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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x      Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended June 30, 2011

o         Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from                  to                 

Commission File Number 000-21091

FIBERTOWER CORPORATION

(Exact name of registrant as specified in its charter)

185 Berry Street

Suite 4800

San Francisco, CA 94107

(Address of principal executive offices)

(415) 659-3500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes o No x

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date: The registrant had 49,779,329 shares of its common stock outstanding as of July 29, 2011.

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FIBERTOWER CORPORATION

INDEX

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ITEM 1.   FINANCIAL STATEMENTS

FIBERTOWER CORPORATION

Condensed Consolidated Balance Sheets

(In thousands, except par value)

See accompanying notes.

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FIBERTOWER CORPORATION

Condensed Consolidated Statements of Operations

(unaudited)

(In thousands, except per share data)

See accompanying notes.

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FIBERTOWER CORPORATION

Condensed Consolidated Statements of Cash Flows

(unaudited)

(In thousands)

See accompanying notes.

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FIBERTOWER CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1—Organization and Business

Organization and operations—FiberTower Corporation (referred to as FiberTower in these financial statements) was incorporated in 1993 in the State of Delaware to build and operate a shared, high-coverage, high-capacity backhaul network for wireless operators and service providers in the United States.

We are a leading alternative provider of facilities-based backhaul services to wireless carriers. Facilities-based providers own or lease a substantial portion of the property and equipment necessary to provide backhaul services. Backhaul is the transport of voice, video and data traffic from a wireless carrier’s mobile base station, or cell site, to its mobile switching center or other exchange point where the traffic is then switched onto a wireline telecommunications network. We provide backhaul services nationally by utilizing our wireless spectrum assets and fiber relationships to construct and operate high-coverage, high-capacity hybrid microwave and fiber networks. Our services provide wireless carriers a long-term solution for their increasing demand for backhaul capacity while giving them increased availability and reliability.

We have incurred operating and net losses and negative cash flows since our inception, and we had an accumulated deficit of $697.5 million at June 30, 2011. Our business does not currently generate sufficient cash flow from operations to fund our short-term or long-term liquidity needs. As a result, we have relied primarily on the proceeds from equity and debt financings to fund our operating and investing activities, and we believe that we will be required to raise additional capital in the near future. Failure to generate sufficient revenue or obtain additional capital could have a material adverse effect on our results of operations, financial condition and cash flows.

The recoverability of assets is highly dependent on the ability of management to execute its business plan which is subject to a number of risks including, but not limited to: (1) our ability to obtain replacement contracts from our customers when their contracts expire or are terminated early, (2) dependence on key customers and suppliers, (3) potential competition from larger, more established companies, (4) the ability to develop and bring new services or products to market (including expansion of our network), (5) dependence on key employees, (6) the ability to attract and retain additional qualified personnel and (7) the ability to obtain adequate financing to support our planned growth.  Our future performance will be affected by financial, business, economic, legislative and other factors, many of which are beyond our control.

Based upon our current plans, we believe that our existing cash and cash equivalents of $12.4 million at June 30, 2011, together with the cash received in July 2011 of $5.6 million resulting from early termination charges discussed in Note 2, Basis of Presentation and Accounting Policies and Note 12, Subsequent Event, will be sufficient to cover our estimated liquidity needs until at least June 30, 2012.  However, our business is capital intensive, and we believe we will require additional amounts to fund capital expenditures and pay operating expenses in the near future. We anticipate that we will incur between $15 million and $17 million in capital expenditures during 2011.

We expect that we will be required to obtain financing through the issuance of equity or debt securities, or both, in order to repay our Notes due 2012 when they mature on November 15, 2012, as we do not expect cash flow from operations alone to be sufficient for such purpose.  We also expect that we will be required to obtain such financing to meet our other liquidity needs in the future. There can be no assurance that this additional financing will be available to us. If we do not have sufficient funds to meet our liquidity needs, we may need to reduce our operations or further delay our expansion. In addition, we may be required to sell assets, issue additional equity securities or incur additional debt, or we may need to refinance or restructure all or a portion of our indebtedness at or before maturity. We may not be able to accomplish any of these alternatives. In addition, the terms of our debt agreements may restrict us from adopting some of these alternatives.

Note 2—Basis of Presentation and Accounting Policies

Principles of consolidation and basis of presentation — The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  Operating results for the six-month period ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010.

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There have been no material changes in our significant accounting policies as of June 30, 2011 as compared to the significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2010.

Concentrations of significant customers— For the three and six months ended June 30, 2011 and 2010, the following customers accounted for a significant portion of our revenues.  The table below shows the concentration of revenue from our significant customers, both including and excluding the effect of the early termination charges received as discussed below:

Accounts receivable from these customers comprised the following percentages of our total accounts receivable balances at June 30, 2011 and December 31, 2010:

During 2011, our business has experienced significant volatility as two key customers have terminated service contracts in certain markets with us as a result of various reasons, including cost cutting efforts by customers and a shift from TDM-based T-1 circuits to Ethernet-based circuits.

During the six months ended June 30, 2011, Clearwire cancelled approximately 90% of its contracts with us.  These cancellations resulted in early termination charges which are expected to offset the loss of monthly recurring revenue from Clearwire only for the short term.   During the six months ended June 30, 2011, Clearwire terminated service at 595 billing locations, which, at the time of termination, were generating approximately $690 thousand in monthly service revenue. We recognized $3.3 million in revenue from Clearwire from the collection of early termination charges during the six months ended June 30, 2011.

During the three months ended June 30, 2011, Clearwire terminated service at 375 billing locations, which, at the time of termination, were generating approximately $434 thousand in monthly service revenue.  We recognized $1.9 million in revenue from Clearwire for the collection of early termination charges during the three months ended June 30, 2011.

During the six months ended June 30, 2011, AT&T Mobility terminated T-1 circuits across 311 billing locations which, at the time of termination, were generating approximately $595 thousand of monthly service revenue.  These terminations were partially offset by new growth.  This resulted in approximately $7.5 million of early termination charges related to service that was terminated during the six months ended June 30, 2011.  We recognized $2.1 million in revenue from AT&T Mobility for the collection of early termination charges during the six months ended June 30, 2011 related to the termination of T-1 circuits during November 2010 through April 2011.

During the three months ended June 30, 2011, AT&T Mobility terminated T-1 circuits across 257 billing locations which, at the time of termination, were generating approximately $517 thousand of monthly service revenue.  These terminations were partially offset by new growth.  This resulted in approximately $6.4 million of early termination charges related to service that was terminated during the three months ended June 30, 2011.  We recognized $1.4 million in revenue from AT&T Mobility for the collection of early termination charges during the three months ended June 30, 2011 related to the termination of T-1 circuits during March and April 2011.

As discussed in Note 12, Subsequent Event, in July 2011, we received an additional $5.6 million from AT&T Mobility from the collection of early termination charges related to the termination of T-1 circuits during March, May and June 2011.  In July 2011, AT&T Mobility terminated additional T-1 circuits across 144 billing locations which, at the time of termination, were generating approximately $304 thousand of monthly service revenues.  Together with AT&T Mobility’s early termination charges resulting from the T-1 circuits terminated in July 2011, we may receive an additional $4.1 million in early termination charges from AT&T Mobility during the third quarter of 2011.  Therefore, as revenue from customers’ early termination of their service is recognized when payment is received, we may record approximately $9.7 million as revenue from AT&T Mobility during the third quarter of 2011 for early termination charges related to the termination of T-1 circuits through July 2011.

We do not record accounts receivable related to early termination charges.

Recent accounting pronouncements — There have been no recent accounting pronouncements or changes in accounting pronouncements during the six months ended June 30, 2011, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the year ended December 31, 2010, that are of significance, or potential significance, to us.

Note 3—Property and Equipment

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

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Internal labor costs and interest were capitalized and included in construction-in-progress as follows (in thousands):

We capitalize certain costs related to software developed or obtained.  Computer software costs capitalized in the three months ended June 30, 2011 were negligible and $0.5 million were capitalized in the six months ended June 30, 2011.  Computer software costs of $0.1 million were capitalized in the three months ended June 30, 2010 and $0.3 million were capitalized in the six months ended June 30, 2010.

Assets classified as construction-in-progress are not being depreciated as they have not yet been placed in service.

See discussion in Note 5, Long-term Debt and Capital Lease regarding the network equipment under capital lease.

Note 4—Impairment of Long-Lived Assets and Other Charges

Construction of our network is a complex process involving the interaction and assembly of multiple components that result in internal labor, third party and equipment costs. We regularly assess the recoverability of costs accumulated in construction-in-progress as well as those relating to our in-service network assets.  These assessments involve significant assumptions and estimates including the remaining useful life of the assets, technology requirements of our customers, and network configurations.  Actual results may differ from these estimates and assumptions as we execute our network build-out plan and such differences may result in impairment charges in future periods. We recorded impairment charges of $3.1 million in the three months ended June 30, 2011 and $3.4 million in the six months ended June 30, 2011 related to this process.  These impairment charges were $0.9 million in the three months ended June 30, 2010 and $1.0 million in the six months ended June 30, 2010.

The impairment of long-lived assets and other charges are included in cost of service revenues in the Condensed Consolidated Statements of Operations.

Note 5—Long-term Debt and Capital Lease

The carrying value of our indebtedness, excluding our obligation under capital lease, is comprised of the following (in thousands):

9.00% Senior Secured Notes Due 2016 (“Notes due 2016”)

We issued the Notes due 2016 on December 22, 2009, in connection with our exchange offer (“Exchange Offer”) whereby certain of the Notes due 2012 were exchanged for Interim Notes, which were later redeemed for shares of our common stock, cash and the Notes due 2016.  The principal amount of the Notes due 2016 at June 30, 2011 was $120.6 million and at December 31, 2010 was $117.1 million.  The Notes due 2016 are carried at a premium to par.  This premium is amortized over the term of the Notes due 2016.  In addition, we are increasing the principal balance of the Notes due 2016 by accruing interest expense for the future issuance of notes through interest payments-in-kind.  The difference between the principal balance and the carrying value represents the premium to par.

The change in the carrying value of our Notes due 2016 for the six months ended June 30, 2011 is summarized as follows (in thousands):

We are recognizing interest expense on the Notes due 2016 at the effective interest rate (7.31%) necessary to equate future principal and interest payments to an initial carrying value of $124.3 million. The Notes due 2016 will mature in January 2016. Interest is payable at 9.00% per annum on the principal amount accruing from December 22, 2009, payable semi-annually on January 1 and July 1 of each year beginning July 1, 2010. On each interest payment date, one-third of the interest will be payable in cash and two-thirds of the interest will be payable in additional Notes due 2016 in a principal amount equal to such portion of the interest amount. When we issued the Notes due 2016, we placed into escrow approximately $11.0 million in cash, classified as restricted cash and investments in our Condensed Consolidated Balance Sheets, which, together with the earnings thereon, was an amount sufficient to pay the cash portion of the first six interest payments.  On each of January 1, 2011 and July 1, 2011, we paid the $1.8 million cash portion of the first two interest payments.

The Notes due 2016 are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis by each of our existing and future domestic restricted subsidiaries. All of our current subsidiaries are restricted subsidiaries governed by the terms of our indentures. The Notes due 2016 and the related guarantees are our senior secured obligations and rank pari passu in right of payment with all of our and the guarantors’ existing and future senior indebtedness, including our Notes due 2012. Because the liens

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on the collateral securing the Notes due 2016 rank ahead of the liens securing the Notes due 2012, the Notes due 2016 rank effectively senior in right of payment to the Notes due 2012 to the extent of the value of the collateral securing the Notes due 2016. The Notes due 2016 and the related guarantees are secured, to the extent permitted by law, by a first priority pledge (subject to permitted liens) of substantially all of our and our existing and future restricted subsidiaries’ assets (it being understood that the Communications Act of 1934 currently prohibits the grant of a security interest in an FCC license), other than certain excluded assets, and by a first priority pledge (subject to permitted liens) of the equity interests of each of our existing and future domestic restricted subsidiaries and the equity interests of any unrestricted subsidiaries or foreign subsidiaries owned by any such domestic restricted subsidiaries, in each case subject to certain limitations and exceptions. The maximum potential amount of future undiscounted payments the guarantors could be required to make under the guarantees of the Notes due 2016 is $184.6 million. This amount represents total anticipated cash payments, including expected interest payments that are not recorded on the Condensed Consolidated Balance Sheets.

The indenture governing the Notes due 2016 contains covenants that restrict our ability to (1) incur or guarantee additional indebtedness or issue certain preferred stock, (2) pay dividends or make other distributions, (3) issue capital stock of our restricted subsidiaries, (4) transfer or sell assets, including the capital stock of our restricted subsidiaries, (5) make certain investments or acquisitions, (6) grant liens on our assets, (7) incur dividend or other payment restrictions affecting our restricted subsidiaries, (8) enter into certain transactions with affiliates, and (9) merge, consolidate or transfer all or substantially all of our assets. As of June 30, 2011, we are in compliance with all of the covenants.

We may redeem the Notes due 2016 prior to January 2012 at 100% of the aggregate principal amount of the notes to be redeemed plus a make-whole premium and accrued and unpaid interest to the date of redemption. We may redeem the Notes due 2016 beginning in January 2012 at 104.5% of the aggregate principal amount of the notes to be redeemed plus accrued and unpaid interest to the date of redemption. The redemption price decreases to 102.25% in January 2014 and to 100% in January 2015. If a fundamental change, which generally includes events relating to certain changes in control of FiberTower, occurs prior to maturity, holders may require us to repurchase all or part of the Notes due 2016 for cash at a repurchase price equal to 101% of their aggregate principal amount, plus accrued and unpaid interest, up to the repurchase date. We evaluated these provisions and determined they do not represent derivatives that are required to be bifurcated from the Notes due 2016.

If an event of default on the Notes due 2016 has occurred and is continuing, the aggregate principal amount, plus any accrued and unpaid interest, may be declared immediately due and payable.

See Note 6, Fair Value Disclosures for disclosure of the fair value of our Notes due 2016.

9.00% Convertible Senior Secured Notes Due 2012 (“Notes due 2012”)

The change in the carrying value of our Notes due 2012 for the six months ended June 30, 2011 is summarized as follows (in thousands):

The Notes due 2012, which mature on November 15, 2012, are fully guaranteed, jointly and severally, by each of our subsidiaries and bear interest at a rate of 9.00% per annum, payable semi-annually in arrears on May 15 and November 15 of each year.

We elected to pay the May 15, 2010 and November 15, 2010 interest payments entirely by the issuance of additional Notes due 2012, as permitted under the related indenture. This resulted in the issuance of an additional $3.1 million in 2010 in principal amount of Notes due 2012. These additional notes are identical to the original Notes due 2012, except that interest on such additional notes began to accrue from the date they were issued. The interest rate applicable to such interest payments made in additional Notes due 2012 is 11%. Interest payments after November 15, 2010 are payable only in cash.  On May 16, 2011, we paid the $1.4 million interest payment in cash.

We will be required to repay any Notes due 2012 that are not redeemed or converted prior to maturity for 125.411% of their principal amount, or $37.7 million. We are accreting the principal premium ratably over the six-year period from inception until the Notes due 2012 mature and are recognizing such accretion as additional interest expense. The effect of this accretion is to increase the effective yield to the holders to 12% per annum based on the par value of the Notes due 2012. The effect of the accretion related to the interest payments made by the issuance of additional notes is to increase the effective yield to the holders from 12% to approximately 13% per annum.

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The Notes due 2012 and related guarantees are secured, to the extent permitted by law, by a second priority pledge of substantially all of our assets (other than certain excluded assets) and by a second priority pledge of the stock of all of our subsidiaries.  The Notes due 2012 rank pari passu in right of payment to all of our existing and future senior indebtedness and senior to all of our existing and future subordinated indebtedness. Because the liens on the collateral securing the Notes due 2016 rank ahead of the liens securing the Notes due 2012, the Notes due 2016 rank effectively senior in right of payment to the Notes due 2012 to the extent of the value of the collateral securing the Notes due 2016. The maximum potential amount of future undiscounted payments the guarantors could be required to make under the guarantees of the Notes due 2012 is $43.1 million. This amount represents total anticipated cash payments, including expected interest payments that are not recorded on the Condensed Consolidated Balance Sheets.

If our common stock has traded at or above 150% of the $62.20 per share conversion price for 20 of any 30 consecutive trading days and the daily trading volume for each such trading day, when multiplied by the closing sale price for such trading day, equals at least $8.0 million, we may redeem any of the Notes due 2012, in whole or in part, at 100% of the aggregate accreted principal amount, together with accrued and unpaid interest.

We concluded that the embedded feature of the Notes due 2012 related to the make-whole premium and the designated event make-whole premium qualified as derivatives (“Derivative”). The carrying value of the Derivative at June 30, 2011 and December 31, 2010 was zero.

See Note 6, Fair Value Disclosures for disclosure of the fair value of our Notes due 2012 and the Derivative.

Obligation under Capital Lease

In 2009, we acquired an indefeasible right of use of dark fiber under a 5-year lease which has been accounted for as a capital lease. The carrying amount of the asset is the present value of the minimum lease payments determined using our incremental borrowing rate. The carrying value of the network equipment under capital lease at June 30, 2011 and December 31, 2010 was $4.2 million as shown in Note 3, Property and Equipment.

Note 6—Fair Value Disclosures

The following table presents information about our assets measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010, and indicates the fair value hierarchy of the valuation techniques we utilized to determine such fair value (in thousands):

(1)           Includes $4.5 million of money market mutual funds which invest in U.S. Government securities.

(2)           Includes $14.5 million of money market mutual funds which invest in U.S. Government securities.

The bonds issued by U.S. government agencies included in restricted cash and investments in our Condensed Consolidated Balance Sheets are classified as held-to-maturity and are reported at amortized cost which approximates fair value at June 30, 2011.

The estimated fair value of our Notes due 2016 and Notes due 2012 as compared to their carrying value were as follows (in thousands):

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The estimate of fair value for the Notes due 2016 and Notes due 2012 was determined based on bids from market makers.

The fair value of the Derivative at June 30, 2011 and December 31, 2010 was zero. We monitor the fair value of the Derivative each reporting period and record changes in fair value through charges or credits to miscellaneous income, net with an offsetting adjustment to the carrying value of the Notes due 2012 on the balance sheet. The value of the Derivative can fluctuate based on changes in several factors including the trading price of our common stock, passage of time and other events affecting the Notes due 2012.

Note 7—Stockholders’ Equity and Stock-Based Compensation

Under the FiberTower Corporation 2010 Stock Incentive Plan and the FiberTower Corporation 2001 Stock Incentive Plan (the “2001 Stock Incentive Plan”), holders of restricted stock awards have voting rights.  Because holders of restricted stock have voting rights, such shares are considered outstanding for financial reporting purposes, but are included in net income (loss) per share computations only to the extent vested.   In addition, certain of our restricted stock awards convey dividend rights to the holder prior to vesting.  These are considered participating securities for purposes of computing net income (loss) per share.  See Note 9, Net Loss Per Share for additional information.

A summary of restricted stock award activity for the three and six months ended June 30, 2011 and 2010 is as follows:

(1)           As provided for under the terms of the 2001 Stock Incentive Plan, we awarded restricted shares to certain non-employee directors pursuant to automatic annual awards which vested on the day following the date of grant.  The weighted average grant date fair value of these awards granted during the six months ended June 30, 2011 was $3.64 per share and during the six months ended June 30, 2010 was $4.24 per share based on our common stock price at the date of the award.

(2)           The grant date fair value of the service-based awards granted during the six months ended June 30, 2011 was $1.65 per share and during the six months ended June 30, 2010 was $3.56 per share based on our common stock price at the date of the award.  These awards vest annually over a three-year period from the grant date.

(3)           The grant date fair value of the service and market-based awards were as follows:

The service and market-based awards become eligible for end-of-performance-period cliff vesting upon the price of our common stock remaining at or above the market condition price target for 20 continuous trading days at any time during the performance period.  While the service and market-based awards will become eligible for vesting upon attaining the applicable market condition price target, no eligible portion of the award will vest until the end of the three-year vesting period.

At June 30, 2011, there was approximately $6.8 million of unrecognized compensation cost related to restricted stock awards. This compensation cost is expected to be recognized over a weighted-average period of approximately 1.9 years.  The aggregate intrinsic value of the restricted stock outstanding at June 30, 2011 was $4.0 million.

During the first six months of 2011 and 2010, we did not award stock options.

A summary of stock option activity for the three and six months ended June 30, 2011 and 2010 is as follows:

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At June 30, 2011, there was approximately $0.2 million of unrecognized compensation cost related to stock options. This compensation cost is expected to be recognized over a weighted-average period of approximately nine months.

Employee and non-employee director’s stock-based compensation expense for restricted stock and stock option awards was recorded in the Condensed Consolidated Statements of Operations as follows (in thousands):

During the six months ended June 30, 2011, we reversed $0.2 million of previously recognized compensation cost related to the cancellation of unvested restricted stock awarded to sales and marketing employees whose employment terminated.  Such amounts were $0.1 million for employees whose payroll-related costs are classified as cost of service revenues and $0.1 million for general and administrative employees.

Warrants — At June 30, 2011, there were 257,000 common stock warrants outstanding with an exercise price of $72.50 per share.  Such warrants expire in December 2014.

Common Stock Reserved for Future Issuance

Shares of common stock reserved for future issuance at June 30, 2011 were as follows (in thousands):

Note 8—Income Taxes

There was a $0.1 million state tax provision recorded during the three months ended June 30, 2011.

Unrecognized tax benefits were $0.4 million at June 30, 2011, unchanged from December 31, 2010.

There is no income tax benefit from our net loss for the six months ended June 30, 2011 as we have recorded a full valuation allowance against our net deferred tax assets.

Note 9—Net Loss Per Share

Basic net loss per share is computed by dividing net loss, excluding net loss allocated to participating securities, by the weighted average number of shares outstanding less the weighted average unvested restricted shares outstanding.  Diluted net loss per share is computed by dividing net loss, excluding net loss allocated to participating securities, by the denominator for basic net loss per share and any dilutive effects of stock options, restricted stock, convertible notes and warrants.  Diluted net loss per share was the same as basic net loss per share in the three and six months ended June 30, 2011 and 2010 because we had a net loss in those periods and inclusion of potentially issuable shares would be anti-dilutive.

The following table sets forth the computation of basic and diluted net loss per share (in thousands, except per share data):

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For each of the three and six months ended June 30, 2011, 0.6 million stock options were excluded from the calculation of diluted net loss per share because their inclusion would have been anti-dilutive.  Such amounts were 0.3 million for each of the three and six months ended June 30, 2010.

In addition, during each of the three and six months ended June 30, 2011 and 2010, the calculation of diluted net loss per share excluded (1) 0.5 million shares potentially issuable if all currently outstanding Notes due 2012 were converted (see Note 5, Long-term Debt and Capital Lease for additional information) and (2) warrants outstanding to acquire 0.3 million shares.

Note 10—Related Party Transactions

During the three and six months ended June 30, 2011 and 2010, we leased co-location space from a stockholder that (1) owns approximately 5% of our outstanding common stock at June 30, 2011 and (2) has two of its affiliates who serve on our Board of Directors. The aggregate operating expenses included in the Condensed Consolidated Statements of Operations pertaining to these lease arrangements, were approximately $1.0 million for the three months ended June 30, 2011 and $2.0 million for the six months ended June 30, 2011.  Such amounts were approximately $0.9 million for the three months ended June 30, 2010 and $1.9 million for the six months ended June 30, 2010.

Note 11—Guarantees and Other Contingencies

Regulatory Matters— We are subject to significant Federal Communications Commission, or FCC, regulation, some of which is in a state of flux due to challenges to existing rules and proposals to create new rules, including but not limited to, the nation’s first National Broadband Plan (NBP), which the FCC released on March 16, 2010. The NBP contains 198 specific recommendations for the FCC, Congress, or other federal, state or local entities to consider implementing.  Many such recommendations are presently under active FCC, Congressional or Executive Branch consideration, including some directly or indirectly related to backhaul. However, it is not clear the extent to which the recommendations will be implemented. Such FCC regulations, legislation and Executive Branch policies are subject to different interpretations and inconsistent application.  They have historically given rise to disputes with other carriers and municipalities regarding the classification of traffic, rates, rights-of-way, spectrum policy, government procurement policy, backhaul platforms, Universal Service Funding for broadband, network reliability, wireless siting rights and zoning matters. Management believes that resolution of any such disputes will not have a material adverse impact on our consolidated financial position.

License Renewal— Like most other FCC licenses, the 24.25-24.45 GHz and 25.05-25.25 GHz (24GHz) and 38.6-40.0 GHz (39 GHz) wide-area licenses which we hold were granted for an initial ten-year term. All those licenses now possess renewal dates ranging from 2011 to 2021. Due to extensions granted by the FCC, the substantial majority of those 24 GHz and 39 GHz licenses also now possess a June 1, 2012 date to meet construction requirements, also known as “substantial service” requirements.

We hold two types of 39 GHz licenses which cover either rectangular service areas (“RSAs”), or economic areas (“EAs”). On October 1, 2008, the FCC released an Order governing FiberTower-held 39 GHz licenses. Our RSA 39 GHz licenses with 2007 expiration dates received either (1) ten-year renewals for licenses deemed constructed or (2) ten-year renewals contingent upon meeting construction requirements which the FCC extended until June 1, 2012. All of our RSA licenses previously scheduled to expire in 2007 that are located in our top 50 markets met the FCC’s construction standard and, consequently, were renewed for ten years along with some licenses in smaller markets that were protected due to spectrum lease or other construction activity. Our remaining 183 RSA licenses, which were scheduled to expire at various times through 2009 - 2010 and all of our 352 EA licenses

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which were to expire on October 18, 2010, are subject to this precedent and were renewed subject to both renewal application filing requirements and substantial service showings or construction extension requests. Accordingly, on October 8, 2008, the FCC extended the substantial service deadline for the 352 EA licenses to June 1, 2012. Applications to renew without condition or renew subject to meeting an extended June 1, 2012 construction deadline for: (1) 39 GHz RSA licenses expiring in 2009 and 2010; and (2) for the 352 EA licenses, have been granted. Recent applications to renew without condition or renew subject to meeting an extended June 1, 2012 construction deadline for 39 GHz RSA licenses expiring in 2011 remain pending. The licenses subject to the unconditioned renewal applications or renewal subject to June 1, 2012 construction deadline extensions or both, represent over 1.15 billion spectrum Points of Presence, or PoPs, in total.

To obtain renewal of a license, the licensee must demonstrate that, at the time of renewal, it either met a “safe harbor” build-out requirement or that it has provided substantial service as determined by the FCC. What level of service is considered “substantial” will vary depending upon the type of product offering by the licensee. The FCC has provided specific safe harbor guidance only for point-to-point offerings, where it has indicated the licensee should have constructed four links per channel per million persons in the license area. Licensees may show that they have met the substantial service test in other ways, such as providing niche services or offering service to underserved consumers. On May 25, 2010, the FCC released a Notice of Proposed Rulemaking and Order In the Matter of Amendment of Parts 1, 22, 24, 27, 74, 80, 90, 95, and 101 To Establish Uniform License Renewal, Discontinuance of Operation, and Geographic Partitioning and Spectrum Disaggregation Rules and Policies for Certain Wireless Radio Services; Imposition of a Freeze on the Filing of Competing Renewal Applications for Certain Wireless Radio Services and the Processing of Already-Filed Competing Renewal Applications (WT Docket 10-1112) seeking to establish new uniform license renewal (“Uniform License Renewal” proceeding) rules for many mobile and fixed wireless spectrum bands, including at 24 GHz and 39 GHz. The proposed rules include refinements or changes to the rules governing 24 GHz and 39 GHz spectrum renewal to largely mirror the renewal rules that govern the 700 MHz Commercial Services Band (located at 698-746, 747-762 and 777-792 MHz). These 700 MHz rules requirements include a suggested requirement for geographic-area licensees to file a “renewal showing” in which they demonstrate that they have and are continuing to provide service. The existing 24 GHz and 39 GHz renewal and substantial service requirements will govern until the Uniform License Renewal proceeding produces a final Order. We filed comments in the Uniform License Renewal proceeding on August 6, 2010 and are actively monitoring and engaging in this proceeding, which remains pending. It is not clear if the Uniform License Renewal proceeding will take months, 1-to-2 years, or longer to fully conclude.

Currently, licensees are required, prior to the expiration date of their licenses, to file renewal applications with an exhibit demonstrating compliance with the substantial service criteria. If an entity is deemed not to have provided substantial service through meeting the safe harbor build-out requirement or through other means with respect to a license for which renewal is sought, the renewal will not be granted and the license will expire.

In October 2010, the FCC extended the buildout requirement deadline for 102 of our 103, 24 GHz licenses, in response to our August 26, 2010 extension request. We are required, or expect to be required, to demonstrate substantial service by June 1, 2012 for the majority of our 39 GHz licenses, and for the 102 licenses in the 24 GHz band. We filed renewal applications for those 102 licenses in the 24 GHz band prior to their February 1, 2011 expiration date, but we expect their renewal to be conditioned upon meeting the June 1, 2012 buildout requirement. We do not currently meet the substantial service safe harbor guidance provided by the FCC for the substantial majority of our 24 GHz and 39 GHz licenses, which require renewal applications or showings mostly by June 1, 2012. We believe that our licenses will be renewed based on (1) our significant network investment, (2) spectrum offerings, (3) market leadership, (4) expanding geographic coverage and (5) the ability to convey to the FCC information about best practices for refreshing the license renewal standards through the Uniform License Renewal proceeding. This proceeding, which also addresses the spectrum bands that our mobile customers use to operate their networks, could prove to be a catalyst or an obstacle to wireless network operators, depending upon whether the license renewal standards ultimately adopted are market-oriented. However, since we are required to demonstrate substantial service at the time licenses are renewed, the FCC has little and possibly changing precedent in the 24 GHz and 39 GHz bands, and determination of substantial service is subject to FCC discretion, the FCC could choose to not renew licenses that it decides do not meet the substantial service safe harbor.

We continue to meet regularly with the FCC and are committed to present data on our significant market leadership, network investment and expanding geographic coverage to make the spectrum bands viable and able to provide substantial service at renewal and in the long term. We continue to believe that we will meet the substantial service requirements necessary for renewal at the appropriate deadlines and will continue to engage the FCC on this subject.

Other guarantees—From time to time, we enter into certain types of contracts that contingently require us to indemnify various parties against claims from third parties. These contracts primarily relate to: (1) certain real estate leases, under which we may be required to indemnify property owners for environmental and other liabilities and for other claims arising from our use of the applicable premises; (2) certain agreements with our officers, directors and employees, under which we may be required to indemnify such persons for liabilities arising out of the performance of their duties; (3) contracts under which we may be required to indemnify customers against third-party claims that a FiberTower product or service infringes a patent, copyright or other intellectual property

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right; and (4) procurement or license agreements under which we may be required to indemnify licensors or vendors for certain claims that may be brought against them arising from our acts or omissions with respect to the supplied products or technology.

Generally, a maximum obligation under these contracts is not explicitly stated. Because the obligated amounts associated with these types of agreements are not explicitly stated, the overall maximum amount of the obligation cannot be reasonably estimated. Historically, we have not been required to make payments under these obligations, and no liabilities have been recorded for these obligations in our Condensed Consolidated Balance Sheets.

In January 2011, we entered into an indefeasible right of use agreement to lease 2,500 fiber miles of dark fiber with an initial term of 20 years.  Fiber miles are measured by the length of a fiber strand multiplied by the number of fiber strands used in a fiber cable.  We are committed, beginning no later than January 2012, to lease a minimum of 500 fiber miles by the end of each twelve-month period over the first 60 months of the agreement. At the end of the initial term, we have the option to renew the lease for two successive 5-year terms. Our total future minimum lease payments under this agreement are $12.9 million.  No fiber miles have been drawn down on this agreement. Draw downs on this agreement will be accounted for as a capital lease.

Legal proceedings—We are subject to certain legal proceedings and claims in the ordinary course of business. In the opinion of management, the ultimate outcome of these matters will not have a material impact on our financial position or results of operations.

Note 12—Subsequent Event

In July 2011, we received an additional $5.6 million from AT&T Mobility from the collection of early termination charges related to the termination of T-1 circuits during March, May and June 2011.  In July 2011, AT&T Mobility terminated additional T-1 circuits across 144 billing locations which, at the time of termination, were generating approximately $304 thousand of monthly service revenues.  Together with AT&T Mobility’s early termination charges resulting from the T-1 circuits terminated in July 2011, we may receive an additional $4.1 million in early termination charges from AT&T Mobility during the third quarter of 2011.  Therefore, as revenue from customers’ early termination of their service is recognized when payment is received, we may record approximately $9.7 million as revenue from AT&T Mobility during the third quarter of 2011 for early termination charges related to the termination of T-1 circuits through July 2011.

We believe that these early terminations will have a positive impact on our cash position in 2011.

ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (“MD&A”)

FORWARD - LOOKING STATEMENTS

This report includes “forward-looking” statements, as that term is defined in the Private Securities Litigation Reform Act of 1995 or by the Securities and Exchange Commission, or SEC, in its rules, regulations and releases. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. These include statements regarding, among other things, our future financial performance and results of operations including our expected range of 2011 capital expenditures, our financial and business prospects, the deployment of our services, capital requirements, financing prospects, planned capital expenditures, expected cost per site, anticipated customer growth, expansion plans and anticipated cash balances.

There are many risks, uncertainties and other factors that can prevent the achievement of goals or cause results to differ materially from those expressed or implied by these forward-looking statements.  These include, among other things, negative cash flows and operating and net losses, additional liquidity requirements, potential loss of significant customers, downturns in the wireless communication industry, regulatory costs and restrictions, potential loss of FCC licenses, equipment supply disruptions and cost increases, competition from alternative backhaul service providers and technologies, along with those risk factors described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010 and in Part II, Item 1A of this Quarterly Report on Form 10-Q (“Risk Factors”).

Our MD&A is provided in addition to the accompanying condensed consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. Some of the statements in this MD&A are forward-looking statements as described above.  References in the MD&A to note numbers and note titles refer to those Notes to Condensed Consolidated Financial Statements included in Item 1, Financial Statements of this report.

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Overview

We are a leading alternative provider of facilities-based backhaul services to wireless carriers. Facilities-based providers own or lease a substantial portion of the property and equipment necessary to provide backhaul services. Backhaul is the transport of voice, video and data traffic from a wireless carrier’s mobile base station, or cell site, to its mobile switching center or other exchange point where the traffic is then switched onto a wireline telecommunications network. We provide backhaul services nationally by utilizing our wireless spectrum assets and fiber relationships to construct and operate high-coverage, high-capacity hybrid microwave and fiber networks. Our services provide wireless carriers a long-term solution for their increasing demand for backhaul capacity while giving them increased availability and reliability.

We compete with a range of diversified telecommunications services providers. Our competitors include (1) Incumbent and Competitive Local Exchange Carriers, or ILECs, including AT&T, Verizon, Embarq and Qwest; (2) Cable Multiple Systems Operators, including Cox, Time Warner Cable, Bright House and Comcast; (3) wireless carriers; (4) Fiber Service Providers, including Level 3 Communications, Time Warner Telecom, Zayo Broadband, DukeNet and FPL FiberNet; and (5) other fixed wireless backhaul providers, including Tower Cloud and Telecom Transport Management Inc.

As of June 30, 2011, we had 138 employees, of whom 102 were in Engineering, Market/Field Operations, and Network Operations, the payroll-related costs of which are classified as Cost of Service Revenues; 8 were in Sales and Marketing; and 28 were in General and Administrative.  On March 3, 2011, we implemented a reduction in force resulting in a reduction of approximately 10% of our employee headcount.

As of June 30, 2011:

·                  We provide services to 5,777 billing customer locations at 3,335 deployed sites in 13 markets throughout the U.S;

·                  We have master service agreements with nine U.S. wireless carriers;

·                  We have extensive relationships with fiber service providers giving us access to over 1,000 mobile switching centers, or MSCs, and 125,000 fiber-based aggregation points;

·                  We own a national spectrum portfolio of 24 GHz and 39 GHz wide-area spectrum licenses, including over 740 MHz in the top 20 U.S. metropolitan areas and, in the aggregate, approximately 1.55 billion channel pops calculated as the number of channels in a given area multiplied by the population, as measured in the 2000 census, covered by these channels. We believe our spectrum portfolio represents one of the largest and most comprehensive collections of millimeter wave spectrum in the U.S. Our licenses extend over substantially all of the continental U.S., covering areas with a total population of over 300 million; and

·                  We hold separate service agreements with Verizon Business and Qwest Communications, as their fixed wireless partner on the General Services Administration Networx contract to provide fixed wireless government-grade primary transport and physically diverse network transport services. The service agreement with Verizon Business also allows us to provide government-grade services for other Verizon Business-managed contracts.

As an important part of our business strategy, we seek to:

·                  maintain liquidity through efficient capital allocation and by balancing new site and market growth;

·                  improve financial performance while delivering consistent accelerating profitable top-line revenue growth;

·                  leverage our existing fixed cost network infrastructure and customer relationships while supporting higher standards and demand for greater bandwidth capacity;

·                  ensure we are meeting customer commitments with respect to on-time delivery and network quality;

·                  expand our sales efforts and product portfolio, including Ethernet capabilities, to improve our sales funnel and increase bookings;

·                  more fully leverage our national spectrum portfolio;

·                  expand within existing markets or add new markets based on increasing demand for backhaul services; and

·                  continue to develop additional revenue sources through new solutions that meet the needs of our customers.

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The growth of our business depends substantially on the condition of the wireless communications industry. The willingness of customers to purchase our services is affected by numerous factors, including:

·                  market demand for wireless services and the impact of next generation technology including Long-Term Evolution (LTE) traffic on the marketplace;

·                  demand for fiber-based solutions vs. wireless solutions;

·                  availability of alternative services at better prices;

·                  predictability of our deployment schedules; and

·                  quality of our services.

In order to provide backhaul services to our customers, we have constructed networks in 13 markets throughout the U.S. As we continue to expand our markets, we incur significant upfront costs for pre-development site evaluation, site leases, cost of new capital equipment and construction costs. These expenses are incurred well in advance of receiving revenues from customers.

During the second quarter of 2011, we achieved the following financial and operational milestones:

·                  Service revenues grew 27% to $23.4 million from $18.4 million in the second quarter of 2010.  Net of revenue recognized from the collection of early termination charges of $3.4 million in the second quarter of 2011 and $0.3 million in the second quarter of 2010, service revenues grew 11% over that period;

·                  Average monthly revenue per deployed site, net of the revenue from the collection of early termination charges, grew 4% to $2,003 from $1,925 in the second quarter of 2010.  We expect that the average monthly revenue per deployed site will decrease in subsequent quarters as a result of customers’ early termination of service;

·                  During the second quarter of 2011, we added 27 new deployed sites; and

·                  Adjusted EBITDA, net of the revenue recognized from the collection of early termination charges, improved to positive $1.2 million in the second quarter of 2011 from negative $1.0 million in the second quarter of 2010.  See “Results of Operations—Non-GAAP Financial Measures” below for a reconciliation of Adjusted EBITDA to net loss.

As of June 30, 2011, we had deployed 3,335 sites, of which 2,985 had at least one billing customer. A deployed site may not yet be billing for various reasons including that we have not yet sold any service at that site.

Our business plan depends on our expectation that our sites will generate revenue within the useful life of the site sufficient to fully recover our investment in property and equipment. If we are unable to generate sufficient revenues from these sites in the future, our business, financial condition and results of operations would be adversely affected. Since our inception, our operating expenses have exceeded our revenues. We have incurred net losses and negative cash flows since our inception and we expect that we will continue to incur operating and net losses and negative cash flows for the next few years. See “Liquidity and Capital Resources” below for additional information.

Service Revenues

We generate revenue by charging a monthly recurring charge based on the amount of bandwidth traffic carried across our network.  Increasing revenues on a per-deployed site basis is one of our most important objectives. Revenue per deployed site, shown later in the Performance Measures section of this MD&A, is a key operating metric reflecting our ability to scale and leverage our existing network.  The duration of our customer contracts is generally for three or five years.

Traffic grows as we construct new sites for customers, sell services to new customers at existing sites, or sell incremental bandwidth to existing customers. The average monthly revenue per deployed site increased to $2,003 in the second quarter of 2011 from $1,925 in the second quarter of 2010.  The revenue per deployed site amounts exclude $3.4 million in the second quarter of 2011 and  $0.3 million in the second quarter of 2010 recognized from the collection of early termination charges.  We intend to continue our focus on site-level margins, project return on investment, and cost reductions.

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For the three and six months ended June 30, 2011 and 2010, the following customers accounted for a significant portion of our revenues.  The table below shows the concentration of revenue from our significant customers, both including and excluding the effect of the early termination charges received as discussed below:

Accounts receivable from these customers comprised the following percentages of our total accounts receivable balances at June 30, 2011 and December 31, 2010:

During 2011, our business has experienced significant volatility as two key customers have terminated service contracts in certain markets with us as a result of various reasons, including cost cutting efforts by customers and a shift from TDM-based T-1 circuits to Ethernet-based circuits.  We are not able to predict at this time whether such customers will choose to terminate additional service contracts with us or whether other customers will choose to terminate their contracts in the future.  A significant majority of our current customer contracts provide T-1 backhaul service. These contracts generally have a five-year term, and a significant number of these contracts expire each year. As a result of increased data usage by cell phone users, we expect our customers will generally not renew this T-1 backhaul service, but will instead seek backhaul service, such as the Ethernet backhaul service that we provide, that has greater data capacity.

If we are unable to replace this lost monthly recurring revenue upon the early termination or expiration of these contracts through new sales, our business, financial condition and operating results will be harmed.  Additionally, if we were to lose Sprint Nextel or T-Mobile as a customer, or if AT&T Mobility further reduced their usage of our services, our business, financial condition and operating results would be further harmed.  In addition, if any of these customers were to encounter financial difficulties or become financially unable to pay our fees, our business could be adversely affected. If the announced merger of AT&T Mobility and T-Mobile is completed, this will result in further concentration of our customer revenues, and could also result in future cancellations of redundant services as the AT&T Mobility and T-Mobile networks are consolidated.

During the six months ended June 30, 2011, Clearwire cancelled approximately 90% of its contracts with us.  These cancellations resulted in early termination charges which are expected to offset the loss of monthly recurring revenue from Clearwire only for the short term.   During the six months ended June 30, 2011, Clearwire terminated service at 595 billing locations, which, at the time of termination, were generating approximately $690 thousand in monthly service revenue. We recognized $3.3 million in revenue from Clearwire from the collection of early termination charges during the six months ended June 30, 2011.

During the three months ended June 30, 2011, Clearwire terminated service at 375 billing locations, which, at the time of termination, were generating approximately $434 thousand in monthly service revenue.  We recognized $1.9 million in revenue from Clearwire for the collection of early termination charges during the three months ended June 30, 2011.

During the six months ended June 30, 2011, AT&T Mobility terminated T-1 circuits across 311 billing locations which, at the time of termination, were generating approximately $595 thousand of monthly service revenue.  These terminations were partially offset by new growth.  This will result in approximately $7.5 million of early termination charges related to service that was terminated during the six months ended June 30, 2011.  We recognized $2.1 million in revenue from AT&T Mobility for the collection of early termination charges during the six months ended June 30, 2011 related to the termination of T-1 circuits during November 2010 through April 2011.

During the three months ended June 30, 2011, AT&T Mobility terminated T-1 circuits across 257 billing locations which, at the time of termination, were generating approximately $517 thousand of monthly service revenue.  These terminations were partially offset by new growth.  This will result in approximately $6.4 million of early termination charges related to service that was terminated during the three months ended June 30, 2011.  We recognized $1.4 million in revenue from AT&T Mobility for the collection of early termination charges during the three months ended June 30, 2011 related to the termination of T-1 circuits during March and April 2011.

As discussed in Note 12, Subsequent Event, in July 2011, we received an additional $5.6 million from AT&T Mobility from the collection of early termination charges related to the termination of T-1 circuits during March, May and June 2011.  In July 2011, AT&T Mobility terminated additional T-1 circuits across 144 billing locations which, at the time of termination, were generating approximately $304 thousand of monthly service revenues.  Together with AT&T Mobility’s early termination charges resulting from the T-1 circuits terminated in July 2011, we may receive an additional $4.1 million in early termination charges from AT&T Mobility during the third quarter of 2011.  Therefore, as revenue from customers’ early termination of their service is recognized when payment is received, we may record approximately $9.7 million as revenue from AT&T Mobility during the third quarter of 2011 for early termination charges related to the termination of T-1 circuits through July 2011.

We do not record accounts receivable related to early termination charges.

Costs and Expenses

The major components of our cost of service revenues are:

·                  Leasing.  We incur charges for site lease expense for space leased at our sites. When lease arrangements have uneven payment schedules, we account for lease expense on a straight-line basis over the lease term.

·                  Fiber Service Providers.  We pay charges to our fiber service providers for the purchase and lease of fiber. When the fiber leases have uneven payment schedules, we account for fiber lease expense on a straight-line basis over the lease term.

·                  Field Technicians.  We incur costs for engineering and maintenance personnel including stock-based compensation.

·                  Other.  We incur costs for site evaluation and design, site maintenance, power, program and project management, costs related to unsuccessful site acquisitions that are incurred during deployment and personnel costs to monitor the network.

We expect cost of service revenues to increase in future periods as we execute our business plan to grow our network operations.

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Construction of our network is a complex process involving the interaction and assembly of multiple components that result in internal labor, third party and equipment costs. We regularly assess the recoverability of costs accumulated in construction-in-progress as well as those relating to our in-service network assets.  These assessments involve significant assumptions and estimates including the remaining useful life of the assets, technology requirements of our customers, and network configurations.  Actual results may differ from these estimates and assumptions as we execute our network build-out plan and such differences may result in impairment charges in future periods.   We recorded impairment charges of $3.1 million in the three months ended June 30, 2011 and $0.9 million in the three months ended June 30, 2010 related to this process which is included in cost of service revenues.  These impairment charges were $3.4 million in the six months ended June 30, 2011 and $1.0 million in the six months ended June 30, 2010.

Sales and marketing expenses are comprised primarily of compensation and related benefits, including stock-based compensation and travel expenses.

General and administrative expenses primarily consist of compensation and related benefits, including stock-based compensation, facilities, travel expenses, professional fees and insurance.

Depreciation and amortization expenses primarily consist of depreciation related to deployed network sites and the amortization of intangible assets with finite lives. We expect depreciation expense to increase in future periods as a result of deploying and commencing depreciation on additional sites.

Interest expense is primarily the result of interest cost incurred on the outstanding balance of our indebtedness. See Note 5, Long-term Debt and Capital Lease for additional information.

Challenges Facing Our Business

In addition to the Risk Factors, there are various challenges facing our business. These include the transforming nature of our market including the shift from TDM-based T-1 circuits to Ethernet-based circuits, expanding our network capacity to support rapidly growing bandwidth, acquiring and retaining customers on new and existing sites, deploying new sites in a predictable manner, the concentrated nature of our customers and the weakened state of the U.S. economy.

We operate in a transforming market. Our future success depends on an increased demand for wireless services for voice and other mobile broadband services such as transmissions of photos or videos and internet communication.  A significant majority of our current customer contracts provide T-1 backhaul service. These contracts generally have a five-year term, and a significant number of these contracts expire each year. As a result of increased data usage by cell phone users, we expect our customers will generally not renew this T-1 backhaul service, and will instead seek backhaul service, such as Ethernet backhaul service that we provide, that has greater data capacity.   In addition, as described above, recently, we have had two significant customers terminate service contracts in certain markets with us as a result of various reasons, including cost cutting efforts by customers and a shift from TDM-based T-1 circuits to Ethernet-based circuits.  We are not able to predict at this time whether such customers will choose to terminate additional service contracts with us or whether other customers will choose to terminate their contracts in the future.  If we are unable to obtain replacement contracts, whether for Ethernet service or otherwise, upon expiration or early termination of our T-1 contracts, our business and results of operations will be adversely affected.

Our ability to expand our network capacity to support rapidly growing demand for bandwidth will be critical to our success. We expect that as demand for bandwidth grows and as customers shift from TDM-based T-1 circuits to Ethernet-based circuits, revenue per Mbps will decline at a rapid pace. It can be challenging to manage profitability if our cost structure does not decline at a level consistent with the decline in revenue per Mbps. In addition, competitors may be, and have been, able to reduce the prices of their services significantly or may offer, and have offered, backhaul connectivity with other services, which could make their services more attractive to customers.

Acquiring and retaining customers on new and existing sites in a timely fashion is critical to our ability to grow revenue and generate an appropriate return on the capital that we invest. Our business, financial condition and results of operations will be negatively affected if we do not obtain sufficient revenues by maintaining existing sources of revenue, selling incremental bandwidth to existing customers, selling new customers at existing sites and constructing new sites for customers.

Deploying new sites in a predictable manner can be challenging given the difficulties in dealing with numerous landlords in order to lease space on sites at reasonable rates, complying with the various zoning and permitting laws of different cities or districts, negotiating fiber arrangements, and managing the contractors involved with construction, program and project management. We have taken steps to reduce deployment unpredictability on larger deployments by engaging with large, well-established, turnkey vendors that are experienced in these activities.

We are a relatively new entrant into a highly concentrated market with a limited number of potential customers in any particular market. Maintaining and growing our existing relationships with the leading wireless carriers and developing new relationships with other carriers are critical to our success.

We have built flexibility into our spending by reducing recurring general and administrative expenses and, in response to recent significant customer cancellations, have implemented further cost savings measures and have reduced our expected 2011 capital expenditures.   On March 3, 2011, we implemented a reduction in force resulting in a reduction of approximately 10% of our employee headcount.  These actions are designed to reduce our cost structure and are expected to help improve our operating results in

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2011.  We believe this reduction in force will not impact our ability to continue to meet any of our deployment, operational, sales or customer service agreements.

We expect that we will be required to obtain financing through the issuance of equity or debt securities, or both, in order to repay our Notes due 2012 when they mature on November 15, 2012, as we do not expect cash flow from operations alone to be sufficient for such purpose.  We also expect that we will be required to obtain such financing to meet our other liquidity needs in the future. There can be no assurance that this additional financing will be available to us. If we do not have sufficient funds to meet our liquidity needs, we may need to reduce our operations or further delay our expansion. In addition, we may be required to sell assets, issue additional equity securities or incur additional debt, or we may need to refinance or restructure all or a portion of our indebtedness at or before maturity. We may not be able to accomplish any of these alternatives. In addition, the terms of our debt agreements may restrict us from adopting some of these alternatives.

Results of Operations

Presented below are selected statements of operations data for the three and six months ended June 30, 2011 and 2010 that have been derived from our unaudited condensed consolidated financial statements. You should read this information together with the unaudited condensed consolidated financial statements and related notes that are included elsewhere in this report. Our historical results are not necessarily indicative of the results that are expected in future periods.

Statements of Operations Data:

(In thousands)