ABOVENET INC

Litigation Relating to the Merger

On March 22, 2012 and March 28, 2012, two class actions on behalf of the stockholders of the Company, respectively styled Raul v. LaPerch, et al., Index. No. 54232/2012 (the “Raul Action”), and Wachsler v. AboveNet Inc., et al., Index No. 54662/2012 (the “Wachsler Action”), were filed in the Supreme Court for the State of New York, County of Westchester. On March 30, 2012, a class action on behalf of the stockholders of the Company, styled Miramar Firefighters Pension Fund v. AboveNet, Inc., Case No. 7376, was filed in the Court of Chancery of the State of Delaware (the “Delaware action,” and together with the Raul Action and the Wachsler Action, the “Actions”). The Actions name as defendants the Company, Zayo Group, LLC and the members of the Company’s Board of Directors, Jeffrey Brodsky, Michael J. Embler, William LaPerch, Richard Postma, Richard Shorten, Jr. and Stuart Subotnick. The Raul Action and Delaware Action also name Voila Sub, Inc. as a defendant. The Actions allege that the members of the Company’s Board of Directors violated their fiduciary duties to the Company’s stockholders in connection with the Merger. The Raul Action and the Delaware Action further allege that the Company, Zayo Group, LLC and Voila Sub, Inc. aided and abetted those purported breaches, and the Wachlser Action further alleges that Company and Zayo Group, LLC aided and abetted those purported breaches. On April 17, 2012, the plaintiffs in the Delaware action filed an Amended Verified Class Action Complaint adding additional allegations in support of their breach of fiduciary duty claims, and on April 18, 2012 filed motions to expedite proceedings and for a preliminary injunction. On April 21, 2012, an Amended Class Action Complaint was filed in the Raul Action. On April 27, 2012, the parties in the Raul Action and the Wachsler Action filed stipulations providing that all further proceedings related to the merger would take place in the Delaware action and that the Raul Action and the Wachsler Action would be stayed through and including June 20, 2012. The stipulations also provided that all motions filed in either action would be adjourned. The Court approved these stipulations on April 30, 2012. On April 30, 2012, the defendants in the Delaware action filed a stipulated order and case management schedule. This order reflects, among other things, the parties’ agreement that the defendants will provide certain limited discovery to the plaintiffs. The Actions seek, among other things, an order enjoining the Merger as well as unspecified damages. The defendants deny the allegations in the Actions and intend to defend the Actions vigorously. See Note 14, “Merger Agreement with Zayo Group, LLC.”

At the effective time of the Merger, (i) each outstanding option to purchase Common Stock, whether vested or unvested, will be converted into cash equal to the amount (if any) by which the Per Share Amount exceeds the exercise price payable under that option, (ii) each outstanding restricted stock unit issued by the Company, whether vested or unvested, will be converted into cash equal to the number of shares of the Common Stock subject to that restricted stock unit multiplied by the Per Share Amount, and (iii) if the closing of the Merger occurs prior to the end of the offering period underway under the Stock Purchase Plan, each participant in that offering will be paid an amount equal to the product of (x) the amount, if any, by which the Per Share Amount exceeds the applicable exercise price and (y) the number of shares of the Common Stock the participant could purchase with his or her accumulated payroll deductions as of the business day immediately prior to the closing of the Merger at the applicable exercise price.

Consummation of the Merger is subject to customary conditions, including without limitation (i) the approval by the holders of a majority of the outstanding shares of the Common Stock entitled to vote on the Merger, (ii) the expiration or early termination of the waiting period applicable to the consummation of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, which condition has been satisfied, (iii) the receipt of all required approvals or clearances from applicable governmental entities, or the applicable waiting period thereunder having been terminated or expired and (iv) the absence of any injunction or law prohibiting the Merger. Moreover, each party’s obligation to consummate the Merger is subject to certain other conditions, including without limitation (x) the accuracy of the other party’s representations and warranties (subject to customary materiality qualifiers) and (y) the other party’s compliance in all material respects with its covenants and agreements contained in the Merger Agreement. In addition, the obligation of Parent and Merger Sub to consummate the Merger is subject to the absence of any event, change, circumstance, occurrence, effect or state of facts having occurred, since March 18, 2012 to the effective time of the Merger, that has had and continues to have, or would reasonably be expected to have a material adverse effect on the business, assets, condition (financial or otherwise) or results of operations of the Company and its subsidiaries taken as a whole.

On March 18, 2012, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Zayo Group, LLC, a Delaware limited liability company (“Parent”), and Voila Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”), providing for the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Parent. The Merger Agreement was unanimously approved by the Company’s Board of Directors. For more information regarding the Merger Agreement, see Note 14, “Merger Agreement with Zayo Group, LLC,” to the accompanying consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Costs of revenue.  Consolidated costs of revenue for the three months ended March 31, 2012 was $43.9 million, compared to $40.2 million for the three months ended March 31, 2011, an increase of $3.7 million, or 9.2%.  Consolidated costs of revenue as a percentage of revenue was 34.4% for the three months ended March 31, 2012, compared to 35.1% for the three months ended March 31, 2011, resulting in consolidated gross profit margin of 65.6% and 64.9% for the three months ended March 31, 2012 and 2011, respectively.  The costs of revenue for our U.S. operations was $40.0 million and $35.7 million for the three months ended March 31, 2012 and 2011, respectively, an increase of $4.3 million, or 12.0%. The increase in the domestic costs of revenue for the three months ended March 31, 2012 compared to the three months ended March 31, 2011 was attributable principally to (i) an increase of $1.1 million for expenses associated with third party network costs; (ii) an increase of $1.1 million in co-location expenses, to support our IP network services and increase our presence in third party data centers; (iii) an increase of $0.7 million in payroll-related expenses due to headcount added since the three months ended March 31, 2011; (iv) an increase of $0.6 million in installation costs; (v) an increase of $0.3 million for right-of-way expenses; and (vi) an increase of $0.2 million in long haul expenses from 2011 levels. The costs of revenue for our foreign operations was $3.9 million for the three months ended March 31, 2012, compared to $4.5 million for the three months ended March 31, 2011, a decrease of $0.6 million, or 13.3%. The decrease was primarily due to a decrease in repairs and maintenance charges and the fact that the prior year quarter included some overaccruals that were reversed in the third and fourth quarters of 2011. In addition, the results for the three months ended March 31, 2012 compared to the three months ended March 31, 2011 reflect a 1.9% decrease in the translation rate due to the strengthening of the U.S. dollar against the British pound.