ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

You should read the following discussion in conjunction with our accompanying unaudited condensed consolidated financial statements and notes thereto, and our audited consolidated financial statements, notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations as of and for the year ended December 31, 2005, included in our Annual Report on Form 10-K for such period as filed with the U.S. Securities and Exchange Commission. The results shown herein are not necessarily indicative of the results to be expected in any future periods. This discussion contains forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) based on current expectations which involve risks and uncertainties. Actual results and the timing of events could differ materially from the forward-looking statements as a result of a number of factors. For a discussion of the material factors that could cause actual results to differ materially from the forward-looking statements, you should read “Risk Factors” included in this Form 10-Q.

EXECUTIVE SUMMARY

SAVVIS, Inc. is a global information technology (IT) services company delivering integrated hosting, network, digital content services, industry solutions, security, and professional services to businesses around the world and various segments of the U.S. federal government. Our unique solutions model combines advanced virtualization technology, a utility services approach, and automated software management and provisioning systems to deliver access to a suite of IT services that offer high availability, business agility and disruptive economics. Our solutions enable customers to focus on their core business while we ensure the performance of their IT infrastructure. We have approximately 5,200 customers across all industries with a particular emphasis in the financial services, media and entertainment, retail, and the U.S. federal government sectors.

Services

Although we operate in one operating segment separated by geographic location, the following briefly describes our services by revenue category:

Managed IP VPN

Managed IP VPN includes revenue primarily from our IP VPN. This service is a fully managed, end-to-end service that includes all hardware, management systems, and operations to transport video and data applications. This service has built-in security, fully-meshed connectivity, and the ability to assign individual service levels to different applications so each application receives the performance levels it requires and reduces unused capacity.

Hosting

Hosting revenue includes revenue from our managed hosting solutions. Hosting includes the facilities, networks, servers, storage, and operations to run business applications. Customers can take advantage of our flexible service model which allows them to decide the right combination of our service for their applications from basic colocation to managed hosting to utility computing.

Digital Content Services

Revenue from digital content services, or media services, includes our WAM!NET services, digital media services and Content Delivery Network (CDN) services. These services provide a managed infrastructure tied to workflow applications that enhance the creation, production and distribution of digital content and streaming media. These services help customers manage, share, store and distribute their digital content inside their organization and throughout supply chains outside of their organization.

Other Network Services

Other network services include Internet access and private line services to enterprises and wholesale carrier customers. These services can be purchased individually or in combination. The network portfolio emphasizes high performance and availability, end-to-end management and monitoring, security, fully-meshed connectivity between customer sites for improved reliability and efficiency, and cost effectiveness.

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Our customers’ varied and individual needs often require that our portfolio of services be combined and integrated in order to best suit their needs. To address these needs, we also offer the following services:

Industry Solutions

Industry solutions integrate powerful applications with our global infrastructure to deliver services that enhance industry-specific workflows and improve enterprise productivity. These services support the financial services, media and entertainment and retail markets and the U.S. federal government. Cross-industry solutions for email and collaboration are also available.

Professional Services

Professional services are provided through a group of industry experts and skilled practitioners that allow our customers to get the maximum value out of our company’s services. We offer assistance and consultation in security, web-based applications, business recovery, program management, infrastructure, and migration.

Business Trends

Our financial results continue to be affected by competition in our industry. We expect competitive factors in our industry to continue to affect the prices for our services and our results of operations. Price pressures vary by product and service. Prices for telecommunications services, including the services we offer, have decreased over the past several years, and we expect to continue to see decreases for the foreseeable future. To some extent, the impact of lower prices that we charge our customers has been offset by lower costs incurred by us to provide the service. In addition, unmanaged bandwidth services have experienced significant price pressure. In contrast, colocation services have enjoyed more stable pricing, and we believe these services will continue to maintain stability and grow in certain markets as we provide more value-added services to our customers.

We have also addressed industry-wide price competition and price decreases by broadening the range of services that we offer, including the addition of CDN services, colocation services, carrier wholesale services, consulting services, and an expanded portfolio of managed security services as a result of our acquisition of the assets of Cable & Wireless USA, Inc. and Cable & Wireless Internet Services, Inc., together with the acquisition of assets of certain of their affiliates (CWA) in March 2004.

In evaluating our financial results and the performance of our business, our management reviews our revenues, gross profit, defined as revenue less cost of revenue, excluding depreciation, amortization, and accretion, gross margin and operating income. In addition, management evaluates these indicators on a quarterly and annual basis in order to have a complete understanding of business trends. The following table presents a quarterly overview of these indicators for the periods indicated (in thousands):

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Revenue

Prior to our acquisition of the CWA assets in March 2004, we were heavily dependent on our largest customer, Reuters Limited (Reuters), which comprised 54% of total revenue for the year ended December 31, 2003. Most of our remaining revenue was generated from our managed IP VPN services. However, after we acquired the CWA assets, our revenue profile changed significantly. Reuters revenue comprised only 13% of total revenue for the three months ended March 31, 2006 and 15% of total revenue for the year ended December 31, 2005. Moreover, the acquisition increased our revenue from hosting services, which represented 48% of total revenue for the three months ended March 31, 2006 and 44% of total revenue for the year ended December 31, 2005.

Our revenue grew by 11% during the three months ended March 31, 2006 compared to the three months ended March 31, 2005. For the first quarter of 2006, our revenue increased 5% sequentially compared to the fourth quarter of 2005. This was due primarily to increases in revenue from managed IP VPN of $2.1 million, hosting of $6.1 million, and other network services of $1.4 million, partially offset by a decline in revenue from Reuters of $1.2 million.

In May 2005, we signed a new three-year contract with Reuters to continue providing network delivery of Reuters’ market data services worldwide and to create the opportunity for us to provide to Reuters a broad array of additional services. As a result of the new agreement, we reduced pricing for certain Reuters services and eliminated existing contractual minimum amounts. In addition, in the first quarter of 2005, Reuters also announced it signed a long-term agreement for the provision of network services with a competing telecommunications provider. Accordingly, we expect revenue from Reuters to continue to decline in 2006 compared to 2005.

We plan to offset this decrease and increase our revenue through a number of initiatives, including improving the productivity of our direct sales force by increasing sales force automation and providing more sales support in terms of engineering and product expertise, given our product breadth and extensive customer base, exploring opportunities to sell additional services to existing customers, and capitalizing on the current imbalance in the supply and demand ratio for colocation services by continuing to achieve improved customer pricing.

Gross Profit and Gross Margin

We use gross profit and gross margin to evaluate the profitability of our business. Gross profit, defined as revenue less cost of revenue, but excluding depreciation, amortization, and accretion, was $67.2 million for the three months ended March 31, 2006, an increase of $14.1 million, or 27%, from $53.1 million for the three months ended March 31, 2005. The improvement of gross profit throughout the years ended December 31, 2004 and 2005 reflects our continued efforts to rationalize network operations, reduce our fixed network costs, and reduce the service costs of our hosting data centers as a result of the synergies from our acquisition of the CWA assets. As a result, gross margin, defined as gross profit as a percentage of revenue, was 37% for the three months ended March 31, 2006 compared to 33% for the three months ended March 31, 2005. We expect gross profit and gross margin to continue improving due to the scalability of our business model and ongoing cost-optimization efforts.

Income (Loss) from Operations

Income from operations for the three months ended March 31, 2006, was $3.7 million, an improvement of $9.0 million compared to a loss from operations of $5.3 million for the three months ended March 31, 2005. The improvement was primarily due to the increase in revenue of $17.8 million and the absence of $2.1 million of integration costs, partially offset by increases in cost of revenue of $3.7 million; sales, general, and administrative expenses of $6.0 million; and depreciation, amortization, and accretion of $1.1 million.

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SIGNIFICANT TRANSACTIONS

Restricted Stock Units

In August 2005, the compensation committee awarded 19.9 million restricted stock units (RSUs) to executives and employees under the 2003 Incentive Compensation Plan (the 2003 Plan), of which 6.7 million were subsequently forfeited upon employment terminations in 2005 and the first quarter of 2006. In March 2006, the compensation committee awarded 5.2 million RSUs to executives. We received no cash consideration for such awards. Such awards resulted in deferred compensation of $13.1 million in 2005 and $5.5 million in 2006, which represents the fair value of the RSUs on the date of grant. The vesting of the RSUs is subject to continued employment and our achievement of financial performance targets over a period of up to four years. RSUs represent common stock but do not give the recipient any actual ownership interest in our common stock, other than the right to receive cash dividends, until vested and the shares of common stock underlying the RSUs are delivered. Deferred compensation is being amortized on a straight-line basis and recognized as non-cash equity-based compensation over the requisite service period. Compensation expense associated with RSUs was $1.0 million during the three months ended March 31, 2006. If we believe it is probable that we will achieve our performance targets, non-cash equity-based compensation will be accelerated to ensure that the amount of non-cash equity-based compensation recorded is reflective of the accelerated vesting of RSUs.

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RESULTS OF OPERATIONS

The historical financial information included in this Form 10-Q does not reflect our future results of operations, financial position and cash flows.

Three Months Ended March 31, 2006 Compared to the Three Months Ended March 31, 2005

Executive Summary of Results of Operations

Revenue increased $17.8 million, or 11%, for the three months ended March 31, 2006 compared to the three months ended March 31, 2005, as a result of a 23% increase in managed IP VPN, a 24% improvement in hosting and an 11% increase in digital content services, partially offset by smaller declines in other network services and Reuters revenue. Income from operations improved $9.0 million, or 170%, for the three months ended March 31, 2006 compared to the three months ended March 31, 2005, as a result of the increase in revenue and the absence of $2.1 million in integration costs in 2006. These factors were partially offset by increases in cost of revenue of $3.7 million, or 3%; sales, general, and administrative expenses of $6.0 million, or 16%; and depreciation, amortization, and accretion of $1.1 million, or 6%. Cost of revenue and sales, general, and administrative expenses include non-cash equity-based compensation expense, in accordance with U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 107, which was previously reported as a separate line in 2005. Net loss improved $8.5 million, or 40%, for the three months ended March 31, 2006 compared to the three months ended March 31, 2005, as a result of the factors previously described.

Revenue. The following table presents diversified revenue by major category and revenue from our largest customer (dollars in thousands):

Revenue was $180.0 million for the three months ended March 31, 2006, an increase of $17.8 million, or 11%, from $162.2 million for the three months ended March 31, 2005. Diversified managed IP VPN revenue was $32.4 million for the three months ended March 31, 2006, an increase of $6.0 million, or 23%, from $26.4 million for the three months ended March 31, 2005. This increase was mainly attributed to new sales activity and growth in existing services. Diversified hosting revenue was $85.6 million for the three months ended March 31, 2006, an increase of $16.8 million, or 24%, from $68.8 million for the three months ended March 31, 2005. The increase was due primarily to growth in existing services, particularly in our infrastructure and managed utility service offerings, stabilized pricing, and lower customer churn. Digital content services revenue, which includes CDN and WAM!NET revenue, was $10.6 million for the three months ended March 31, 2006, an increase of $1.0 million, or 11%, from $9.6 million for the three months ended March 31, 2005. The increase was due primarily to CDN usage increases, partially offset by reduced pricing for CDN services during the three months ended March 31, 2006 compared to the three months ended March 31, 2005. Other network services includes internet access revenue and private line services and was $28.6 million for the three months ended March 31, 2006, a decrease of $3.1 million, or 10%, from $31.7 million for the three months ended March 31, 2005. The decrease was due primarily to pricing pressures in unmanaged bandwidth for such services from a year ago.

Reuters revenue was $22.8 million for the three months ended March 31, 2006, a decrease of $2.9 million, or 11%, from $25.7 million for the three months ended March 31, 2005. The decline was due primarily to pricing reductions and the elimination of minimum revenue commitments from Reuters. We expect Reuters revenue in 2006 to be lower than 2005 as a result of revised competitive pricing and the elimination of minimum revenue commitments based on the terms of the 2005 agreement with Reuters previously described elsewhere herein. We expect Reuters to contribute approximately 12-13% of total annual revenue in 2006.

Cost of Revenue. Cost of revenue, which excludes depreciation, amortization, and accretion, which is reported separately, was $112.8 million for the three months ended March 31, 2006, an increase of $3.7 million, or 3%, from $109.1 million for the three months ended March 31, 2005. The increase was due primarily to an increase in personnel and related costs and higher utilities costs, partially offset

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by continued realization of various cost-savings initiatives executed during the past 18 months. Gross profit, defined as total revenue less cost of revenue, was $67.2 million for the three months ended March 31, 2006, an increase of $14.1 million, or 27%, from $53.1 million for the three months ended March 31, 2005. Gross profit as a percentage of revenue, or gross margin, increased to 37% for the three months ended March 31, 2006 compared to 33% reported for the three months ended March 31, 2005, primarily resulting from strong revenue growth with a disproportionate increase in costs to generate such revenue, primarily due to cost savings initiatives.

Sales, General, and Administrative Expenses. Sales, general, and administrative expenses include all costs associated with the selling of our services and administrative functions such as finance, legal and human resources. Such expenses were $43.6 million for the three months ended March 31, 2006, an increase of $6.1 million, or 16%, from $37.5 million for the three months ended March 31, 2005. Sales, general, and administrative expenses as a percentage of revenue were 24% for the three months ended March 31, 2006 compared to 23% of revenue for the three months ended March 31, 2005. This was due primarily to an increase in personnel and related costs, higher commissions and the inclusion of $1.6 million in non-cash stock-based compensation expense that was previously reported separately, partially offset by the realization of various cost-savings initiatives executed during the past 18 months.

Depreciation, Amortization, and Accretion. Depreciation, amortization, and accretion includes depreciation of property and equipment, amortization of intangible assets, and accretion of the discounted present value of certain liabilities and long-term fixed price contracts assumed in the CWA acquisition. Depreciation, amortization, and accretion was $19.9 million for the three months ended March 31, 2006, an increase of $1.1 million, or 6%, from $18.8 million for the three months ended March 31, 2005.

Integration Costs. Integration costs represented incremental costs to the combined organization after the CWA asset acquisition, including consulting services, payroll costs and stay bonuses, and PoP consolidation and network restructuring. We did not incur any integration costs associated with the CWA acquisition in 2006 as integration activities have been completed. Integration costs were $2.1 million for the three months ended March 31, 2005.

Net Interest Expense and Other. Net interest expense and other primarily represents interest on the Subordinated Notes, capital leases, and revolving credit facility (the Revolving Facility), as well as amortization of the original issue discount on the Subordinated Notes and amortization of debt issuance costs. Net interest expense and other was $16.2 million for the three months ended March 31, 2006, an increase of $0.6 million, or 4%, from $15.6 million for the three months ended March 31, 2005. The increase was primarily due to the compounding of payable in kind interest, partially offset by a lower interest rate in 2006 on the Revolving Facility compared with the GECC capital lease, which was repaid in June 2005. Management expects payments for cash interest expense to be approximately $11 million for the remainder of 2006 under our current financing arrangements.

Net Loss. Net loss for the three months ended March 31, 2006 was $12.4 million, an improvement of $8.5 million, or 40%, from $20.9 million for the three months ended March 31, 2005, primarily driven by the factors previously described.

LIQUIDITY AND CAPITAL RESOURCES

Executive Summary

As of March 31, 2006, our cash and cash equivalents balance was $49.6 million. We had $18.9 million in net cash provided by operating activities during the three months ended March 31, 2006, an increase of $8.9 million from net cash provided by operating activities of $10.0 million for the three months ended March 31, 2005. This change was primarily due to improvements in our results of operations, partially offset by a decline in working capital driven by cash payments in March 2006 for 2005 bonuses. Net cash used in investing activities for the three months ended March 31, 2006 was $16.4 million, an increase of $1.4 million from net cash used for investing activities of $15.0 million for the three months ended March 31, 2005. This change was primarily related to an increase in capital expenditures. Net cash used in financing activities for the three months ended March 31, 2006 was $13.9 million, an increase of $13.9 million from net cash used in financing activities of less than $0.1 million for the three months ended March 31, 2005. This increase primarily relates to the $16.0 million pay down on the Revolving Facility, partially offset by cash received for the exercise of stock options.

Historically, we have not been cash flow positive. For example, cash flows from operations were negative for much of the year ended December 31, 2004 due to the significant acquisition and integration costs paid during that year. However, management does not consider the cash flows from 2004 to be representative of expected future cash flows as we ended that year with positive cash flows from operations for the fourth quarter and continued that trend in 2005. In 2006, we expect to fund our business needs primarily through cash flows from operations. The achievement of this goal is reflected in the quarterly trend analysis below, which presents cash flows from operations for the five consecutive quarters through March 31, 2006. Due to the dynamic nature of our industry and unforeseen circumstances, if we are unable to fully fund cash requirements through operations, we may need to obtain additional financing through a combination of equity and debt financings, renegotiation of terms on our existing debt, and sales of assets and services. If any such activities are required, there can be no assurance that we would be successful in completing any of these activities on terms that would be favorable to us. As of March 31, 2006, our unused availability under the Revolving Facility was $31.7 million, which is reflective of $11.3 million of letters of credit outstanding and $42.0 million of outstanding principal.

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The following table presents a quarterly overview of key components of our cash flows (in thousands):

Discussion of Changes in Liquidity and Capital Resources

Net cash provided by operating activities was $18.9 million for the three months ended March 31, 2006, an increase of $8.9 million from net cash provided of $10.0 million for the three months ended March 31, 2005. This increase for the three months ended March 31, 2006 is primarily driven by improvements in our cash results from operations, partially offset by a decline in working capital driven by cash payments in March 2006 for 2005 bonuses. Such increase also reflects the negotiation of telecommunications provider service credits of $3.1 million for the three months ended March 31, 2006. We did not incur any integration expenses in the first quarter of 2006, as integration activities have been completed but we do expect to pay up to $2.5 million of previously expensed integration-related costs throughout 2006.

Net cash used in investing activities for the three months ended March 31, 2006 was $16.4 million, an increase of $1.4 million compared to $15.0 million in net cash used in investing activities for the three months ended March 31, 2005. This increase primarily relates to an increase in capital expenditures of $2.3 million for the three months ended March 31, 2006. The increase in capital expenditures supports the growth in new and existing revenue streams.

Net cash used in financing activities for the three months ended March 31, 2006 was $13.9 million, an increase of $13.9 million from net cash used in financing activities of less than $0.1 million for the three months ended March 31, 2005. This increase primarily relates to the $16.0 million pay down on the Revolving Facility and was partially offset by $2.2 million in cash received for the exercise of stock options for the three months ended March 31, 2006.

Revolving Credit Facility

On June 10, 2005, we and certain of our subsidiaries entered into a credit agreement with Wells Fargo Foothill, Inc., as arranger and administrative agent, and certain other lenders to provide us with an $85.0 million Revolving Facility, which includes a $15.0 million letter of credit facility. The Revolving Facility may be used for working capital and other general corporate purposes. The Revolving Facility matures, and all outstanding borrowings and unpaid interest are due, on December 9, 2008. In addition, all outstanding borrowings are subject to mandatory prepayment upon certain events, including the availability of less than $7.0 million in borrowing capacity and qualified cash balances, as defined by the Revolving Facility agreement. As of March 31, 2006, the $85.0 million Revolving Facility included outstanding principal of $42.0 million, outstanding letters of credit of $11.3 million, and unused availability of $31.7 million. We paid down $16.0 million in the first quarter of 2006. We may terminate the Revolving Facility prior to maturity, provided we pay a premium of 2.0% of the revolver amount if terminated during the first 12 months of the Revolving Facility term, a premium of 0.5% of the revolver amount if terminated during the 12 months thereafter, and no premium during the remainder of the term.

The Revolving Facility contains affirmative covenants, negative covenants, and financial covenants. The negative covenants place restrictions on, among other things, levels of investments, indebtedness, and dividend payments that we may make or incur. The financial covenants, which apply only if we maintain qualified cash and availability of less than $35.0 million, require the maintenance of certain financial measures at defined levels. Under the Revolving Facility, borrowings bear interest determined by a base LIBOR rate

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of one to six months plus an additional 2.75% to 3.25%, determined by certain financial measures, with a minimum interest rate at all times of 5.25%. As of March 31, 2006, the Revolving Facility bears weighted average interest at 7.63% based on the one-month and six-month LIBOR set in March 2006. As of March 31, 2006, the one-month LIBOR was 4.83%, the six-month LIBOR was 5.14%, and the additional interest spread above LIBOR was 2.75%, lowered from 3.00% during the three months ended March 31, 2006 due to our achievement of certain financial measures. Interest is payable at varying dates, as outlined in the Revolving Facility agreement, generally every one to three months. Unused commitments on the Revolving Facility are subject to a 0.5% annual commitment fee. The Revolving Facility is secured by substantially all of our domestic properties and assets. The carrying amount of our obligations under the Revolving Facility approximate fair value because the interest rates are based on floating interest rates identified by reference to market rates.

Subordinated Notes

In February 2004, we issued $200.0 million of Series A Subordinated Notes (Subordinated Notes). The proceeds were used to fund the CWA asset acquisition and related operational, working capital, and capital expenditure requirements. Debt issuance costs associated with the Subordinated Notes were $2.0 million, consisting of fees to the purchasers of the Subordinated Notes, and were capitalized in other current and other non-current assets in our condensed consolidated balance sheets and are being amortized to interest expense using the effective interest method until maturity. The Subordinated Notes accrued interest based on a 365-day year at a rate of 12.5% per annum until February 3, 2005 and 15% per annum thereafter, payable semi-annually on June 30 and December 31 through the issuance of additional Subordinated Notes equal to the accrued interest payable at the time of settlement. Prior to January 29, 2008, we may redeem the Subordinated Notes, in whole but not in part, at a redemption price equal to 100% of the principal amount, plus accrued and unpaid interest, plus a make-whole premium. The make-whole premium is equal to all remaining interest to be paid on the Subordinated Notes from the date of the redemption notice through January 30, 2008 discounted semi-annually at a rate equal to the treasury rate plus 0.5%, plus 1% of the principal amount of the Subordinated Notes. After January 30, 2008, we may redeem the Subordinated Notes, in whole but not in part, at a redemption price equal to 101% of the principal amount plus all accrued and unpaid interest. Upon a change of control, the holders of the Subordinated Notes have the right to require us to redeem any or all of the Subordinated Notes at a cash price equal to 100% of the principal amount of the Subordinated Notes, plus all accrued and unpaid interest as of the effective date of such change in control. The Subordinated Notes mature in a single installment on January 30, 2009. The outstanding principal and interest-to-date of the Subordinated Notes, excluding the original issue discount, was $266.7 million as of March 31, 2006 and $257.1 million as of December 31, 2005.

Warrants exercisable for Series B Convertible Preferred Stock (Series B Preferred) were issued with the Subordinated Notes. The $200.0 million in proceeds from issuance were allocated between the Subordinated Notes and the warrants for Series B Preferred, based on their relative fair values, resulting in an original issue discount of $65.9 million. The allocated value of the Subordinated Notes at date of issuance, plus accrued interest on the face value and accreted interest on the original issue discount, are reflected as long-term debt in our condensed consolidated balance sheets. The fair value of the Series B Preferred was determined with the assistance of an independent third-party valuation firm, and the allocated fair value is reflected in additional paid-in capital in stockholders’ equity (deficit) in our consolidated balance sheet. The purchasers of the Subordinated Notes exercised the warrants and the Series B Preferred were converted into common stock in December 2004. The Series B Preferred was retired by our Board of Directors in December 2005.

Debt Covenants

The provisions of our Revolving Facility and Subordinated Notes contain a number of covenants including, but not limited to, restricting or limiting our ability to incur more debt, pay dividends and repurchase stock (subject to financial measures and other conditions). The ability to comply with these provisions may be affected by events beyond our control. The breach of any of these covenants could result in a default under our debt agreements and could trigger acceleration of repayment. As of and during the three months ended March 31, 2006 and the year ended December 31, 2005, we were in compliance with all covenants under the Revolving Facility and Subordinated Notes, as applicable.

Future Principal Payments

As of March 31, 2006, aggregate future principal payments of long-term debt were zero in 2006 and 2007, $42.0 million in 2008, and $401.9 million in 2009, consisting of $200.0 million in principal and $201.9 million of accrued non-cash interest, with no payments due thereafter. The weighted average interest rate applicable to our outstanding borrowings under the Revolving Facility and Subordinated Notes was 14.00% as of March 31, 2006 and 13.53% as of December 31, 2005.

Commitments and Contingencies

Our customer contracts generally span multiple periods, which result in us entering into arrangements with various suppliers of communications services that require us to maintain minimum spending levels, some of which increase over time, to secure favorable pricing terms. Our remaining aggregate minimum spending levels, allocated ratably over the terms of such contracts, are $67.0 million

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in year 2006; $27.7 million in year 2007; $7.5 million in year 2008; and $89.5 million thereafter. Should we not meet the minimum spending levels in any given term, decreasing termination liabilities representing a percentage of the remaining contracted amount may become immediately due and payable. Furthermore, certain of these termination liabilities are subject to reduction should we experience the loss of a major customer or suffer a loss of revenue from a general economic downturn. Before considering the effects of any potential reductions for the business downturn provisions, if we had terminated all of these agreements as of March 31, 2006, the maximum liability would have been $82.5 million.

We are subject to various legal proceedings and other actions arising in the normal course of business. While the results of such proceedings and actions cannot be predicted, we believe, based on facts known to us today, that the ultimate outcome of such proceedings and actions will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

We have employment agreements with key executive officers that contain provisions with regard to base salary, bonus, stock-based compensation, and other employee benefits. These agreements also provide for severance benefits in the event of employment termination or a change in control.

Off-Balance Sheet Arrangements

In the normal course of business, we are a party to certain guarantees and financial instruments with off-balance sheet risk, such as letters of credit, indemnifications and operating leases, which are not reflected in our consolidated balance sheets. The agreements associated with such guarantees and financial instruments mature at various dates through July 2017 and may be renewed as circumstances warrant. As of March 31, 2006, we had $11.3 million in letters of credit pledged as collateral to support various property and equipment leases and utilities. In addition, certain of the operating leases assumed by us in the CWA asset acquisition were collateralized by Cable & Wireless plc with letters of credit and guarantees. Such collateral remained in place following the acquisition and we agreed to reimburse Cable & Wireless plc for any payments made under the collateral. Such collateral totals $15.1 million and will be replaced by us on or before July 2007. Our financial instruments are valued based on the amount of exposure under the instruments and the likelihood of performance being required. In our past experience, no claims have been made against these financial instruments nor do we expect the exposure to material losses resulting there from to be anything other than remote. As a result, we determined such financial instruments did not have significant value and have not recorded any related amounts in our condensed consolidated financial statements.

CRITICAL ACCOUNTING POLICIES

Share-Based Payments

As of March 31, 2006, we had two share-based compensation plans – the 2003 Plan and the 1999 Stock Option Plan (the 1999 Plan), collectively referred to herein as the Plans. The 2003 Plan provides for the grant of stock options, stock appreciation rights, restricted stock, unrestricted stock, stock units, dividend equivalent rights and cash awards while the 1999 Plan provides only for the grant of stock options. Any of these awards may be granted as performance incentives to reward attainment of annual or long-term performance goals. The Plans have 86.0 million shares authorized for grants of options or other share-based instruments. Stock options are generally granted with contractual terms of 10 years and graded vesting over four years. Restricted stock awards granted, which have been awarded only to non-employee directors, vest over three years. Restricted stock units granted to certain employees have included performance features, with vesting expected over periods ranging from three to four years.

We recognize compensation expense over the vesting period for share-based awards. Under the Plans, we recognized total non-cash stock-based compensation costs of $1.8 million and $0.1 million for unvested, outstanding stock options, restricted stock and restricted stock units during the three months ended March 31, 2006 and 2005, respectively. The majority of these amounts were reflected in selling, general and administrative expenses in our condensed consolidated statements of operations, with the remainder included in cost of revenue. As of March 31, 2006, we had $ 17.7 million of unrecognized compensation cost related to share-based compensation that is expected to be ultimately recognized, which includes 18.4 million restricted stock units, 0.1 million shares of restricted common stock and 4.8 million stock options that have a weighted average exercise price of $ 0.75 per share. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 3.0 years.

Prior to January 1, 2006, we accounted for share-based awards under those plans using the recognition and measurement provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, as permitted by SFAS 123, “Accounting for Stock-Based Compensation.” As such, we only recognized compensation cost for share-based awards to the extent such awards were issued with an exercise price below the fair market value of our common stock on the date of grant. Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS 123(R), “Share-Based Payment,” using the modified-prospective-transition method. Under such method, compensation cost recognized in the accompanying condensed consolidated statement of operations for the three months ended March 31, 2006

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includes a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). Results for prior periods have not been restated for the adoption of SFAS 123(R).

As a result of adopting SFAS 123(R) on January 1, 2006, our net loss for the three months ended March 31, 2006 was $0.1 million lower than if we had continued to account for share-based awards under APB 25 and follow the disclosure provisions only of SFAS 123. Basic and diluted loss per common share would not have changed. Prior to and after the adoption of SFAS 123(R), we have not realized the tax benefits of deductions resulting from the exercise of share-based awards due to our history of net operating losses.

In addition, in December 2005, prior to the adoption of SFAS 123(R), the compensation committee of our board of directors approved the acceleration of vesting of certain unvested and “out-of-the-money” stock options with exercise prices equal to or greater than $0.75 per share previously awarded to employees, including certain executive officers and non-employee directors, under our equity compensation plans. The acceleration of vesting was effective for stock options outstanding as of December 13, 2005. Options to purchase approximately 21.1 million shares of common stock, including approximately 5.5 million options held by executive officers and approximately 0.2 million options held by non-employee directors, were subject to the acceleration, which resulted in 92% of our outstanding options being vested. The purpose of the acceleration was to enable us to minimize the amount of compensation expense recognized in association with these options in our consolidated statements of operations upon adoption of SFAS 123(R). We believe that the aggregate future expense that was eliminated as a result of the acceleration of the vesting of these options was approximately $11.2 million. We also believed that because the options that were accelerated had exercise prices in excess of the market value of our common stock on the date of acceleration, the options had limited economic value and were not fully achieving their original objective of incentive compensation and employee retention.

Other Critical Accounting Policies

While all of the significant accounting policies described in the notes to the consolidated financial statements contained elsewhere herein are important, some of these policies may be viewed as being critical. Such policies are those that are most important to the portrayal of our financial condition and require our most difficult, subjective or complex estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of our consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates and assumptions on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ from these estimates and assumptions. For further information regarding the application of these and other accounting policies, see Note 2 of Notes to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report and Part II, Item 7 of the 2005 Form 10-K.

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FACTORS THAT MAY AFFECT FUTURE RESULTS AND THE TRADING PRICE OF OUR COMMON STOCK

Risks Related to Our Business

A material reduction in revenue from our largest customer, who represented 15% of our revenues in 2005 and 13% of our revenues in the first quarter of 2006, could harm our financial results to the extent not offset by cost reductions or new customers.

Together, Reuters and Telerate, which was acquired by Reuters in 2005, accounted for $100.5 million, or 15%, of our revenue in 2005 compared to $122.0 million, or 20%, of our revenue in 2004, and $22.8 million, or 13%, of our revenue for the first quarter of 2006 compared to $25.7 million, or 16%, of our revenue in the first quarter of 2005. This reduction was primarily due to reduced pricing for certain of our services and the elimination of minimum revenue commitments based on the terms of a new three-year Master Services Agreement with Reuters that we entered into in May 2005. Under the new agreement, Reuters no longer has any obligation to purchase a minimum amount of our services. In addition, Reuters, which now owns Telerate, may reduce the services that we provide under our contract with Telerate. Accordingly, there are no assurances that Reuters will continue to buy services from our company. Furthermore, given Reuters’ acquisition of Telerate, we anticipate that Reuters will continue to drive synergies in its operations, including the costs it pays to purchase products and services, which may result in a decline in the level of services it purchases from us. The loss of this customer or a significant group of our other customers, or a considerable reduction in the amount of our services that Reuters purchases or a significant group of our customers purchase, could materially reduce our revenues which, to the extent not offset by cost reductions or new customer additions, could materially reduce our cash flows and financial position. This may limit our ability to raise capital or fund our operations, working capital needs and capital expenditures in the future.

We expect to continue to incur net losses .

We incurred a net loss of $12.4 million for the three months ended March 31, 2006, $69.1 million in fiscal year 2005, $148.8 million in fiscal year 2004, and $94.0 million in fiscal year 2003. We had positive cash flows from operating activities of $18.9 million for the three months ended March 31, 2006, $62.9 million in fiscal year 2005, and negative cash flows from operations of $26.8 million in fiscal year 2004 and $0.3 million in fiscal year 2003. We expect to continue to incur net losses at least through 2008.

Our revenues and operating results are affected by a number of factors including the following:

Accordingly, we believe that period-to-period comparisons of our results of operations should not be relied upon as indications of future performance. In addition, these factors may affect our long-term viability.

We have experienced revenue losses from reductions in services by customers, price reductions on services and customer turnover in the past and may continue to do so in the future. If we continue to experience such revenue loss without a corresponding growth in new customers or services, our revenues would decrease .

Revenue loss occurs for several reasons, such as individual site reductions in customer networks, price reductions, voluntary termination by customers who choose to switch to a competing service and termination for nonpayment of bills or abuse of the network. While our experience in fiscal year 2005 and the three months ended March 31, 2006, has been of market pricing stabilizing in some of the services we offer and in some cases increasing, we have experienced revenue loss in the past and, as our customer base grows, these revenue losses may recur. If, in the future, we were to lose a large number of customers without signing contracts with new customers, our revenues would decrease.

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Our brand is not as well known as some of our competitors. Failure to develop brand recognition could hurt our ability to compete effectively.

We need to strengthen our brand awareness to realize our strategic and financial objectives. Many of our competitors have well-established brands associated with the provision of data networking, Internet access, hosting services, and digital content services, and significantly larger budgets for brand promotion than we do. The promotion and enhancement of our brand also will depend in part on our success in continuing to provide high quality services. We cannot guarantee that we will be able to maintain or achieve these levels of quality.

Our failure to meet performance standards under our service level agreements could result in our customers terminating their relationship with us or our customers being entitled to receive service credits which could lead to reduced revenues .

We have service level agreements with substantially all of our customers in which we provide various guarantees regarding our levels of service. As a result, service interruptions could result in difficulty maintaining service level commitments required by these agreements. If we fail to provide the levels of service required by these agreements, our customers may be able to receive service credits for their accounts, as well as terminate their relationship with us. In addition, any inability to meet our service level commitments could reduce the confidence of our customers and could consequently impair our ability to obtain and retain customers, which would adversely affect both our ability to generate revenues and our operating results.

We depend on a number of third party providers, and the loss of or problems with one or more of these providers may impede our growth or cause us to lose customers .

We are dependent on third party providers to supply bandwidth capacity leased from telecommunications network providers in the quantities and quality we require. While we have entered into various agreements for carrier line capacity, any failure to obtain additional capacity, if required, would impede the growth of our business and cause our financial results to suffer. In addition, our customers that use the services of these telecommunication providers may in the future experience difficulties due to system failures unrelated to our systems. If, for any reason, these providers fail to provide the required services to our customers, our customers may lose confidence in our company, and we may not be able to retain these customers.

If we are unable to provide satisfactory and high quality customer services, customer satisfaction and demand for our services will suffer .

We believe that building strong relationships with our customers, as well as future growth in our sales, depends on our ability to provide our customers with customer support, training, consulting and maintenance when necessary. We have an in-house technical infrastructure group, customer service group and field solutions group that are responsible for the delivery of services to our customers. If we are unable to provide customers with satisfactory and quality customer support, training, consulting, maintenance and other services, we could face customer dissatisfaction, damage to our reputation, decreased overall demand for our services and loss of revenue.

We may not be able to secure additional financing on favorable terms, or at all, to meet our future capital needs .

If we do not have sufficient cash flow from our operations, we may need to raise additional funds through equity or debt financings in order to meet our operating and capital needs. We may not be able to secure additional debt or equity financing on favorable terms, or at all, at the time when we need such funding. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our common stock. In addition, any debt financing that we may secure in the future could have restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, if we decide to raise funds through debt or convertible debt financings, we may be unable to meet our interest or principal payments.

Our significant indebtedness could limit our ability to operate our business successfully .

We are highly leveraged. As of March 31, 2006, the total principal amount of our debt, including capital lease obligations, was $335.5 million. We expect our interest expense to be approximately $67 million and $74 million in 2006 and 2007, respectively, under our current financing. In order to finance our acquisition of the assets of CWA and to provide ongoing funding to its operations and capital expenditures, we issued $200.0 million in Series A Subordinated Notes in February 2004 that accrued interest at the rate of 12.5% per annum until February 3, 2005, and thereafter at 15% per annum. Interest accrues on a non-cash basis and is payable semi-annually in additional Series A Subordinated Notes. The notes are due on January 30, 2009. Our senior credit facility and capital lease obligations require monthly and quarterly cash payments for interest. Our senior credit facility matures in 2008 and our capital lease obligations have a maturity of three to thirteen years. Our level of indebtedness increases the possibility that we may not generate cash sufficient to

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pay, when due, the outstanding amount of our indebtedness. If we do not have sufficient cash available to repay our debt obligations when they mature, we will have to refinance such obligations, and there can be no assurance that we will be successful in such refinancing or that the terms of any refinancing will be acceptable to us. The amount of our debt also means that we will need to dedicate a substantial portion of our cash flow from operations to the payment of our indebtedness, reducing the funds available for operations, working capital, capital expenditures, acquisitions, and general corporate or other purposes. Through fiscal 2008, a substantial portion of our debt and interest costs are non-cash pay but payment will become due beginning in 2009 and will total approximately $401.9 million. Our cash debt service obligation for our existing debt as of March 31, 2006, is approximately $10 million and $15 million in 2006 and 2007, respectively.

We may make acquisitions or enter into joint ventures or strategic alliances, each of which is accompanied by inherent risks .

If appropriate opportunities present themselves, we may make acquisitions or investments or enter into joint ventures or strategic alliances with other companies. Risks commonly encountered in such transactions include:

As a result of these potential problems and risks, businesses that we may acquire or invest in may not produce the revenue, earnings, or business synergies that we anticipated. In addition, we cannot assure you that any potential transaction will be successfully identified and completed or that, if completed, the acquired businesses or investment will generate sufficient revenue to offset the associated costs or other potential harmful effects on our business.

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Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could harm our operating results .

Section 404 requires that we annually furnish an internal controls report of our management’s assessment of the effectiveness of our internal controls over financial reporting, and our auditors are required to attest to, and report on, our assessment. In addition, effective internal controls are necessary for us to provide reliable and accurate financial reports and effectively prevent fraud. Although we received an unqualified opinion regarding the effectiveness of our internal controls over financial reporting as of December 31, 2005, in the course of our ongoing evaluation of our internal controls over financing reporting, we have identified certain areas which we would like to improve and are in the process of evaluating and designing enhanced processes and controls to address these areas identified during our evaluation, none of which we believe constitutes or will constitute a material change. However, we cannot be certain that our efforts will be effective or sufficient for us, or our independent registered public accounting firm, to issue unqualified reports in the future, especially as our business continues to grow and evolve. Any failure to implement required new or improved controls, or difficulties encountered in their implementation or operation, could harm our operating results or cause management to be unable to report that our internal controls over financial reporting are effective.

We may be liable for the material that content providers distribute over our network.

The law relating to the liability of private network operators for information carried on or disseminated through their networks is still unsettled. We may become subject to legal claims relating to the content disseminated on our network. For example, lawsuits may be brought against us claiming that material on our network on which one of our customers relied was inaccurate. Claims could also involve matters such as defamation, invasion of privacy and copyright infringement. In addition, there are other issues such as online gambling where the legal issues remain unclear. Content providers operating private networks have been sued in the past, sometimes successfully, based on the content of material. If we need to take costly measures to reduce our exposure to these risks, or are required to defend ourselves against such claims, our financial results could be negatively affected.

Failures in our network, including any breach of security, could disrupt our ability to provide our services, increase our capital costs, result in a loss of customers or otherwise negatively affect our business.

Our ability to implement our business plan successfully depends upon our ability to provide high quality, reliable services. Interruptions in our ability to provide our services to our customers, through the occurrence of a natural disaster or other unanticipated problem, could adversely affect our business and reputation. For example, problems at one or more of our data center facilities could result in service interruptions or significant equipment damage. In addition, our network could be subject to unauthorized access, computer viruses, and other disruptive problems caused by customers, employees, or others. Unauthorized access, computer viruses or other disruptive problems could lead to interruptions, delays or cessation of service to our customers. Unauthorized access could also potentially jeopardize the security of confidential information of our customers or our customers’ end-users, which might expose us to liability from customers and the government agencies that regulate us as well as also deter potential customers from purchasing our services. We may be unable to implement disaster recovery or security measures in a timely manner or, if and when implemented, these measures may not be sufficient or could be circumvented through the reoccurrence of a natural disaster or other unanticipated problem, or as a result of accidental or intentional actions. Resolving network failures or alleviating security problems may also require interruptions, delays or cessation of service to our customers. Accordingly, problems at our data centers, network interruptions or breaches of security on our network may result in liability, a loss of customers and damage to our reputation.

Increased energy costs and power outages may adversely affect our operating results .

Our data centers are susceptible to regional costs of power and electrical power outages. We attempt to limit exposure to system downtime by using backup generators and power supplies. However, we may not be able to limit our exposure entirely even with these protections in place. In addition, we may not always be able to pass on the increased costs of energy on to our customers, which could harm our business.

Our failure to successfully implement our growth strategy could harm our business.

Our growth strategy depends on our ability to identify, hire, train and retain IT professionals, technical engineers, operations employees, sales and senior management personnel who maintain relationships with our customers and who can provide the technical, strategic and marketing skills required for our company to grow. There is a shortage of qualified personnel in these fields, and we compete with other companies for the limited pool of these personnel. Furthermore, our growth strategy includes expanding our colocation business. Increasing our colocation business depends on our ability to either raise prices to existing customers or lease or acquire facilities in the desired markets where there is a demand for these services on commercially reasonable terms. There is no assurance that we will be able to recruit or retain qualified personnel or that we will be able to lease or acquire facilities in growth markets on commercially reasonable terms, and this failure to implement our growth strategy could cause our operations and financial results to be negatively impacted.

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We may not be able to protect our intellectual property rights .

We rely upon a combination of internal and external nondisclosure safeguards including confidentiality agreements as well as trade secret laws to protect our proprietary rights. We cannot however assure you that the steps taken by us in this regard will be adequate to deter misappropriation of proprietary information or that we will be able to detect unauthorized use and take appropriate steps to enforce our intellectual property rights. We also are subject to the risk of litigation alleging infringement of third-party intellectual property rights. Any such claims could require us to spend significant sums in litigation, pay damages, develop non-infringing intellectual property, or acquire licenses to the intellectual property that is the subject of the alleged infringement.

Difficulties presented by international economic, political, legal, accounting and business factors could harm our business in international markets .

In 2005, 18% of our total revenue was generated in countries outside of the United States. Some risks inherent in conducting business internationally include:

Any one or more of these factors could adversely affect our business.

Risks Related to Our Industry

The markets for our network, hosting, digital content services, industry solutions, and professional services are highly competitive, and we may not be able to compete effectively .

The markets for our network, hosting, digital content services, industry solutions, and professional services are extremely competitive, and there are few significant barriers to entry. We expect that competition will intensify in the future, and we may not have the financial resources, technical expertise, sales and marketing abilities or support capabilities to compete successfully in these markets. Many of our current and potential competitors have longer operating histories, greater name recognition, access to larger customer bases and greater market presence, engineering and marketing capabilities and financial, technological and personnel resources than we do. As a result, as compared to us, our competitors may:

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We may have to compete with an increased number of competitors .

We expect that new competitors will enter the data networking, Internet access and hosting markets. Such new competitors could include computer hardware, software, media and other technology and telecommunications companies, as well as satellite and cable companies. A number of telecommunications companies and online service providers currently offer, or have announced plans to offer or expand, their data networking services. Further, the ability of some of these potential competitors to bundle other services and products with their data networking services could place us at a competitive disadvantage. Various companies are also exploring the possibility of providing, or are currently providing, high-speed data services using alternative delivery methods, including the cable television infrastructure, direct broadcast satellites, all optical networks, gigabit ethernet, wireless cable and wireless local access. In addition, Internet backbone providers may benefit from technological developments, such as improved router technology that will enhance the quality of their services. Because we purchase telecommunications services from local competitors, this may result in decreased local competition and increased our costs for local telecommunications services and thus increase prices to our customers.

Our failure to achieve desired price levels could impact our ability to achieve profitability or positive cash flow.

We have experienced and expect to continue to experience pricing pressure for some of the services that we offer. Prices for voice, wireless, and Internet services have decreased in recent years, and we expect significant price declines in the future. In addition, by bundling their services and reducing the overall cost of their services, telecommunications companies that compete with us may be able to provide customers with reduced communications costs in connection with their data networking, Internet access or hosting services, thereby significantly increasing pricing pressure on us. We may not be able to offset the effects of any such price reductions even with an increase in the number of our customers, higher revenues from enhanced services, cost reductions or otherwise. In addition, we believe that the data networking and VPNs and Internet access and hosting industries are likely to continue to encounter consolidation which could result in greater efficiencies in the future. Increased price competition or consolidation in these markets could result in erosion of our revenues and operating margins and could prevent us from becoming profitable. Furthermore, in recent months, these larger consolidated telecommunication providers have indicated that they want to start charging companies delivering services over the Internet for access to connected customers. If these providers are able to charge Internet companies for this, our costs will increase, and this could impact our ability to be profitable.

Consolidation in the telecommunications industry may impede our ability to compete effectively .

Recently, several telecommunication companies completed mergers with other telecommunication companies, including the mergers of SBC Communications Inc. with AT&T Corp. and Verizon Communications, Inc. with MCI, Inc. This consolidation in the telecommunications industry results in fewer companies competing in this market, changing the nature of the market and possibly causing us to pay higher prices for the services that we receive from these companies, which may impede our ability to compete effectively.

Our operations could be adversely affected if we are unable to maintain peering arrangements with Internet Service Providers on favorable terms .

We enter into peering agreements with Internet Service Providers that allow us to access the Internet and exchange traffic with these providers. Previously, many providers agreed to exchange traffic without charging each other. Recently, however, many providers that previously offered peering have reduced peering relationships or are seeking to impose charges for transit. Increases in costs associated with Internet and exchange traffic could have an adverse effect on our business. If we are not able to maintain our peering relationships on favorable terms, we may not be able to provide our customers with affordable services, which would adversely affect our results from operations.

New technologies could displace our services or render them obsolete .

New technologies or industry standards have the potential to replace or provide lower cost alternatives to our Internet access services, data networking and hosting services. The adoption of such new technologies or industry standards could render these services obsolete or unmarketable. For example, these services rely on the continued widespread commercial use of the set of protocols, services and applications for linking computers known as Internet protocol. Alternative sets of protocols, services and applications for linking computers could emerge and become widely adopted. For example, improvements in Internet protocol to allow for the assignment of priorities to data packets in order to ensure their delivery in the manner customers prefer would eliminate one advantage of the Asynchronous Transfer Mode (ATM) architecture of our network. In addition, improvements in heating and cooling technology could render our data centers obsolete. We cannot guarantee that we will be able to identify new service opportunities successfully and develop and bring new products and services to market in a timely and cost-effective manner, or that products software and services or technologies developed by others will not render our current and future services non-competitive or obsolete. In addition, we cannot guarantee that our current and future services will achieve or sustain market acceptance or be able to address effectively the compatibility and interoperability issues raised by technological changes or new industry standards. If we fail to anticipate the emergence of, or obtain access to a new technology or industry standard, we may incur increased costs if we seek to use those technologies and standards, or our competitors that use such technologies and standards may use them more cost-effectively than we do.

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The data networking and Internet access industries are highly regulated in many of the countries in which we plan to provide services, which could restrict our ability to conduct business in the United States and internationally .

We are subject to varying degrees of regulation in each of the jurisdictions in which we provide services. Local laws and regulations, and their interpretation and enforcement, differ significantly among those jurisdictions. Future regulatory, judicial and legislative changes may have a material adverse effect on our ability to deliver services within various jurisdictions. For example, the EU will enact a data retention scheme that will include certain IP data that could have an impact on our operations in Europe. Moreover, national regulatory frameworks that are consistent with the policies and requirements of the World Trade Organization have only recently been, or are still being put in place in many countries. Accordingly, many countries are still in the early stages of providing for and adapting to a liberalized telecommunications market. As a result, in these markets we may encounter more protracted and difficult procedures to obtain licenses and negotiate interconnection agreements.

Within the United States, the U.S. government continues to evaluate the data networking and Internet access industries. The FCC has a number of on-going proceedings that could impact our ability to provide services. For example, the FCC has determined that the Communications Assistance for Law Enforcement Act applies to broadband access providers and interconnected VoIP, and the FCC has also issued a policy statement on “net neutrality” principles that it believes should govern the Internet. Such regulations and policies may complicate our efforts to provide services in the future. Our operations are dependent on licenses and authorizations from governmental authorities in most of the foreign jurisdictions in which we operate or plan to operate and, with respect to a limited number of our services, in the United States. These licenses and authorizations generally will contain clauses pursuant to which we may be fined or our license may be revoked on short notice. Consequently, we may not be able to obtain or retain the licenses necessary for our operations.

Risks Related to Our Common Stock

We are controlled by parties whose interests may not be aligned with yours .

Investment partnerships sponsored by Welsh, Carson, Anderson & Stowe (Welsh Carson) own approximately 57% of our outstanding voting stock as of March 31, 2006. In addition, these investment partnerships currently have the right to appoint half of the members of our Board of Directors pursuant to an Investors Rights Agreement among us and certain of our stockholders. During 2002, we issued $133.3 million of our 11.5% Series A convertible preferred stock (Series A Preferred) to investment partnerships sponsored by and individuals affiliated with Welsh Carson. The Series A Preferred accrues dividends at the rate of 11.5% per annum on the outstanding accreted value thereof and these accrued but unpaid dividends are added to the outstanding accreted value quarterly. The Series A Preferred is convertible into such number of our common stock equal to the outstanding accreted value divided by the conversion price of $0.75, and votes with our common stock on an as-converted basis. As of March 31, 2006, the accreted value of Series A Preferred held by Welsh Carson was $219.0 million, which was convertible into approximately 292.0 million shares of common stock. As of March 31, 2006, including outstanding common stock of approximately 54.8 million, investment partnerships sponsored by Welsh Carson had outstanding voting stock representing a total of approximately $346.8 million votes. In 2004, in order to fund our acquisition of the CWA net assets, we issued $200.0 million of our Series A Subordinated Notes. As of March 31, 2006, investment partnerships sponsored by Welsh Carson held approximately $154.6 million of these notes. Both the Series A Subordinated Notes and Series A Preferred contain provisions relating to a change of control of our Company. These factors, among others, could result in decisions concerning our operations or financial structure that may present conflicts of interest between Welsh Carson and its affiliates and our other common stockholders.

Holders of our common stock will continue to suffer significant dilution so long as our Series A Preferred Stock remains outstanding .

In 2002, as part of our recapitalization, we issued $203.1 million of Series A Preferred. The Series A Preferred accrues dividends at the rate of 11.5% annum on the outstanding accreted value thereof, and these accrued but unpaid dividends are added to the outstanding accreted value quarterly. The Series A Preferred is convertible into such number of our common stock equal to the outstanding accreted value divided by the conversion price of $0.75, and votes with our common stock on an as-converted basis. As of March 31, 2006, the accreted value of all Series A Preferred was $317.0 million, which is convertible into approximately 422.7 million shares of common stock.

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There may not be an active, liquid market for our common stock .

There is no guarantee that an active trading market for our common stock will be maintained on the Nasdaq Capital Market. The Nasdaq Stock Market (Nasdaq) may delist our stock from the Nasdaq Capital Market if we fail to meet its listing requirements, such as the requirement to maintain a minimum bid price of $1.00 or more. On October 3, 2005, we received a notice from the Listing Qualifications division of Nasdaq indicating that our common stock was subject to potential delisting from the Nasdaq Capital Market because our common stock closed under $1.00 for thirty consecutive days. We received a letter from Nasdaq on March 28, 2006, indicating that the Company had regained compliance with the Nasdaq Capital Market listing criteria. However, if trading in our stock is not active, Nasdaq may delist our stock and investors may not be able to sell their shares quickly or at the latest market price.

We may effect a reverse stock split to avoid our common stock being delisted from the Nasdaq Capital Market .

We may effect a reverse stock split in order to avoid being delisted from the Nasdaq Capital Market. However, while we expect that the resulting reduction in our outstanding shares of common stock will increase the market price of our common stock, we cannot assure you that the reverse stock split will increase the market price of our common stock by a multiple equal to the number of pre-split shares in the reverse split ratio, or result in any permanent increase in the market price. In some cases the stock price of companies that have effected reverse stock splits has subsequently declined back to pre-reverse split levels. A reverse stock split is often viewed negatively by the market and, consequently, could lead to a decrease in our overall market capitalization.

Sales of a significant amount of our common stock in the public market could reduce our stock price and impair our ability to raise funds in new stock offerings .

We have approximately 191.0 million shares of common stock outstanding as of April 20, 2006. In addition, as of March 15, 2006, we have approximately 422.7 million common shares issuable pursuant to the conversion of our Series A Preferred and approximately 6.7 million shares of common stock issuable pursuant to the exercise of outstanding warrants. The holders of our Series A Preferred and warrants are also entitled to certain registration rights. Sales of substantial amounts of shares of our common stock in the public market, or the perception that those sales will occur, could cause the market price of our common stock to decline. Those sales also might make it more difficult for us to sell equity and equity-related securities in the future at a time and at a price that we consider appropriate.

Our stock price is subject to significant volatility .

Since March 2005 until the present, the price per share of our common stock has ranged from a high of $1.92 per share to a low of $0.41 per share. Our stock price has been and may continue to be subject to significant volatility due to sales of our securities by significant shareholders and the other risks and uncertainties described in this report. The price of our common stock may also fluctuate due to conditions in the technology industry or in the financial markets generally.

Our certificate of incorporation, bylaws and Delaware law contain provisions that could discourage a takeover .

Our certificate of incorporation and Delaware law contain provisions which may make it more difficult for a third party to acquire us, including provisions that give the Board of Directors the power to issue shares of preferred stock. We have also chosen to be subject to Section 203 of the Delaware General Corporation Law, which, subject to certain exceptions, prevents a stockholder of more than 15% of a company’s voting stock from entering into business combinations set forth under Section 203 with that company.