share and per share amounts)
Service revenue		$	62,776		$	64,395		$	66,783		$	69,461
Network operations, including equity-based compensation expense			28,098			29,224			30,639			31,063
Operating income			2,688			2,981			3,749			5,864
Net (loss) income			(570	)		(883	)		(462	)		2,584
Net (loss) income per common share—basic			(0.01	)		(0.02	)		(0.01	)		0.06
Weighted-average number of shares outstanding—basic			44,464,821			44,525,633			44,585,230			44,646,381
Net (loss) income per common share—diluted			(0.01	)		(0.02	)		(0.01	)		0.06
Weighted-average number of shares outstanding—diluted			44,464,821			44,525,633			44,585,230			45,005,387

---

(2)

In the fourth quarter of 2010 the Company recognized a tax benefit. (See Note 5)



(3)

In the first quarter of 2010 the Company recorded an impairment charge and adjusted its asset retirement obligations. (See Notes 2 and 3)

12. Subsequent events:

Senior Secured Notes

        In January 2011, the Company issued its 8.375% Senior Secured Notes (the "Senior Notes") due February 15, 2018, for an aggregate principal amount of $175.0 million in a private offering for resale to qualified institutional buyers pursuant to SEC Rule 144A. The Senior Notes are secured and bear interest at 8.375% per annum. Interest is payable in cash semiannually in arrears on February 15 and August 15, of each year, beginning on August 15, 2011. The Company received net proceeds of approximately $170.5 million after deducting $4.5 million of issuance costs. The Company intends to use the net proceeds from the Senior Notes for general corporate purposes and/or repurchases of its common stock or its Convertible Notes or a special dividend to its stockholders. The Company will incur approximately $15.3 million of additional annual interest expense related to the issuance of the Senior Notes. This includes $14.7 million from the interest on the Senior Notes and $0.6 million from the amortization of the costs related to the Senior Notes.

        The Senior Notes are fully guaranteed on a senior secured basis, jointly and severally, by each of the Company's existing domestic and future material domestic subsidiaries, subject to certain exceptions and permitted liens. Under certain circumstances, subsidiaries may be released from these guarantees without the consent of the holders of the Senior Notes. The Senior Notes and the guarantees are secured by (i) first priority liens on substantially all of Company's and its guarantors' assets, (ii) all of the equity interests in any of its domestic subsidiaries and (iii) 65% of the equity interests of its first-tier foreign subsidiaries held by Company and its guarantors. The Senior Notes and the guarantees represent Company's and the guarantors' senior secured obligations and effectively rank equally and ratably with all of its and the guarantors' existing and future first lien obligations, to the extent of the




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COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2009 and 2010

12. Subsequent events: (Continued)




value of the collateral securing such indebtedness, subject to permitted liens; are structurally subordinated to any existing and future indebtedness and liabilities of non-guarantor subsidiaries and rank equally in right of payment with all of its and the guarantors' existing and future senior indebtedness.

        The Senior Notes may be redeemed, in whole or in part, at any time prior to February 15, 2015 at a price equal to 100% of the principal amount plus a "make-whole" premium, plus accrued and unpaid interest, if any, to the date of redemption. The Senior Notes are redeemable, in whole or in part, at any time on or after February 15, 2015 at the applicable redemption prices specified under the indenture governing the Senior Notes plus accrued and unpaid interest, if any, to the date of redemption. In addition, the Company may redeem up to 35% of the Senior Notes before February 15, 2014 with the net cash proceeds from certain equity offerings. If the Company experiences specific kinds of changes of control, the Company must offer to repurchase all of the Senior Notes at a purchase price of 101% of their principal amount, plus accrued and unpaid interest, if any, to the repurchase date.

        The indenture governing the Senior Notes, among other things, limits the Company's ability and its guarantors' ability to incur indebtedness; to pay dividends or make other distributions; to make certain investments and other restricted payments; to create liens; consolidate, merge, sell or otherwise dispose of all or substantially all of its assets; to incur restrictions on the ability of a subsidiary to pay dividends or make other payments; and to enter into certain transactions with its affiliates.




Table of Contents

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


        None.

ITEM 9A.    CONTROLS AND PROCEDURES


        We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

        As required by SEC Rule 13a-15(b), an evaluation was performed under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, our management, including our principal executive officer and our principal financial officer, concluded that the design and operation of these disclosure controls and procedures were effective at the reasonable assurance level.

        There has been no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.




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MANAGEMENT'S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING


        We are responsible for the preparation and integrity of our published financial statements. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and, accordingly, include amounts based on judgments and estimates made by our management. We also prepared the other information included in the annual report and are responsible for its accuracy and consistency with the financial statements.

        We are responsible for establishing and maintaining a system of internal control over financial reporting, which is intended to provide reasonable assurance to our management and Board of Directors regarding the reliability of our financial statements. The system includes but is not limited to:

•

a documented organizational structure and division of responsibility;



•

established policies and procedures, including a code of conduct to foster a strong ethical climate which is communicated throughout the company;



•

regular reviews of our financial statements by qualified individuals; and



•

the careful selection, training and development of our people.

        There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls. Also, the effectiveness of an internal control system may change over time. We have implemented a system of internal control that was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles.

        We have assessed our internal control system in relation to criteria for effective internal control over financial reporting described in "Internal Control-Integrated Framework" issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based upon these criteria, we believe that, as of December 31, 2007,2010, our system of internal control over financial reporting was effective.

        The independent registered public accounting firm, Ernst & Young LLP, has audited our 20072010 financial statements. Ernst & Young LLP was given unrestricted access to all financial records and related data, including minutes of all meetings of stockholders, the Board of Directors and committees of the Board. Ernst & Young LLP has issued an unqualified report on our 20072010 financial statements as a result of the audit and also has issued an unqualified report on our internal control over financial reporting which is attached hereto.

Cogent Communications Group, Inc.
February 26, 2008 28, 2011
By:		/s/ DAVID SCHAEFFER David Schaeffer Chief Executive Officer
By:		/s/ THADDEUS WEED Thaddeus Weed Chief Financial Officer




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Report of Independent Registered Public Accounting Firm
On Internal Control over Financial Reporting


The Board of Directors and Stockholders of Cogent Communications Group, Inc.

        We have audited Cogent Communications Group, Inc.'s internal control over financial reporting as of December 31, 2007,2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Cogent Communications Group, 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. 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, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

        A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        In our opinion, Cogent Communications Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007,2010, based on the COSO criteria.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Cogent Communications Group, Inc. and subsidiaries as of December 31, 20062009 and 2007,2010, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 20072010 of Cogent Communications Group, Inc. and subsidiaries and our report dated February 26, 200828, 2011 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

		/s/ Ernst & Young LLP

McLean, VA
February 26, 200828, 2011




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ITEM 9B.    OTHER INFORMATION


        Not applicable.


PART III


ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT


        The information required by this Item 10 is incorporated in this report by reference to the information set forth under the captions entitled "Election of Directors," "The Board of Directors and Committees," and "Section 16(a) Beneficial Ownership Reporting Compliance" in the 20082011 Proxy Statement for the 20082011 Annual Meeting of Stockholders, which is expected to be filed with the Commission within 120 days after the close of our fiscal year.

ITEM 11.    EXECUTIVE COMPENSATION


        The information required by this Item 11 is incorporated in this report by reference to the information set forth under the captions entitled "The Board of Directors and Committees," "Executive Compensation", "Employment Agreements", "Compensation Committee Report on Executive Compensation," and "Compensation Committee Interlocks and Insider Participation" in the 20082011 Proxy Statement.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


        The information required by this Item 12 is incorporated in this report by reference to the information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" in the 20082011 Proxy Statement.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


        The information required by this Item 13 is incorporated in this report by reference to the information set forth under the caption "Certain Transactions" in the 20082011 Proxy Statement.

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES


        The information required by this Item 14 is incorporated in this report by reference to the information set forth under the caption "Relationship With Independent Public Accountants" in the 20082011 Proxy Statement.




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PART IV


ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES


		(a)		1.		Financial Statements. A list of financial statements included herein is set forth in the Index to Financial Statements appearing in "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA."
	2.			2.		Financial Statement Schedules. The Financial Statement Schedule described below is filed as part of the report.
						Description
						Schedule II—Valuation and Qualifying Accounts.
						All other financial statement schedules are not required under the relevant instructions or are inapplicable and therefore have been omitted.




(b)

Exhibits.




2.1		Agreement and Plan of Merger, dated as of January 2, 2004, among Cogent Communications Group, Inc., Lux Merger Sub, Inc. and Symposium Gamma, Inc. (previously filed as Exhibit 2.1 to our Periodic Report on Form 8-K, filed on January 8, 2004, and incorporated herein by reference)
2.2		Agreement and Plan of Merger, dated as of March 30, 2004, among Cogent Communications Group, Inc., DE Merger Sub, Inc. and Symposium Omega, Inc. (incorporated by reference to Exhibits 2.6 of our Annual Report on Form 10-K for the year ended December 31, 2003, filed on March 30, 2004)
2.3(b)		Agreement and Plan of Merger, dated as of August 12, 2004, among Cogent Communications Group, Inc., Marvin Internet, Inc., and UFO Group, Inc. (previously filed as Exhibit 2.6 to our Annual Report on Form 10-K, filed on March 31, 2005, and incorporated herein by reference)
2.4		Asset Purchase Agreement, dated as of September 15, 2004, between Global Access telecommunications Inc., Symposium Gamma, Inc. and Cogent Communications Group, Inc. (previously filed as Exhibit 2.7 to our Annual Report on Form 10-K, filed on March 31, 2005, and incorporated herein by reference)Exhibits
2.5		Agreement and Plan of Merger, dated as of October 26, 2004, among Cogent Communications Group, Inc., Cogent Potomac, Inc. and NVA Acquisition, Inc. (previously filed as Exhibit 2.8 to our Annual Report on Form 10-K, filed on March 31, 2005, and incorporated herein by reference)
2.6		Agreement for the Purchase and Sale of Assets, dated December 1, 2004, among Cogent Communications Group, Inc., SFX Acquisition, Inc. and Verio Inc. (previously filed as Exhibit 2.9 to our Annual Report on Form 10-K, filed on March 31, 2005, and incorporated herein by reference)
3.1		3.1		Fifth Amended and Restated Certificate of Incorporation (previously filed as Exhibit 3.1 to our Annual Report on Form 10-K, filed on March 31, 2005, and incorporated herein by reference)
3.2						3.2		Amended and Restated Bylaws in effect from September 17, 2007 (previously filed as Exhibit 3.1 to our Quarterly Report on Form 10-Q, filed on November 8, 2007, and incorporated herein by reference)
4.1						4.1		Indenture related to the Convertible Senior Notes due 2027, dated as June 11, 2007, between Cogent Communications Group, Inc. and Wells Fargo Bank, N.A., as trustee (including form of 1.00% Convertible Senior Notes due 2027) (previously filed as Exhibit 4.1 to our Periodic Report on Form 8-K, filed on June 12, 2007, and incorporated herein by reference)
4.2						4.2		Form of 1.00% Convertible Senior Notes due 2027 ((previously filed as Exhibit A to the Exhibit 4.1 to our Periodic Report on Form 8-K, filed on June 12, 2007, and incorporated herein by reference)
4.3						4.3		Registration Rights Agreement, dated as of June 11, 2007, by and among Cogent Communications Group, Inc. and Bear, Stearns & Co. Inc., UBS Securities LLC, RBC Capital Markets Corporation and Cowen and Company, LLC (previously filed as Exhibit 4.3 to our Periodic Report on Form 8-K, filed on June 12, 2007, and incorporated herein by reference)
10.1		Seventh Amended and Restated Registration Rights Agreement				4.4		Indenture related to the 8.375% Senior Secured Notes due 2018, dated as of January 26, 2011, among Cogent Communications Group, Inc., dated October 26, 2004the guarantors named therein and Wilmington Trust FSB, as trustee and collateral agent (including form of 8.375% Senior Secured Notes due 2018 attached as Exhibit A thereto) (previously filed as Exhibit 10.24.1 to our AnnualPeriodic Report on Form 10-K,8-K, filed on March 31, 2005,February 1, 2011, and incorporated herein by reference)







10.2

4.5

Form of 8.375% Senior Secured Notes due 2018 (previously filed as Exhibit A to the Exhibit 4.1 to our Periodic Report on Form 8-K, filed on February 1, 2011, and incorporated herein by reference)




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						10.1		Fiber Optic Network Leased Fiber Agreement, dated February 7, 2000, by and between Cogent Communications, Inc. and Metromedia Fiber Network Services, Inc., as amended July 19, 2001 (incorporated by reference to Exhibit 10.1 to our Registration Statement on Form S-4, Commission File No. 333-71684, filed on October 16, 2001)*
10.3						10.2		Dark Fiber IRU Agreement, dated April 14, 2000, between WilTel Communications, Inc. and Cogent Communications, Inc., as amended June 27, 2000, December 11, 2000, January 26, 2001, and February 21, 2001 (incorporated by reference to Exhibit 10.2 to our Registration Statement on Form S-4, Commission File No. 333-71684, filed on October 16, 2001)*
10.4						10.3		David Schaeffer Employment Agreement with Cogent Communications Group, Inc., dated February 7, 2000 (incorporated by reference to Exhibit 10.6 to our Registration Statement on Form S-4, Commission File No. 333-71684, filed on October 16, 2001)
10.5		Form of Restricted Stock Agreement relating to Series H Participating Convertible Preferred Stock (incorporated by reference to Exhibit 10.2 to our Registration Statement on Form S-8, Commission File No. 333-108702, filed on September 11, 2003)
10.6				10.4		Lease for Headquarters Space by and between 6715 Kenilworth Avenue Partnership and Cogent Communications Group, Inc., dated September 1, 2000 (incorporated by reference to Exhibit 10.10 to our Registration Statement on Form S-4, Commission File No. 333-71684, filed on October 16, 2001)
10.7						10.5		Renewal of Lease for Headquarters Space, by and between 6715 Kenilworth Avenue Partnership and Cogent Communications Group, Inc., dated August 5, 2003 (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q, filed on November 14, 2003)
10.8		The Amended and Restated Cogent Communications Group, Inc. 2000 Equity Plan (incorporated by reference to Exhibit 10.12 to our Registration Statement on Form S-4, Commission File No. 333-71684, filed on October 16, 2001)
10.9				10.6		2003 Incentive Award Plan of Cogent Communications Group, Inc. (incorporated by reference to Exhibit 10.1 to our Registration Statement on Form S-8, Commission File No. 333-108702, filed on September 11, 2003)
10.10						10.7		2004 Incentive Award Plan of Cogent Communications Group, Inc. (as amended and restated through JuneApril 15, 2010) (incorporated by reference to Exhibit 10.1 to our Periodic Report on Form 8-K, filed on April 20, 20072010, and filed herewith)incorporated herein by reference)
10.11						10.8		Dark Fiber Lease Agreement dated November 21, 2001, by and between Cogent Communications, Inc. and Qwest Communications Corporation (incorporated by reference to Exhibit 10.13 to our Registration Statement on Form S-4, as amended by a Form S-4/A (Amendment No. 2), Commission File No. 333-71684, filed on December 7, 2001)
10.12						10.9		Robert N. Beury, Jr. Employment Agreement with Cogent Communications Group, Inc., dated June 15, 2000 (incorporated by reference to Exhibit 10.20 to our Annual Report on Form 10-K, filed on March 31, 2003)
10.13						10.10		Mark Schleifer Employment Agreement with Cogent Communications Group, Inc., dated September 18, 2000 (incorporated by reference to Exhibit 10.21 to our Annual Report on Form 10-K, filed on March 31, 2003)
10.14		R. Reed Harrison Employment Agreement with Cogent Communications Group, Inc., dated July 1, 2004 (incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q, filed on August 16, 2004)
10.15				10.11		Brad Kummer Employment Agreement with Cogent Communications Group, Inc., dated January 11, 2000, (incorporated by reference to Exhibit 10.23 to our Registration Statement on Form S-1, Commission File No. 333-122821, filed on February 14, 2005)




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10.16
						10.12		Extension of Lease for Headquarters Space, by and between 6715 Kenilworth Avenue Partnership and Cogent Communications Group, Inc., dated February 3, 2005 (previously filed as Exhibit 10.27 to our Annual Report on Form 10-K, filed on March 31, 2005, and incorporated herein by reference)
10.17		Notice of Grant, dated November 4, 2005, made to David Schaeffer (previously filed as Exhibit 10.1 to our Periodic Report on Form 8-K, filed on November 7, 2005, and incorporated herein by reference)
10.18				10.13		Extension of Lease for Headquarters Space to August 31, 2006, by and between 6715 Kenilworth Avenue Partnership and Cogent Communications Group, Inc., dated July 21, 2005 (previously filed as Exhibit 10.1 to our Quarterly Report on Form 10-K, filed on August 15, 2005, and incorporated herein by reference)
10.19						10.14		Option for extension of Lease for Headquarters Space to August 31, 2007, by and between 6715 Kenilworth Avenue Partnership and Cogent Communications Group, Inc., dated July 21, 2005 (previously filed as Exhibit 10.2 to our Quarterly Report on Form 10-K, filed on August 15, 2005, and incorporated herein by reference)
10.20						10.15		Extension of Lease for headquarters space to August 31, 2010, by and between 6715 Kenilworth Avenue Partnership and Cogent Communications Group, Inc., dated June 20, 2006 (previously filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q, filed on August 8, 2006, and incorporated herein by reference)
10.21						10.16		Jeffery S. Karnes Employment Agreement with Cogent Communications Group, Inc., dated May 17, 2004 (previously filed as Exhibit 10.25 to our Annual Report on Form 10-K, filed on March 14, 2007, and incorporated herein by reference)
10.22						10.17		David Schaeffer Amendment No. 2 to Employment Agreement with Cogent Communications Group, Inc., dated as of March 12, 2007 (previously filed as Exhibit 10.26 to our Annual Report on Form 10-K, filed on March 14, 2007, and incorporated herein by reference)
10.23						10.18		Robert N. Beury, Jr. Employment Agreement with Cogent Communications Group, Inc., dated as of March 12, 2007 (previously filed as Exhibit 10.27 to our Annual Report on Form 10-K, filed on March 14, 2007, and incorporated herein by reference)
10.24						10.19		Thaddeus G. Weed Employment Agreements, dated September 25, 2003 through October 26, 2006 (previously filed as Exhibit 10.28 to our Annual Report on Form 10-K, filed on March 14, 2007, and incorporated herein by reference)
10.25						10.20		Amendment No. 3 to Employment Agreement of Dave Schaeffer, dated as of August 7, 2007 (previously filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q, filed on August 8, 2007, and incorporated herein by reference)
10.26						10.21		Form of Restricted Stock Agreement made to Vice Presidents and certain other employees on January 1, 2008 (filed herewith)2008) (incorporated by reference to Exhibit 10.26 to our Annual Report on Form 10-K, filed on February 27, 2008)
10.27						10.22		Form of Restricted Stock Agreement made to Mr. Schaeffer on January 1, 2008) (incorporated by reference to Exhibit 10.27 to our Annual Report on Form 10-K, filed on February 27, 2008)




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						10.23		Extension of Lease for headquarters space to August 31, 2012 and addition of 3rd floor office space, by and between 6715 Kenilworth Avenue Partnership and Cogent Communications Group, Inc., dated as of August 7, 2008 (filed herewith)(previously filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q, filed on August 8, 2008, and incorporated herein by reference)
21.1		Subsidiaries (filed herewith)
23.1				10.24		Amendment No. 4 to Employment Agreement of Dave Schaeffer, dated as of February 26, 2010 (previously filed as Exhibit 10.25 to our Annual Report on Form 10-K, filed on March 1, 2010, and incorporated herein by reference)
						10.25		Form of Restricted Stock Award made to Mr. Schaeffer on April 15, 2010 (incorporated by reference to Exhibit 10.2 to our Periodic Report on Form 8-K, filed on April 20, 2010, and incorporated herein by reference).
						10.26		Form of Restricted Stock Award to Vice Presidents on April 15, 2010 (incorporated by reference to Exhibit 10.3 to our Periodic Report on Form 8-K, filed on April 20, 2010, and incorporated herein by reference)
						10.27		Amendment No. 5 to Employment Agreement of Dave Schaeffer, dated April 7, 2010 (previously filed as Exhibit 10.1 to our Periodic Report on Form 8-K, filed on April 7, 2010, and incorporated herein by reference).
						21.1		Subsidiaries (filed herewith)
						23.1		Consent of Ernst & Young LLP (filed herewith)
31.1						31.1		Certification of Chief Executive Officer (filed herewith)
31.2						31.2		Certification of Chief Financial Officer (filed herewith)
32.1						32.1		Certification of Chief Executive Officer (filed herewith)
32.2						32.2		Certification of Chief Financial Officer (filed herewith)
						99.1		Policy Against Excise Tax Gross-ups on "Golden Parachute" Payments, with effect from April 7, 2010 (previously filed as Exhibit 99.1 to our Periodic Report on Form 8-K, filed on April 7, 2010, and incorporated herein by reference).

---

*

Confidential treatment requested and obtained as to certain portions. Portions have been omitted pursuant to this request where indicated by an asterisk.




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Schedule II

COGENT COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)


Description		Balance at Beginning of Period			Charged to Costs and Expenses(a)			Deductions			Balance at End of Period
Allowance for doubtful accounts (deducted from accounts receivable)
Year ended December 31, 2005		$	3,229		$	4,831		$	6,623		$	1,437
Year ended December 31, 2006		$	1,437		$	3,410		$	3,614		$	1,233
Year ended December 31, 2007		$	1,233		$	2,705		$	2,779		$	1,159
Allowance for Credits (deducted from accounts receivable)
Year ended December 31, 2005		$	150		$	33		$	—		$	183
Year ended December 31, 2006		$	183		$	—		$	61		$	122
Year ended December 31, 2007		$	122		$	—		$	98		$	24
Allowance for Unfulfilled Customer Purchase Obligations (deducted from accounts receivable)
Year ended December 31, 2005		$	164		$	2,008		$	1,767		$	405
Year ended December 31, 2006		$	405		$	1,585		$	1,406		$	584
Year ended December 31, 2007		$	584		$	2,134		$	1,611		$	1,107
Lease restructuring accrual
Year ended December 31, 2005		$	1,611		$	1,319		$	1,378		$	1,552
Year ended December 31, 2006		$	1,552		$	114		$	1,273		$	393
Year ended December 31, 2007		$	393		$	7		$	400		$	—

Description		Balance at Beginning of Period			Charged to Costs and Expenses(a)			Deductions			Balance at End of Period
Allowance for doubtful accounts (deducted from accounts receivable)
Year ended December 31, 2008		$	1,159		$	5,677		$	4,922		$	1,914
Year ended December 31, 2009		$	1,914		$	5,531		$	4,929		$	2,516
Year ended December 31, 2010		$	2,516		$	5,456		$	5,508		$	2,464
Allowance for Unfulfilled Customer Purchase Obligations (deducted from accounts receivable)
Year ended December 31, 2008		$	1,107		$	24,481		$	24,257		$	1,331
Year ended December 31, 2009		$	1,331		$	11,729		$	11,264		$	1,796
Year ended December 31, 2010		$	1,796		$	4,934		$	5,154		$	1,576

---

(a)

Bad debt expense, net of recoveries, was approximately $4.6 million for the year ended December 31, 2005, $2.62008, $4.9 million for the year ended December 31, 20062009 and $2.0$4.3 million for the year ended December 31, 2007.2010.




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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.

	COGENT COMMUNICATIONS GROUP, INC.
Dated: February 27, 2008	By:	/s/  DAVID SCHAEFFER
		Name:			David SchaefferCOGENT COMMUNICATIONS GROUP, INC.
Dated: February 28, 2011		Title: By:		/s/ DAVID SCHAEFFER Name: David Schaeffer Title:Chairman 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.

Signature		Title		Date
/s/ DAVID SCHAEFFER David Schaeffer		Chairman and Chief Executive Officer (Principal (Principal Executive Officer)		February 27, 200828, 2011
/s/ THADDEUS G. WEED Thaddeus G. Weed		Chief Financial Officer (Principal (Principal Financial and Accounting Officer)		February 27, 200828, 2011
/s/ EREL MARGALIT Erel Margalit		Director		February 27, 200828, 2011
/s/ TIMOTHY WEINGARTEN Timothy Weingarten		Director		February 27, 200828, 2011
/s/ STEVEN BROOKS Steven Brooks		Director		February 27, 200828, 2011
/s/ RICHARD T. LIEBHABER Richard T. Liebhaber		Director		February 27, 200828, 2011
/s/ DAVID BLAKE BATH David Blake Bath		Director		February 27, 2008
/s/  LEWIS H. FERGUSON III       Lewis H. Ferguson III		DirectorFebruary 28, 2011
/s/ MARC MONTAGNER Marc Montagner		Director		February 27, 200828, 2011







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COGENT COMMUNICATIONS GROUP, INC. FORM 10-K ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 2007
TABLE OF CONTENTS
DOCUMENTS INCORPORATED BY REFERENCE
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
PART I

ITEM 1. BUSINESS
ITEM 1A. RISK FACTORS

ITEM 2. DESCRIPTION OF PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm
COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2006 AND 2007 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2005, DECEMBER 31, 2006 AND DECEMBER 31, 2007 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2005, DECEMBER 31, 2006 AND DECEMBER 31, 2007 (IN THOUSANDS)

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Report of Independent Registered Public Accounting Firm On Internal Control over Financial Reporting

ITEM 9B. OTHER INFORMATION

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Schedule II COGENT COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (in thousands)
SIGNATURES