Cogent Communications Holdings, Inc. Annual Report 2008

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FY2008 Annual Report · Cogent Communications Holdings, Inc.

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

(Mark One)

FORM 10-K

(cid:1) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934.

For the fiscal year ended December 31, 2008

OR
(cid:2) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934.
For the transition period from

Commission file number 1-31227
COGENT COMMUNICATIONS GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)

Delaware
(State or Other Jurisdiction of
Incorporation or Organization)

1015 31st Street N.W.
Washington, D.C.
(Address of Principal Executive Offices)

52-2337274
(I.R.S. Employer
Identification No.)

20007
(Zip Code)

(202) 295-4200
Registrant’s Telephone Number, Including Area Code

Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $0.001 per share

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the

Securities Act. Yes (cid:2) No (cid:1)

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d)

of the Exchange Act. Yes (cid:2) No (cid:1)

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 (cid:1) No (cid:2)

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not

contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (cid:1)

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):
Large accelerated filer (cid:1)

Accelerated filer (cid:2)

Smaller reporting company (cid:2)

Non-accelerated filer (cid:2)
(Do not check if a smaller
reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange

Act). Yes (cid:2) No (cid:1)

The number of shares outstanding of the issuer’s common stock, par value $0.001 per share, as of

February 20, 2009 was 44,341,898.

The aggregate market value of the Common Stock held by non-affiliates of the registrant, based on the

closing price of $13.40 per share on June 30, 2008 as reported by the NASDAQ Global Select Market was
approximately $569 million.

COGENT COMMUNICATIONS GROUP, INC.
FORM 10-K ANNUAL REPORT

FOR THE YEAR ENDED DECEMBER 31, 2008

TABLE OF CONTENTS

Part I—Financial Information
Item 1
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Description of Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3
Item 4
Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . .
Part II—Other Information
Item 5

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of

Item 6
Item 7

Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7A Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8
Changes in and Disagreements with Accountants on Accounting and Financial
Item 9

Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9A Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part III
Item 10 Directors and Executive Officers of the Registrant
Item 11
Item 12
Item 13
Item 14
Part IV
Item 15
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . .
Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement for the registrant’s 2009 annual shareholders

meeting are incorporated by reference in Part III of this Form 10-K.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report may contain forward-looking statements within the meaning of Section 21E of the

Securities Exchange Act of 1934, as amended. Forward-looking statements are not statements of
historical facts, but rather reflect our current expectations concerning future results and events. You can
identify these forward-looking statements by our use of words such as ‘‘anticipates,’’ ‘‘believes,’’
‘‘continues,’’ ‘‘expects,’’ ‘‘intends,’’ ‘‘likely,’’ ‘‘may,’’ ‘‘opportunity,’’ ‘‘plans,’’ ‘‘potential,’’ ‘‘project,’’
‘‘will,’’ and similar expressions to identify forward-looking statements, whether in the negative or the
affirmative. We cannot guarantee that we actually will achieve these plans, intentions or expectations.
These forward-looking statements are subject to risks, uncertainties and other factors, some of which
are beyond our control, which could cause actual results to differ materially from those forecasts or
anticipated in such forward-looking statements.

You should not place undue reliance on these forward-looking statements, which reflect our view
only as of the date of this report. We undertake no obligation to update these statements or publicly
release the result of any revisions to these statements to reflect events or circumstances after the date
of this report or to reflect the occurrence of unanticipated events.

ITEM 1. BUSINESS

Overview

PART I

We are a leading facilities-based provider of low-cost, high-speed Internet access and Internet
Protocol, or IP, communications services. Our network is specifically designed and optimized to transmit
data using IP. We deliver our services to small and medium-sized businesses, communications service
providers and other bandwidth-intensive organizations through approximately 17,800 customer
connections in North America and Europe.

Our primary on-net service is Internet access at a speed of 100 Megabits per second, much faster

than typical Internet access currently offered to businesses. We offer this on-net service exclusively
through our own facilities, which run all the way to our customers’ premises. Because of our integrated
network architecture, we are not dependent on local telephone companies to serve our on-net
customers. Our typical customers in multi-tenant office buildings are law firms, financial services firms,
advertising and marketing firms and other professional services businesses. We also provide on-net
Internet access to certain bandwidth-intensive users such as universities, other ISPs and commercial
content providers at speeds of up to ten Gigabits per second. For the years ended December 31, 2006,
2007 and 2008, our on-net customers generated 70.6%, 79.0% and 81.7%, respectively, of our total net
service revenue.

In addition to providing our on-net services, we also provide Internet connectivity to customers

that are not located in buildings directly connected to our network. We serve these off-net customers
using other carriers’ facilities to provide the ‘‘last mile’’ portion of the link from our customers’
premises to our network. For the years ended December 31, 2006, 2007 and 2008, our off-net
customers generated 23.1%, 17.3%, and 16.1%, respectively, of our total net service revenue.

Non-core services are those services we acquired and continue to support but do not actively sell.
For the years ended December 31, 2006, 2007 and 2008, non-core services generated 6.3%, 3.7% and
2.2%, respectively, of our total net service revenue.

We also operate 36 data centers comprising over 340,000 square feet throughout North America

and Europe that allow customers to co-locate their equipment and access our network.

Competitive Advantages

We believe we address many of the IP data communications needs of small and medium-sized
businesses, communications service providers and other bandwidth-intensive organizations by offering
them high-quality Internet service at attractive prices.

Low Cost of Operation. We offer a streamlined set of products on an integrated network that
operates on a single protocol. Our network design allows us to avoid many of the costs associated with
circuit-switched networks related to provisioning, monitoring and maintaining multiple transport
protocols. We believe that our low cost of operation gives us greater pricing flexibility and an advantage
in a competitive environment characterized by falling Internet access prices.

Independent Network. Our on-net service does not rely on infrastructure controlled by local
incumbent telephone companies. We provide the entire network, including the last mile and the
in-building wiring to the customer’s suite. This gives us more control over our service, quality and
pricing and allows us to provision services more quickly and efficiently. We are typically able to activate
customer services in one of our on-net buildings in fewer than ten days.

High Quality, Reliable Service. We are able to offer high-quality Internet service due to our
network, which was designed solely to transmit IP data, and dedicated intra-city bandwidth for each

customer. This design increases the speed and throughput of our network and reduces the number of
data packets dropped during transmission.

Low Capital Cost to Grow Our Business. We have incurred relatively minimal indebtedness in
growing our business because of our network design of using Internet routers without additional legacy
equipment and our strategy of acquiring optical fiber from the excess capacity in existing networks.

Experienced Management Team. Our senior management team is composed of seasoned executives

with extensive expertise in the telecommunications industry as well as knowledge of the markets in
which we operate. The members of our senior management team have an average of over 20 years of
experience in the telecommunications industry. Our senior management team has designed and built
our network and led the integration of our network assets, customers and service offerings we acquired
through 13 acquisitions.

Convergence. There is a clear industry and market trend for legacy products (e.g., TDM voice,
Private Line, Frame Relay, and Asynchronous Transfer Mode) to be replaced with IP based services.
Many of our competitors will have to migrate their existing customers and products to IP. This
migration can be costly, lengthy, and risky. We do not face this challenge because our network and
products are IP.

Our Strategy

We intend to become the leading provider of high-quality Internet access and IP communications

services and to continue to improve our profitability and cash flow. The principal elements of our
strategy include:

Focus on Providing Low-Cost, High-Speed Internet Access and IP Connectivity. We intend to further

load our high-capacity network to respond to the growing demand for high-speed Internet service
generated by bandwidth-intensive applications such as streaming media, online gaming, video, voice
over IP (VOIP), remote data storage, distributed computing and virtual private networks. We intend to
do so by continuing to offer our high-speed and high-capacity services at competitive prices.

Pursuing On-Net Customer Growth. We intend to increase usage of our network and operational
infrastructure by adding customers in our existing on-net buildings, as well as adding buildings to our
network.

Selectively Pursuing Acquisition Opportunities.

In addition to adding customers through our sales

and marketing efforts, we will continue to seek out acquisition opportunities that increase our customer
base, allowing us to take advantage of the unused capacity of our network and add revenues with
minimal incremental costs. We may also make additional acquisitions to add network assets at attractive
prices.

Our Network

Our network is comprised of in-building riser facilities, metropolitan optical networks, metropolitan

traffic aggregation points and inter-city transport facilities. We believe that we deliver a high level of
technical performance because our network is optimized for IP traffic. We believe that our network is
more reliable and delivers IP traffic at lower cost than networks built as overlays to traditional circuit-
switched telephone networks.

Our network serves 135 metropolitan markets in North America and Europe and encompasses:

(cid:127) over 950 multi-tenant office buildings strategically located in commercial business districts;

(cid:127) over 360 carrier-neutral Internet aggregation facilities, data centers and single-tenant buildings;

(cid:127) over 285 intra-city networks consisting of over 12,000 fiber miles;

(cid:127) an inter-city network of more than 32,100 fiber route miles; and

(cid:127) multiple high-capacity transatlantic circuits connecting the North American and European

portions of our network.

We have created our network by acquiring optical fiber from carriers with large amounts of unused

fiber and directly connecting Internet routers to our existing optical fiber national backbone. We have
expanded our network through key acquisitions of financially distressed companies or their assets at a
significant discount to their original cost. Due to our network design and acquisition strategy, we
believe we are positioned to grow our revenue and increase profitability with limited incremental
capital expenditures. We expect our 2009 capital expenditure rate to be similar to the rate we
experienced in 2008.

Inter-city Networks

Our inter-city network consists of optical fiber connecting major cities in North America and
Europe. The North American and European portions of our network are connected by transatlantic
circuits. Our network was built by acquiring from various owners of fiber optic networks the right to
use one or two strands of optical fiber out of the multiple fibers owned by the carrier. We have
installed the optical and electronic equipment necessary to amplify, regenerate, and route the optical
signals along these networks. We have the right to use the fiber under long term agreements. We pay
these providers fees for the maintenance of the optical fiber and provide our own equipment
maintenance.

Intra-city Networks

In each metropolitan area in which we provide high-speed on-net Internet access service, our
backbone network is connected to a router connected to one or more of our metropolitan optical
networks. We create our intra-city networks by obtaining the right to use optical fiber from carriers
with optical fiber networks in those cities. These metropolitan networks consist of optical fiber that
runs from the central router in a market into routers located in our on-net buildings. In most cases the
metropolitan fiber runs in a ring architecture, which provides redundancy so that if the fiber is cut, data
can still be transmitted to the central router by directing traffic in the opposite direction around the
ring. The router in the building provides a connection to each on-net customer.

Within the cities where we offer off-net Internet access service, we lease circuits from

telecommunications carriers, primarily local telephone companies, to provide the last mile connection
to the customer’s premises. Typically, these circuits are aggregated at various locations in those cities
onto higher-capacity leased circuits that ultimately connect the local aggregation route to our network.

In-Building Networks

In office buildings where we provide service to multiple tenants we connect our routers to a cable
containing 12 to 288 optical fiber strands that typically run from our equipment in the basement of the
building through the building riser to the customer location. Service for customers is initiated by
connecting a fiber optic cable from a customer’s local area network to the infrastructure in the building
riser. The customer then has dedicated and secure access to our network using an Ethernet connection.
We believe that Ethernet is the lowest cost network connection technology and is used almost
universally for the local area networks that businesses operate.

Internetworking

The Internet is an aggregation of interconnected networks. We have settlement free

interconnections between our network and most major and hundreds of smaller Internet Service
Providers, or ISPs, at approximately 70 locations. We interconnect our network through public and
private peering arrangements. Public peering is the means by which ISPs have traditionally connected
to each other at central, public facilities. Larger ISPs also exchange traffic and interconnect their
networks by means of direct private connections referred to as private peering.

Peering agreements between ISPs are necessary in order for them to exchange traffic. Without
peering agreements, each ISP would have to buy Internet access from every other ISP in order for its
customer’s traffic, such as email, to reach and be received from customers of other ISPs. We are
considered a Tier 1 ISP and, as a result, we have settlement-free peering arrangements with most other
providers. This allows us to exchange traffic with those ISPs without payment by either party. In such
arrangements, each party exchanging traffic bears its own cost of delivering traffic to the point at which
it is handed off to the other party. We also engage in public peering arrangements in which each party
also pays a fee to the owner of routing equipment that operates as the central exchange for all the
participants. We do not treat our settlement-free peering arrangements as generating revenue or
expense related to the traffic exchanged. However, we charge customers representing approximately
2,300 networks for transit services across our network and we sell this service at approximately 400
locations.

Network Management and Control

Our primary network operations centers are located in Washington, D.C. and Madrid, Spain. These

facilities provide continuous operational support in both North America and Europe. Our network
operations centers are designed to immediately respond to any problems in our network. To ensure the
quick replacement of faulty equipment in the intra-city and long-haul networks, we have deployed field
engineers across North America and Europe. In addition, we have maintenance contracts with third
party vendors that specialize in optical and routed networks.

Our Services

We offer high-speed Internet access and IP connectivity to small and medium-sized businesses,
communications providers and other bandwidth-intensive organizations located in North America and
Europe.

The table below shows our primary service offerings:

On-Net Services

Fiber500 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Two Meg . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fast Ethernet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gigabit Ethernet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10 Gigabit Ethernet
Colocation with Internet Access . . . . . . . . . . . . . . . . . . . . . . . . . .
Point-to-Point . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Off-Net Services

Bandwidth (Mbps)

0.5
2.0
100
1,000
10,000
2 to 10,000
1.5 to 10,000

Bandwidth (Mbps)

T1 or E1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
T3 or E3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ethernet

1.5 or 2.0
45 or 34
10, 100 or 1,000

We offer on-net services in 132 metropolitan markets. We serve over 1,300 buildings of which more

than 1,100 are located in North America with the remainder located in Europe. Our most popular
on-net service in North America is our Fast Ethernet service, which provides Internet access at 100
megabits per second. We typically offer our Fast Ethernet (Internet access) service to our small and
medium-sized business customers at $1,000 a month for month-to-month service. We offer lower prices
for longer term commitments. We also offer Internet access services at higher speeds of up to ten
Gigabits per second. These services are generally used by customers that have businesses, such as web
hosting, that are Internet based and are generally delivered at data centers and carrier hotels. We
believe that, on a per-Megabit basis, this service offering is one of the lowest priced in the marketplace.
We also offer colocation services in 36 locations in North America and Europe. This service offers
Internet access combined with rack space and power in a Cogent facility, allowing the customer to
locate a server or other equipment at that location and connect to our Internet service. Our final
on-net service offering is our ‘‘Point-to-Point’’ or ‘‘Layer 2’’ service. These point-to-point connections
span North America and Europe and allow customers to connect geographically dispersed local area
networks in a seamless manner. We emphasize the sale of on-net services because we believe that we
have a competitive advantage in providing these services and our sales of these services generate higher
gross profit margins.

We offer off-net services to customers not located in our on-net buildings. These services are
provided in the metropolitan markets in North America and Europe in which we offer on-net services
and in approximately three additional markets. These services are generally provided to small and
medium-sized businesses in approximately 2,750 off-net buildings.

We support certain non-core services assumed with certain of our acquisitions. These services

include voice services in Toronto, Canada, and legacy point-to-point services. We expect the revenue
from these non-core services to decline. We do not actively sell these services and expect the growth of
our on-net Internet services to compensate for this loss.

Sales and Marketing

Sales. We employ a direct sales and marketing approach including telesales. As of February 1,
2009, our sales force included 291 full-time employees. Approximately one-third of these employees are
located in our call centers with the remaining two-thirds located in our sales offices. Our outside direct
sales personnel work through direct face-to-face contact with potential customers in, or intending to
locate in, on-net buildings. Through agreements with building owners, we are able to initiate and
maintain personal contact with our customers by staging various promotional and social events in our
on-net buildings. Direct sales personnel are compensated with a base salary plus quota-based
commissions and incentives. We use a customer relationship management system to efficiently track
activity levels and sales productivity.

Agent Program. We also have an agent program used as an alternate channel to distribute our
products and services. The agent program consists of value-added resellers, IT consultants, and smaller
telecom agents, who are managed by our direct sales personnel, and larger national or regional
companies whose primary business is to sell telecommunications, data, and Internet services. The agent
program includes over 180 agents.

Marketing. Because of our focus on a direct sales force, we have not spent funds on television,

radio or print advertising. Our marketing efforts are designed to drive awareness of our products and
services, identify qualified leads through various direct marketing campaigns and provide our sales force
with product brochures, collateral materials and relevant sales tools to improve the overall effectiveness
of our sales organization. In addition, we conduct public relations efforts focused on cultivating industry
analyst and media relationships with the goal of securing media coverage and public recognition of our
Internet communications services. Our marketing organization is responsible for our product strategy

and direction based upon primary and secondary market research and the advancement of new
technologies.

Competition

We face competition from incumbent carriers, Internet service providers and facilities-based

network operators, many of whom are much larger than us, have significantly greater financial
resources, better-established brand names and large, existing installed customer bases in the markets in
which we compete. We also face competition from other new entrants to the communications services
market. Many of these companies offer products and services that are similar to our products and
services. Unlike some of our competitors, we do not have title to most of the dark fiber that makes up
our network. Our interests in that dark fiber are in the form of long-term leases or IRUs obtained
from their titleholders. We rely on the maintenance of such dark fiber to provide our on-net services to
customers. We are also dependent on third-party providers, some of whom are our competitors, for the
provision of connections to our off-net customers.

We believe that competition is based on many factors, including price, transmission speed, ease of

access and use, breadth of service availability, reliability of service, customer support and brand
recognition. Because our fiber optic networks have been recently installed compared to those of the
incumbent carriers, our state-of-the-art technology may provide us with cost, capacity, and service
quality advantages over some existing incumbent carrier networks; however, our network may not
support some of the services supported by these legacy networks, such as circuit-switched voice and
frame relay. While the Internet access speeds offered by traditional ISPs typically do not match our
on-net offerings, these slower services are usually priced lower than our offerings and thus provide
competitive pressure on pricing, particularly for more price-sensitive customers. These and other
downward pricing pressures have diminished, and may further diminish, the competitive advantages that
we have enjoyed as the result of our service pricing.

Regulation

In the United States, the Federal Communications Commission (FCC) regulates common carriers’

interstate services and state public utilities commissions exercise jurisdiction over intrastate basic
telecommunications services. Our Internet service offerings are not currently regulated by the FCC or
any state public utility commission. However, we may become subject to regulation in the U.S. at the
federal and state levels and in other countries. The offerings of many of our competitors and vendors,
especially incumbent local telephone companies, are subject to direct federal and state regulations.
These regulations change from time to time in ways that are difficult for us to predict.

In the United States, we are subject to the obligations set forth in the Communications Assistance

for Law Enforcement Act, which is administered by the FCC. That law requires that we be able to
intercept communications when required to do so by law enforcement agencies. We are required to
comply or we may face significant fines and penalties.

There is no current legal requirement that owners or managers of commercial office buildings give
access to competitive providers of telecommunications services, although the FCC does prohibit carriers
from entering contracts that restrict the right of commercial multiunit property owners to permit any
other common carrier to access and serve the property’s commercial tenants.

Our subsidiary, Cogent Canada, offers voice and Internet services in Canada. Generally, the
regulation of Internet access services and competitive voice services has been similar in Canada to that
in the U.S. in that providers of such services face fewer regulatory requirements than the incumbent
local telephone company. This may change. Also, the Canadian government has requirements limiting
foreign ownership of certain telecommunications facilities in Canada. We are not subject to these

restrictions today. We will have to comply with these regulations to the extent they change and to the
extent we begin using facilities in a manner that subjects us to these restrictions.

Our European subsidiaries operate in a more highly regulated environment for the types of

services they provide. In many European countries, a national license or a notice filed with a regulatory
authority is required for the provision of data and Internet services. In addition, our subsidiaries
operating in member countries of the European Union are subject to the directives and jurisdiction of
the European Union. We believe that each of our subsidiaries has the necessary licenses to provide its
services in the markets where it operates today. To the extent we expand our operations or service
offerings in Europe or other new markets, we may face new regulatory requirements.

The laws related to Internet telecommunications are unsettled and there may be new legislation

and court decisions that may affect our services and expose us to liability.

Employees

As of February 1, 2009, we had 531 employees. A union represents twenty-two of our employees in

France. We believe that we have a satisfactory relationship with our employees.

Available Information

We were incorporated in Delaware in 1999. We make available free of charge through our Internet

website our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on
Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d)
of the Exchange Act. The reports are made available through a link to the SEC’s Internet website at
www.sec.gov. You can find these reports and request a copy of our Code of Conduct on our website at
www.cogentco.com under the ‘‘Investor Relations’’ link.

ITEM 1A. RISK FACTORS

If our operations do not consistently produce positive cash flow to pay for our growth or meet our operating
and financing obligations, and we are unable to otherwise raise additional capital to meet these needs, our
ability to implement our business plan will be materially and adversely affected.

We currently generate positive cash flow from our operations. If we acquire or invest in additional
businesses, assets, services or technologies we may need to raise additional capital beyond that available
from our cash flow. We may also face unforeseen capital requirements for new technology required to
remain competitive or to comply with new regulatory requirements, for unforeseen maintenance of our
network and facilities, and for other unanticipated expenses associated with running our business. In
addition, if we do not retain existing customers or add new customers, our cash flow may be impaired
and we may be required to raise additional funds through the issuance of debt or equity. We cannot
assure you that we will have access to necessary capital, nor can we assure you that any such financing
will be available on terms that are acceptable to our stockholders or us. If issuing equity securities
raises additional funds, substantial dilution to existing stockholders may result.

We need to retain existing customers and continue to add new customers in order to become profitable and
remain cash flow positive.

In order to become profitable and remain consistently cash flow positive, we need to both retain

existing customers and continue to add a large number of new customers. The precise number of
additional customers required to become profitable and remain consistently cash flow positive is
dependent on a number of factors, including the turnover of existing customers and the revenue mix
among customers. We may not succeed in adding customers if our sales and marketing plan is
unsuccessful. In addition, many of our target customers are existing businesses that are already

purchasing Internet access services from one or more providers, often under a contractual commitment.
It has been our experience that such target customers are often reluctant to switch providers due to
costs associated with switching providers. Further, as some of our customers grow larger they may
decide to build their own Internet networks. While no single customer accounted for more than 2.6%
of our 2008 revenues, a migration of a few very large Internet users to their own networks or the loss
or reduced purchases from several significant customers could impair our growth.

Our growth and financial health are subject to a number of economic risks.

Negative developments throughout 2008 in the credit and financial markets in the United States
and worldwide have resulted in extreme disruption in recent months, including, among other things,
extreme volatility in security prices, including our own, severely diminished liquidity and credit
availability, rating downgrades of certain investments and declining valuations of others. If the capital
and credit markets continue to experience volatility and the availability of funds remains limited, it is
possible that our ability to access the capital and credit markets for significant purchases or operations
may be limited by these conditions or other factors at a time when we would like, or need, to do so.
This could have an impact on our ability to react to changing economic and business conditions.

The economic downturn has significantly affected the financial services industry, which includes
many of our customers. In addition, the current tightening of credit in financial markets potentially
adversely affects the ability of certain of our customers to obtain financing for operations, and could
result in a decrease in sales to new customers or existing customers canceling services as well as impact
the ability of our customers to make payments, which would negatively impact our cash flow. We are
unable to predict the likely duration and severity of the current disruption in financial markets and
adverse economic conditions in the U.S. and other countries.

We are experiencing rapid growth of our business and operations and we may not be able to efficiently
manage our growth.

We have rapidly grown our company through acquisitions of companies, assets and customers as
well as implementation of our own network expansion and the acquisition of new customers through
our own sales efforts. Our expansion places significant strains on our management, operational and
financial infrastructure. Our ability to manage our growth will be particularly dependent upon our
ability to:

(cid:127) expand, develop and retain an effective sales force and qualified personnel;

(cid:127) maintain the quality of our operations and our service offerings;

(cid:127) maintain and enhance our system of internal controls to ensure timely and accurate compliance

with our regulatory reporting requirements; and

(cid:127) expand our accounting and operational information systems in order to support our growth.

If we fail to implement these measures successfully, our ability to manage our growth will be impaired.

We may experience difficulties in implementing our expansion in Eastern Europe and may incur related
unexpected costs and regulatory issues.

In 2007, we began to expand our network into Eastern Europe. We have experienced difficulty in

acquiring dark fiber and other difficulties in making our network operational in this region. The
expansion may cost more that we have planned. We also may experience regulatory issues. Finally, we
may be unsuccessful in selling our services in this region. If we are not successful in developing our
market presence in Eastern Europe our operating results could be adversely impacted.

We may experience delays and additional costs in expanding our on-net buildings.

Currently, we plan to increase our carrier-neutral facilities and other on-net buildings by
approximately 100 buildings in 2009 from 1,326 at December 31, 2008. We may be unsuccessful at
identifying appropriate buildings or negotiating favorable terms for acquiring access to such buildings,
and consequently, may experience difficulty in adding customers to our network and fully using the
network’s capacity.

Our connections to the Internet require us to establish and maintain relationships with other providers, which
we may not be able to maintain.

The Internet is composed of various public and private network providers who operate their own
networks and interconnect them at public and private interconnection points. Our network is one such
network. In order to obtain Internet connectivity for our network, we must establish and maintain
relationships with other providers and incur the necessary capital costs to locate our equipment and
connect our network at these various interconnection points.

By entering into what are known as settlement-free peering arrangements, providers agree to
exchange traffic between their respective networks without charging each other. Our ability to avoid the
higher costs of acquiring paid dedicated network capacity and to maintain high network performance is
dependent upon our ability to establish and maintain peering relationships. The terms and conditions
of our peering relationships may also be subject to adverse changes, which we may not be able to
control. For example, several network operators with large numbers of individual users are arguing that
they should be able to charge or charge more to network operators and businesses that exchange traffic
to those users. If we are not able to maintain or increase our peering relationships in all of our markets
on favorable terms, we may not be able to provide our customers with high performance or affordable
or reliable services, which could cause us to lose existing and potential customers, damage our
reputation and have a material adverse effect on our business. We have in the past had disputes with
certain of other network providers that resulted in a temporary disruption of the exchange of traffic
between our network and the network of the other carrier which occurred as recently as November
2008. We have resolved the majority of such disputes through negotiations. We continue to experience
resistance from certain incumbent telephone companies, especially in Europe, to the upgrade of
settlement free peering connections necessary to accommodate the growth of traffic we exchange with
such carriers. We cannot assure you that we will be able to continue to establish and maintain
relationships with providers or favorably resolve disputes with providers.

We may not successfully make or integrate acquisitions or enter into strategic alliances.

As part of our growth strategy, we intend to pursue selected acquisitions and strategic alliances. To

date, we have completed 13 acquisitions. We compete with other companies for acquisition
opportunities and we cannot assure you that we will be able to effect future acquisitions or strategic
alliances on commercially reasonable terms or at all. Even if we enter into these transactions, we may
experience:

(cid:127) delays in realizing or a failure to realize the benefits we anticipate;

(cid:127) difficulties or higher-than-anticipated costs associated with integrating any acquired companies,

products or services into our existing business;

(cid:127) attrition of key personnel from acquired businesses;

(cid:127) unexpected costs or charges; or

(cid:127) unforeseen operating difficulties that require significant financial and managerial resources that

would otherwise be available for the ongoing development or expansion of our existing
operations.

In the past, our acquisitions have often included assets, service offerings and financial obligations
that are not compatible with our core business strategy. We have expended management attention and
other resources to the divestiture of assets, modification of products and systems as well as
restructuring financial obligations of acquired operations. In most acquisitions, we have been successful
in renegotiating long-term agreements that we have acquired relating to long distance and local
transport of data and IP traffic. If we are unable to satisfactorily renegotiate such agreements in the
future or with respect to future acquisitions, we may be exposed to large claims for payment for
services and facilities we do not need.

Consummating these transactions could also result in the incurrence of additional debt and related
interest expense, as well as unforeseen contingent liabilities, all of which could have a material adverse
effect on our business, financial condition and results of operations. Because we have purchased
financially distressed companies or their assets, and may continue to do so in the future, we have not
had, and may not have, the opportunity to perform extensive due diligence or obtain contractual
protections and indemnifications that are customarily provided in corporate acquisitions. As a result, we
may face unexpected contingent liabilities arising from these acquisitions. We may also issue additional
equity in connection with these transactions, which would dilute our existing shareholders.

Revenues generated by the customer contracts that we have acquired have accounted for a

substantial portion of our historical non-core and off-net service revenues. However, following an
acquisition, we have experienced a decline in revenue attributable to acquired customers as these
customers’ contracts have expired and they have entered into standard Cogent customer contracts at
generally lower rates or have chosen not to renew service with us. We anticipate that we will experience
similar declines with respect to customers we may acquire in the future.

We depend upon our key employees and may be unable to attract or retain sufficient qualified personnel.

Our future performance depends upon the continued contribution of our executive management

team and other key employees, in particular, our Chairman and Chief Executive Officer, Dave
Schaeffer. As founder of our company, Mr. Schaeffer’s knowledge of our business and our industry
combined with his deep involvement in every aspect of our operations and planning make him
particularly well-suited to lead our company and difficult to replace.

Our business could suffer because telephone companies and cable companies may provide better delivery of
Internet content originating on their own networks.

Broadband connections provided by cable TV and telephone companies have become the
predominant means by which consumers connect to the Internet. The providers of these broadband
connections may treat Internet content delivered from different sources differently. The possibility of
this has been characterized as an issue of ‘‘net neutrality.’’ As many of our customers operate websites
and services that deliver content to consumers our ability to sell our services would be negatively
impacted if Internet content delivered by us was less easily received by consumers than Internet content
delivered by others.

We have substantial debt which we may not be able to repay when due.

As of December 31, 2008, we have $92.0 million of face value of senior convertible notes

outstanding. The holders of the notes have the right to compel us to repurchase for cash on June 15,
2014, June 15, 2017 and June 15, 2022, all or some of their notes. They also have the right to be paid
the principal upon default and upon certain designated events, such as certain changes of control. We

may not have sufficient funds to pay the principal at the time we are obligated to do so, which could
result in bankruptcy, or we may only be able to raise the necessary funds on unfavorable terms.

Our operations outside of the United States expose us to economic, regulatory and other risks.

The nature of our European and Canadian business involves a number of risks, including:

(cid:127) fluctuations in currency exchange rates;

(cid:127) exposure to additional regulatory and legal requirements, including import restrictions and

controls, exchange controls, tariffs and other trade barriers;

(cid:127) difficulties in staffing and managing our foreign operations;

(cid:127) changes in political and economic conditions; and

(cid:127) exposure to additional and potentially adverse tax regimes.

As we continue to expand our European and Canadian businesses, our success will depend, in

part, on our ability to anticipate and effectively manage these and other risks. Our failure to manage
these risks and grow our European and Canadian operations may have a material adverse effect on our
business and results of operations.

Fluctuations in foreign exchange rates may adversely affect our financial position and results of operations.

Our European and Canadian operations expose us to currency fluctuations and exchange rate risk.

For example, while we record revenues and financial results from our European operations in Euros,
these results are reflected in our consolidated financial statements in U.S. dollars. Therefore, our
reported results are exposed to fluctuations in the exchange rates between the U.S. dollar and the
Euro. We fund certain of our cash flow requirements of our European operations in U.S. dollars.
Accordingly, in the event that the Euro strengthens versus the dollar to a greater extent than we
anticipate the cash flow requirements associated with our European operations may be significantly
greater in U.S.-dollar terms than planned.

Our business could suffer delays and problems due to the actions of network providers on whom we are
partially dependent.

Our off-net customers are connected to our network by means of communications lines that are
provided as services by local telephone companies and others. We may experience problems with the
installation, maintenance and pricing of these lines and other communications links, which could
adversely affect our results of operations and our plans to add additional customers to our network
using such services. We have historically experienced installation and maintenance delays when the
network provider is devoting resources to other services, such as traditional telephony. We have also
experienced pricing problems when a lack of alternatives allows a provider to charge high prices for
services in an area. We attempt to reduce this problem by using many different providers so that we
have alternatives for linking a customer to our network. Competition among the providers tends to
improve installation, maintenance and pricing.

Our network could suffer serious disruption if certain locations experience serious damage.

There are certain locations through which a large amount of our Internet traffic passes. Examples

are facilities in which we exchange traffic with other carriers, the facility through which our
transatlantic traffic passes, and certain of our network hub sites. If any of these facilities were
destroyed or seriously damaged a significant amount of our network traffic could be disrupted. Because
of the large volume of traffic passing through these facilities our ability (and the ability of carriers with
whom we exchange traffic) to quickly restore service would be challenged. There could be parts of our
network or the networks of other carriers that could not be quickly restored or that would experience
substantially reduced service for a significant time. If such a disruption occurs, our reputation could be
negatively impacted which may cause us to lose customers and adversely affect our ability to attract
new customers, resulting in an adverse effect on our operating results.

If the information systems that we depend on to support our customers, network operations, sales, billing and
financial reporting do not perform as expected, our operations and our financial results may be adversely
affected.

We rely on complex information systems to operate our network and support our other business

functions. Our ability to track sales leads, close sales opportunities, provision services, bill our
customers for those services and prepare our financial statements depends upon the effective
integration of our various information systems. If our systems, individually or collectively, fail or do not
perform as expected, our ability to process and provision orders, to make timely payments to vendors,
to ensure that we collect revenue owed to us and prepare our financial statements would be adversely
affected. Such failures or delays could result in increased capital expenditures, customer and vendor
dissatisfaction, loss of business or the inability to add new customers or additional services, and prepare
accurate and timely financial statements all of which would adversely affect our business and results of
operations.

We have historically incurred operating losses and these losses may continue for the foreseeable future.

Since we initiated operations in 2000, we have generated operating losses and these losses may
continue for the foreseeable future. In 2006 we had an operating loss of $46.6 million, in 2007 we had
an operating loss of $29.9 million and in 2008 we had an operating loss of $22.2 million. As of
December 31, 2008, we had an accumulated deficit of $269.2 million. Continued losses may prevent us
from pursuing our strategies for growth or may require us to seek unplanned additional capital and
could cause us to be unable to meet our debt service obligations, capital expenditure requirements or
working capital needs.

We may have difficulty intercepting communications as required by the U.S. Communications Assistance for
Law Enforcement Act and similar laws of other countries.

The U.S. Communications Assistance for Law Enforcement Act and the laws of other countries

require that we be able to intercept communications when required to do so by law enforcement
agencies. We may experience difficulties and incur significant costs in complying with these laws. If we
are unable to comply with the laws we could be subject to fines in the United States of up to
$1.0 million per event and equal or greater fines in other countries.

Our business could suffer from an interruption of service from our fiber providers.

The carriers from whom we have obtained our inter-city and intra-city dark fiber maintain that
fiber. If these carriers fail to maintain the fiber or disrupt our fiber connections for other reasons, such
as business disputes with us and governmental takings, our ability to provide service in the affected
markets or parts of markets would be impaired. The companies that maintain our inter-city dark fiber
and many of the companies that maintain our intra-city dark fiber are also competitors of ours.
Consequently, they may have incentives to act in ways unfavorable to us. While we have successfully
mitigated the effects of prior service interruptions and business disputes in the past, we may incur
significant delays and costs in restoring service to our customers in connection with future service
interruptions, and we may lose customers if delays are substantial.

Our business depends on agreements with colocation operators, which we could fail to obtain or maintain.

Our business depends upon access to customers in carrier neutral colocation centers, which are
facilities in which many large users of the Internet house the computer servers that deliver content and
applications to users by means of the Internet and provide access to multiple Internet access networks.
Most colocation centers allow any carrier to operate within the facility (for a standard fee). We expect
to enter into additional colocation agreements as part of our growth plan. Current government

regulations do not require colocation operators to allow all carriers access on terms that are reasonable
or nondiscriminatory. We have been successful in obtaining agreements with these operators in the past
and have generally found that the operators want to have us in their colocation facilities because we
offer low-cost, high capacity Internet service to their other customers. Any deterioration in our existing
relationships with these colocation center operators could harm our sales and marketing efforts and
could substantially reduce our potential customer base.

Our business depends on license agreements with building owners and managers, which we could fail to
obtain or maintain.

Our on-net business depends upon our in-building networks. Our in-building networks depend on

access agreements with building owners or managers allowing us to install our in-building networks and
provide our services in these buildings. These agreements typically have terms of five to ten years, with
one or more renewal options. Any deterioration in our existing relationships with building owners or
managers could harm our sales and marketing efforts and could substantially reduce our potential
customer base. We expect to enter into additional access agreements as part of our growth plan.
Current federal and state regulations do not require building owners to make space available to us or
to do so on terms that are reasonable or nondiscriminatory. While the FCC has adopted regulations
that prohibit common carriers under its jurisdiction from entering into exclusive arrangements with
owners of multi-tenant commercial office buildings, these regulations do not require building owners to
offer us access to their buildings. Building owners or managers may decide not to permit us to install
our networks in their buildings or may elect not to renew or amend our access agreements. The initial
term of most of our access agreements will conclude in the next several years. Most of these
agreements have one or more automatic renewal periods and others may be renewed at the option of
the landlord. While we have historically been successful in renewing these agreements and no single
building access agreement is material to our success, the failure to obtain or maintain a number of
these agreements would reduce our revenue, and we might not recover our costs of procuring building
access and installing our in-building networks.

We may not be able to obtain or construct additional building laterals to connect new buildings to our
network.

In order to connect a new building to our network we need to obtain or construct a lateral from
our metropolitan network to the building. We may not be able to obtain fiber in an existing lateral at
an attractive price from a provider and may not be able to construct our own lateral due to the cost of
construction or municipal regulatory restrictions. Failure to obtain fiber in an existing lateral or to
construct a new lateral could keep us from adding new buildings to our network and from increasing
our revenues.

Impairment of our intellectual property rights and our alleged infringement on other companies’ intellectual
property rights could harm our business.

We are aware of several other companies in our and other industries that use the word ‘‘Cogent’’

in their corporate names. One company has informed us that it believes our use of the name ‘‘Cogent’’
infringes on their intellectual property rights in that name. If such a challenge is successful, we could be
required to change our name and lose the goodwill associated with the Cogent name in our markets.

The sector in which we operate is highly competitive, and we may not be able to compete effectively.

We face significant competition from incumbent carriers, Internet service providers and facilities-

based network operators. Relative to us, many of these providers have significantly greater financial
resources, more well-established brand names, larger customer bases, and more diverse strategic plans
and service offerings.

Intense competition from these traditional and new communications companies has led to

declining prices and margins for many communications services, and we expect this trend to continue as
competition intensifies in the future. Decreasing prices for high-speed Internet services have somewhat
diminished the competitive advantage that we have enjoyed as a result of our service pricing.

Our competitors may also introduce new technology or services that make our services less
attractive to potential customers. For example, some providers are introducing a new version of the
Internet protocol (Ipv6) that we do not plan to introduce at this time. If this becomes important to
Internet users our ability to compete may be lessened or we may have to incur additional costs in order
to accommodate this technology.

We issue projected results and estimates for future periods from time to time, and such projections and
estimates are subject to inherent uncertainties and may prove to be inaccurate.

Financial information, results of operations and other projections that we may issue from time to

time are based upon our assumptions and estimates. While we believe these assumptions and estimates
to be reasonable when they are developed, they are inherently subject to significant business, economic
and competitive uncertainties and contingencies, many of which are beyond our control. You should
understand that certain unpredictable factors could cause our actual results to differ from our
expectations and those differences may be material. No independent expert participates in the
preparation of these estimates. These estimates should not be regarded as a representation by us as to
our results of operations during such periods as there can be no assurance that any of these estimates
will be realized. In light of the foregoing, we caution you not to place undue reliance on these
estimates. These estimates constitute forward-looking statements.

The utilization of our certain of net operating loss carryforwards are limited and depending upon the amount
of our taxable income we may be subject to paying income taxes earlier than planned.

Due to the uncertainty surrounding the realization of our net deferred tax asset, we have recorded

a valuation allowance for the full amount of our net deferred tax asset. As of December 31, 2008, we
have combined net operating loss carry-forwards of approximately $989 million. This amount includes
federal and state net operating loss carry-forwards in the United States of approximately $379 million
and net operating loss carry-forwards related to our European operations of approximately
$611 million. Section 382 of the Internal Revenue Code in the United States limits the utilization of
net operating losses when ownership changes, as defined by that section, occur. We have performed an
analysis of our Section 382 ownership changes and have determined that the utilization of certain of
our net operating loss carryforwards may be limited. This restricted amount includes the limitation on
annual utilization related to the remaining $183 million of federal and state net operating loss carry-
forwards of Allied Riser Communications Corporation that were acquired by us via a 2002 merger. The
net operating loss carryforwards in the United States will expire, if unused, between 2022 and 2027.
The net operating loss carry-forwards related to our European operations include $493 million that do
not expire and $115 million that expire beginning in 2016.

Network failure or delays and errors in transmissions expose us to potential liability.

Our network uses a collection of communications equipment, software, operating protocols and
proprietary applications for the high-speed transportation of large quantities of data among multiple
locations. Given the complexity of our network, it is possible that data will be lost or distorted. Delays
in data delivery may cause significant losses to one or more customers using our network. Our network
may also contain undetected design faults and software bugs that, despite our testing, may not be
discovered in time to prevent harm to our network or to the data transmitted over it. The failure of
any equipment or facility on the network could result in the interruption of customer service until we
effect necessary repairs or install replacement equipment. Network failures, delays and errors could also

result from natural disasters, power losses, security breaches, computer viruses, denial of service attacks
and other natural or man-made events. Our off-net services are dependent on the networks of other
providers or on local telephone companies. Network failures, faults or errors could cause delays or
service interruptions, expose us to customer liability or require expensive modifications that could have
a material adverse effect on our business.

As an Internet access provider, we may incur liability for information disseminated through our network.

The law relating to the liability of Internet access providers and on-line services companies for
information carried on or disseminated through their networks is unsettled. As the law in this area
develops and as we expand our international operations, the potential imposition of liability upon us
for information carried on and disseminated through our network could require us to implement
measures to reduce our exposure to such liability, which may require the expenditure of substantial
resources or the discontinuation of certain products or service offerings. Any costs that are incurred as
a result of such measures or the imposition of liability could harm our business.

The holders of our senior convertible notes have the right to convert their notes to common stock.

The holders of our senior convertible notes are under certain circumstances able to convert their

notes into common stock at a conversion price of $49.18 per share of common stock and to obtain
additional shares of common stock. If our share price exceeds $49.18 and the conversion right is
exercised by the holders of the notes the number of our shares of common stock outstanding will
increase which could reduce further appreciation in our stock price and impact our per share earnings.
Rather than issue the stock we are permitted to pay the cash equivalent in value to the stock to be
issued. We might not have sufficient funds to do this or doing so might have other detrimental impacts
on us.

Legislation and government regulation could adversely affect us.

As an Internet service provider, we are not subject to substantial regulation by the FCC or the

state public utilities commissions in the United States. Internet service is also subject to minimal
regulation in Europe and in Canada. If we decide to offer traditional voice services or otherwise
expand our service offerings to include services that would cause us to be deemed a common carrier,
we will become subject to additional regulation. Additionally, if we offer voice service using IP (voice
over IP) or offer certain other types of data services using IP we may become subject to additional
regulation. This regulation could impact our business because of the costs and time required to obtain
necessary authorizations, the additional taxes than we may become subject to or may have to collect
from our customers, and the additional administrative costs of providing voice services, and other costs.
Even if we do not decide to offer additional services, governmental authorities may decide to impose
additional regulation and taxes upon providers of Internet service. All of these could inhibit our ability
to remain a low cost carrier and could have a material adverse effect on our business, financial
condition or results of operations.

Much of the law related to the liability of Internet service providers remains unsettled. For
example, many jurisdictions have adopted laws related to unsolicited commercial email or ‘‘spam’’ in
the last several years. Other legal issues, such as the sharing of copyrighted information, transborder
data flow, universal service, and liability for software viruses could become subjects of additional
legislation and legal development. We cannot predict the impact of these changes on us. Regulatory
changes could have a material adverse effect on our business, financial condition or results of
operations.

Terrorist activity throughout the world, military action to counter terrorism and natural disasters could
adversely impact our business.

The September 11, 2001 terrorist attacks in the United States and the continued threat of terrorist

activity and other acts of war or hostility have had, and may continue to have, an adverse effect on
business, financial and general economic conditions internationally. Effects from these events and any
future terrorist activity, including cyber terrorism, may, in turn, increase our costs due to the need to
provide enhanced security, which would adversely affect our business and results of operations. These
circumstances may also damage or destroy the Internet infrastructure and may adversely affect our
ability to attract and retain customers, our ability to raise capital and the operation and maintenance of
our network access points. We are particularly vulnerable to acts of terrorism because our largest
customer concentration is located in New York, our headquarters is in Washington, D.C., and we have
significant operations in Paris, Madrid and London, cities that have historically been targets for
terrorist attacks. We are also susceptible to other catastrophic events such as major natural disasters,
extreme weather, fire or similar events that could effect our headquarters, other offices, our network,
infrastructure or equipment, which could adversely affect our business.

ITEM 2. DESCRIPTION OF PROPERTIES

We lease and own space for offices, data centers, colocation facilities, and points-of-presence.

Our headquarters facility consists of approximately 15,370 square feet located in Washington, D.C.

The lease for our headquarters is with an entity controlled by our Chief Executive Officer. The lease
expires on August 31, 2012.

We also lease a total of approximately 462,000 square feet of space in 72 locations to house our

colocation facilities, corporate headquarters, regional offices and operations centers. The remaining
term of these leases ranges from 3 months to 10 years with, in many cases, options to renew.

We believe that these facilities are generally in good condition and suitable for our operations.

ITEM 3. LEGAL PROCEEDINGS

On September 2, 2008, Sprint Communications L. P. (a subsidiary of Sprint-Nextel Corporation)

filed suit against us in the Circuit court of Fairfax County, Virginia seeking payment for services
allegedly provided by Sprint related to the exchange of Internet traffic by Sprint and the Company.
Sprint sought $1.9 million and additional amounts. The lawsuit has been dismissed.

We are involved in legal proceedings in the normal course of our business that we do not expect to

have a material adverse affect on our business, financial condition or results of operations. For a
discussion of the significant proceedings in which we are involved, see Note 6 to our consolidated
financial statements.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of our security holders during the quarter ended

December 31, 2008.

PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER

MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our sole class of common equity is our common stock, par value $0.001, which is currently traded

on the NASDAQ Global Select Market under the symbol ‘‘CCOI’’. Prior to March 6, 2006, our
common stock traded on the American Stock Exchange under the symbol ‘‘COI’’. Prior to February 5,
2002 no established public trading market for our common stock existed.

As of February 1, 2009, there were approximately 160 holders of record of shares of our common

stock holding 44,341,898 shares of our common stock.

The table below shows, for the quarters indicated, the reported high and low trading prices of our

common stock.

Calendar Year 2007
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Calendar Year 2008
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

High

Low

$24.91
30.09
34.90
30.16

$24.60
22.90
13.85
7.73

$15.74
22.07
20.08
19.67

$15.96
13.16
6.86
3.39

We have not paid any dividends on our common stock since our inception and do not anticipate
paying any dividends in the foreseeable future. Any future determination to pay dividends will be at the
discretion of our board of directors and will be dependent upon then-existing conditions, including our
financial condition, results of operations, contractual restrictions, capital requirements, business
prospects and other factors our board of directors deems relevant.

Performance Graph

The Company, in connection with its merger with Allied Riser Communications Corporation,
began trading shares of its common stock on the American Stock Exchange in February 2002. On
March 6, 2006, the Company’s shares of Common Stock began trading on the NASDAQ National
Market. The Company’s common stock currently trades on the NASDAQ Global Select Market. The
chart below compares the relative changes in the cumulative total return of the Company’s Common
Stock for the period December 31, 2003 - December 31, 2008, against the cumulative total return for
the same period of the (1) The Standard & Poor’s 500 (S&P 500) Index and (2) an industry peer group
consisting of Savvis Communications Corporation (NASDAQ: SVVS); Internap Network Services
Corporation (NASDAQ: INAP); and TW Telecom Inc. (NASDAQ: TWTC). The comparison assumes
$100 was invested on December 31, 2003 in the Company’s common stock, the S&P 500 Index and the
industry peer group, with dividends, if any, reinvested.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG COGENT COMMUNICATIONS GROUP, INC. THE S&P 500 INDEX
AND A PEER GROUP

$160

$140

$120

$100

$80

$60

$40

$20

12/03

12/04

12/05

12/06

12/07

12/08

Cogent Communications Group

S&P 500

Peer Group (1)
26FEB200922595104

Value of $100 Invested on December 31, 2003.

Cogent Communications Group . . . . . . . . .
S&P 500 . . . . . . . . . . . . . . . . . . . . . . . . . .
Peer Group(1) . . . . . . . . . . . . . . . . . . . . .

$100.00
100.00
100.00

$ 92.31
110.88
44.09

$ 23.46
116.33
45.95

$ 69.32
134.70
124.52

$101.32
142.10
106.96

$27.91
89.53
38.03

12/03

12/04

12/05

12/06

12/07

12/08

$100 invested on 12/31/03 in stock or index-including reinvestment of dividends.
Fiscal year ending December 31.
Copyright (cid:3) 2009, S&P, a division of The McGraw-Hill Companies, Inc. All rights reserved.

Unregistered Sales of Equity Securities and Use of Proceeds.

On August 14, 2007, the Company announced that its Board of Directors had authorized a plan to

permit the repurchase of up to $50.0 million of the Company’s common stock in negotiated and open
market transactions. In June 2008, the Company announced that its Board of Directors had authorized
an additional repurchase of up to $50.0 million of the Company’s common stock in negotiated and
open market transactions through December 31, 2009. As of December 31, 2008, the Company had
purchased 4,818,860 shares of its common stock pursuant to these authorizations for an aggregate of
$69.2 million; approximately $30.8 million remained available for such negotiated and open market
transactions concerning our common stock. The Company may purchase shares and its convertible
notes from time to time depending on market, economic, and other factors. The authorization will
continue through December 31, 2009.

The following table summarizes the Company’s common stock repurchases during the fourth

quarter of 2008 made pursuant to this authorization. During the quarter, the Company did not
purchase shares outside of this program, and all purchases were made by or on behalf of the Company
and not by any ‘‘affiliated purchaser’’ (as defined by Rule 10b-18 of the Securities Exchange Act of
1934).

Issuer Purchases of Equity Securities

Period

October 1 - 31, 2008 . . . . . . . . .
November 1 - 30, 2008 . . . . . . .
December 1 - 31, 2008 . . . . . . .

Total
Number of
Shares
(or Units)
Purchased

0
324,664
0

Average
Price Paid
per Share
(or (Unit)

$
0
$3.82
0
$

Total Number of Shares
(or Units) Purchased as
Part of Publicly
Announced Plans
or Programs

Maximum Number (or
Approximate Dollar Value) of
Shares (or Units) that
May Yet Be Purchased Under
the Plans or Programs

4,494,196
4,818,860
4,818,860

$32,070,298
$30,829,936
$30,829,936

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The annual financial information set forth below has been derived from our audited consolidated
financial statements. The information should be read in connection with, and is qualified in its entirety
by reference to, Management’s Discussion and Analysis, the consolidated financial statements and notes
included elsewhere in this report and in our SEC filings.

CONSOLIDATED STATEMENT OF OPERATIONS

DATA:

Service revenue, net . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses:
Network operations . . . . . . . . . . . . . . . . . . . . . . . .
Equity-based compensation expense—network operations .
Selling, general, and administrative—SG&A . . . . . . . . .
Equity-based compensation expense—SG&A . . . . . . . .
. . . . . . . . . . . . . . . .
Terminated public offering costs
Lease restructuring charges
. . . . . . . . . . . . . . . . . . .
Asset impairment . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . .

Years Ended December 31,

2004

2005

2006

2007

2008

(dollars in thousands)

$ 91,286

135,213

149,071

185,663

215,489

63,466
858
40,382
11,404
779
1,821
—
56,645

85,794
399
41,344
12,906
—
1,319
—
55,600

80,106
315
46,593
10,194
—
—
—
58,414

87,548
208
52,011
10,176
—
—
—
65,638

92,727
328
62,917
17,548
—
—
1,592
62,589

Total operating expenses . . . . . . . . . . . . . . . . . . . . .

175,355

197,362

195,622

215,581

237,701

Operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gains—purchases of senior convertible notes . . . . . . . .
Gains—lease obligation restructurings . . . . . . . . . . . . .
Gains—Cisco credit facility . . . . . . . . . . . . . . . . . . .
Gains—dispositions of assets
. . . . . . . . . . . . . . . . . .
Interest income (expense) and other, net . . . . . . . . . . .

(Loss) income before income taxes
. . . . . . . . . . . . . .
Income tax provision . . . . . . . . . . . . . . . . . . . . . . .

Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . . .
Beneficial conversion charges . . . . . . . . . . . . . . . . . .

(84,069)
—
5,292
—
—
(10,883)

(89,660)
—

(89,660)
(43,986)

Net (loss) income applicable to common shareholders

. .

$(133,646)

Net (loss) income per common share available to

common shareholders—basic . . . . . . . . . . . . . . . . .

$ (175.03)

Net (loss) income per common share available to

common shareholders—diluted . . . . . . . . . . . . . . . .

$ (175.03)

(62,149)
—
844
842
3,372
(10,427)

(67,518)
—

(67,518)

(1.96)

(46,551)
—
255
—
254
(7,715)

(53,757)
—

(53,757)

(1.16)

(29,918)
—
2,110
—
95
(3,312)

(31,025)
—

(31,025)

(0.65)

(22,212)
57,568
—
—
178
(7,219)

28,315
(1,536)

26,779
—

26,779

0.60

0.59

Weighted-average common shares—basic . . . . . . . . . . .

763,540

34,439,937

46,343,372

47,800,159

44,563,727

Weighted-average common shares—diluted . . . . . . . . .

763,540

34,439,937

46,343,372

47,800,159

45,623,557

CONSOLIDATED BALANCE SHEET DATA (AT

PERIOD END):

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt (including capital leases and current
portion) (net of unamortized discount of $5,026 in
2004, $3,478 in 2005, $1,213 in 2006, $4,133 in 2007
and $1,611 in 2008) . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . .
OTHER OPERATING DATA:
Net cash (used in) provided by operating activities . . . . .
Net cash used in investing activities . . . . . . . . . . . . . .
Net cash provided by (used in) financing activities . . . . .

$ 13,844
378,586

29,883
351,373

42,642
336,876

177,021
455,325

71,291
347,841

126,382
139,825
212,490

(26,425)
(2,701)
34,486

99,105
—
221,001

(9,062)
(14,055)
39,824

97,024
—
215,632

5,285
(19,478)
27,045

288,441
—
138,830

48,630
(30,864)
116,305

194,560
—
122,356

54,336
(32,539)
(125,638)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

You should read the following discussion and analysis together with ‘‘Selected Consolidated Financial

Data’’ and our consolidated financial statements and related notes included in this report. The discussion in
this report contains forward-looking statements that involve risks and uncertainties, such as statements of
our plans, objectives, expectations and intentions. The cautionary statements made in this report should be
read as applying to all related forward-looking statements wherever they appear in this report. Our actual
results could differ materially from those discussed here. Factors that could cause or contribute to these
differences include those discussed in ‘‘Risk Factors,’’ as well as those discussed elsewhere. You should read
‘‘Risk Factors’’ and ‘‘Special Note Regarding Forward-Looking Statements.’’

General Overview

We are a leading facilities-based provider of low-cost, high-speed Internet access and IP

communications services. Our network is specifically designed and optimized to transmit data using IP.
IP networks are significantly less expensive to operate and are able to achieve higher performance
levels than the traditional circuit-switched networks used by many of our competitors when providing
Internet access services, thus, we believe, giving us cost and performance advantages. We deliver our
services to small and medium-sized businesses, communications service providers and other bandwidth-
intensive organizations through approximately 17,800 customer connections in North America and
Europe. Our primary on-net service is Internet access at a speed of 100 Megabits per second or
greater, much faster than typical Internet access currently offered to businesses. We offer this on-net
service exclusively through our own facilities, which run all the way to our customers’ premises.

Our network is comprised of in-building riser facilities, metropolitan optical fiber networks,

metropolitan traffic aggregation points and inter-city transport facilities. The network is physically
connected entirely through our facilities to over 1,300 buildings in which we provide our on-net
services, including over 950 multi-tenant office buildings. We also provide on-net services in carrier-
neutral colocation facilities, Cogent controlled data centers and single-tenant office buildings. Because
of our integrated network architecture, we are not dependent on local telephone companies to serve
our on-net customers. We emphasize the sale of on-net services because we believe we have a
competitive advantage in providing these services and our sales of these services generate higher gross
profit margins than our off-net and non-core services.

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

We believe our key opportunity is provided by our high-capacity network, which provides us with

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

We are expanding our network to locations that we believe can be economically integrated and

represent significant concentrations of Internet traffic. One of our keys to developing a profitable
business will be to carefully match the expense of extending our network to reach new customers with
the revenue generated by those customers.

We believe two of the most important trends in our industry are the continued long-term growth in

Internet traffic and a decline in Internet access prices. As Internet traffic continues to grow and prices

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

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

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

Due to our strategic acquisitions of network assets and equipment, we believe we are positioned to

grow our revenue base. We continue to purchase and deploy network equipment to parts of our
network to maximize the utilization of our assets and to expand our network. Our future capital
expenditures will be based primarily on our planned expansion of our network, the addition of on-net
buildings and the concentration and growth of our customer base. We plan to continue to expand our
network and to increase our number of on-net buildings by approximately 100 buildings by
December 31, 2009 from 1,326 buildings at December 31, 2008. We expect our 2009 capital
expenditures to be similar to our 2008 capital expenditure rate.

Historically, our operating expenses have exceeded our net service revenue resulting in operating
losses of $46.6 million, $29.9 million and $22.2 million in 2006, 2007 and 2008, respectively. In each of
these periods, our operating expenses consisted primarily of the following:

(cid:127) Network operations expenses, which consist primarily of the cost of leased circuits, sites and
facilities; telecommunications license agreements, maintenance expenses, and salaries of, and
expenses related to, employees who are directly involved with maintenance and operation of our
network.

(cid:127) Selling, general and administrative expenses, which consist primarily of salaries, commissions and

related benefits paid to our employees and other selling and administrative costs including
professional fees and bad debt expenses.

(cid:127) Depreciation and amortization expenses, which result from the depreciation of our property and

equipment, including the assets associated with our network.

(cid:127) Equity-based compensation expenses that result from the grants of stock options and restricted

stock.

Results of Operations

Our management reviews and analyzes several key performance indicators in order to manage our

business and assess the quality of and potential variability of our net service revenues and cash flows.
These key performance indicators include:

(cid:127) net service revenues, which are an indicator of our overall business growth and the success of

our sales and marketing efforts;

(cid:127) growth in our on-net customer base and revenues, which is an indicator of the success of our

primarily on-net focused sales efforts;

(cid:127) growth in our on-net buildings; and

(cid:127) cash flows.

Year Ended December 31, 2007 Compared to the Year Ended December 31, 2008

The following summary table presents a comparison of our results of operations for the year ended

December 31, 2007 and 2008 with respect to certain key financial measures. The comparisons
illustrated in the table are discussed in greater detail below.

Net service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
On-net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Off-net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-core revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Network operations expenses(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general, and administrative expenses(2) . . . . . . . . . . . . . . . . . .
Equity-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization expenses . . . . . . . . . . . . . . . . . . . . . . . .
Gains—lease obligations and asset sales . . . . . . . . . . . . . . . . . . . . . . . .
Gains—purchases of senior convertible notes . . . . . . . . . . . . . . . . . . . .
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year Ended
December 31,

2007

2008

(in thousands)

$185,663
146,604
32,123
6,936
87,548
52,011
10,384
—
65,638
2,205
—
—
(31,025)

$215,489
176,033
34,606
4,850
92,727
62,917
17,876
1,592
62,589
178
57,568
1,536
26,779

Percent
Change

16.1%
20.1%
7.7%
(30.1)%
5.9%
21.0%
72.1%
100.0%
(4.6)%
(91.9)%
100.0%
100.0%
186.3%

(1) Excludes equity-based compensation expense of $208 and $328 in the years ended December 31,

2007 and 2008, respectively, which, if included would have resulted in a period-to-period change of
6.0%.

(2) Excludes equity-based compensation expense of $10,176 and $17,548 in the years ended

December 31, 2007 and 2008, respectively, which, if included would have resulted in a
period-to-period change of 29.4%.

Net Service Revenue. Our net service revenue increased 16.1% from $185.7 million for the year

ended December 31, 2007 to $215.5 million for the year ended December 31, 2008. The impact of
exchange rates resulted in approximately $3.2 million of the $29.8 million increase in revenues. For the
years ended December 31, 2007 and 2008, on-net, off-net and non-core revenues represented 79.0%,
17.3% and 3.7% and 81.7%, 16.1% and 2.2% of our net service revenues, respectively.

Our on-net revenues increased 20.1% from $146.6 million for the year ended December 31, 2007

to $176.0 million for the year ended December 31, 2008. Our on-net revenues increased as we
increased the number of our on-net customer connections by 26.4% from approximately 11,200 at
December 31, 2007 to approximately 14,100 at December 31, 2008. On-net customer connections
increased at a greater rate than on-net revenues due to a decline in the average revenue per on-net
customer connection. This decline is partly attributed to a shift in the customer connection mix and due
to volume and term based pricing discounts. Due to the increase in the size of our sales force, we are
now able to focus not only on customers who purchase high-bandwidth connections, as we have done
historically, but also on customers who purchase lower-bandwidth connections. We expect to continue
to focus our sales efforts on a broad mix of customers. In June 2008, we introduced additional volume

and term based discounts to certain of our customers in an effort to continue to gain market share and
grow our on-net revenues. Additionally, on-net customers who cancel their service from our installed
base of customers, in general, have greater average revenue per connection than new customers. These
trends resulted in a reduction to our average revenue per on-net connection.

Our off-net revenues increased 7.7% from $32.1 million for the year ended December 31, 2007 to
$34.6 million for the year ended December 31, 2008. Our off-net customer connections increased 1.8%
from approximately 2,990 at December 31, 2007 to approximately 3,040 at December 31, 2008. Off-net
revenues increased at a greater rate than off-net customer connections due to an increase in the
average revenue per off-net customer connection. Off-net customers who cancel their service, in
general, have a lower average revenue per connection than new off-net customers who generally
purchase higher-bandwidth connections.

Our non-core revenues decreased 30.1% from $6.9 million for the year ended December 31, 2007

to $4.9 million for the year ended December 31, 2008. The number of our non-core customer
connections declined 23.9% from approximately 800 at December 31, 2007 to approximately 610 at
December 31, 2008. We do not actively market these acquired non-core services and expect that the net
service revenue associated with them will continue to decline.

Network Operations Expenses. Our network operations expenses, excluding equity-based

compensation expense, increased 5.9% from $87.5 million for the year ended December 31, 2007 to
$92.7 million for the year ended December 31, 2008. The increase is primarily attributable to an
increase in costs related to our network and facilities expansion activities and an increase in utilities
charges partly offset by the decline in network operations expenses associated with the decline in our
non-core revenues. The impact of exchange rates resulted in approximately $1.4 million of this
$5.2 million increase in network operations expenses.

Selling, General, and Administrative Expenses (‘‘SG&A’’). Our SG&A expenses, excluding equity-

based compensation expense, increased 21.0% from $52.0 million for the year ended December 31,
2007 to $62.9 million for the year ended December 31, 2008. SG&A expenses increased primarily from
the increase in salaries and related costs required to support our expanding sales and marketing efforts
and a $2.6 million increase in bad debt expense. The impact of exchange rates resulted in
approximately $1.2 million of this $10.9 million increase in SG&A expenses.

Equity-based Compensation Expense. Equity-based compensation expense is related to restricted

stock and stock options. The total equity-based compensation expense increased 72.1% from
$10.4 million for the year ended December 31, 2007 to $17.9 million for the year ending December 31,
2008. In April 2007 and January 2008, we issued approximately 1.0 million and 0.6 million shares,
respectively, of restricted stock to our employees resulting in the increase in equity-based compensation
expense. As of December 31, 2008 there was approximately $19.4 million of total unrecognized
compensation cost related to non-vested equity-based compensation awards. That cost is expected to be
recognized over a weighted average period of approximately twenty-eight months.

Depreciation and Amortization Expenses. Our depreciation and amortization expense decreased
4.6% from $65.6 million for the year ended December 31, 2007 to $62.6 million for the year ended
December 31, 2008. The decrease is primarily due to the decline in depreciation expense from fully
depreciated fixed assets more than offsetting depreciation expense associated with the increase in
deployed fixed assets.

Asset Impairment.

In the first quarter of 2008, we recorded an impairment charge of $1.6 million

related to an IRU asset under a capital lease. The IRU asset was no longer in use and we have
obtained alternative dark fiber that serves the related facilities and customers.

Gains—lease obligations and asset sales.

In September 2007, we entered into a settlement

agreement under which we were released from our obligation under an abandoned facility lease
acquired in an acquisition. This settlement agreement resulted in a gain of approximately $2.1 million.

Gains on Purchases of Convertible Senior Notes.

In 2008, we purchased $108.0 million of face

value of our convertible senior notes (the ‘‘Notes’’) for $48.6 million in cash in a series of transactions.
These transactions resulted in a gain of $57.6 million for the year ended December 31, 2008. After
these transactions there is $92.0 million of face value of our Notes outstanding. We may purchase
additional Notes.

Income tax provision. The income tax provision was $1.5 million for the year ended December 31,

2008. There was no income tax provision for the year ended December 31, 2007. In the year ended
December 31, 2008, primarily due to the gains on the purchases of our Notes, we became subject to
the alternative minimum tax in the United States. Under the alternative minimum tax system, the
ability to offset taxable income with the utilization of net operating loss carryforwards is limited. The
tax provision for the year ended December 31, 2008 includes income taxes for the United States of
approximately $0.6 million of federal alternative minimum tax and approximately $0.9 million of state
income taxes (including approximately $0.5 million related to an uncertain tax position).

Buildings On-net. As of December 31, 2007 and 2008 we had a total of 1,217 and 1,326 on-net

buildings connected to our network, respectively.

Year Ended December 31, 2006 Compared to the Year Ended December 31, 2007

The following summary table presents a comparison of our results of operations for the year ended

December 31, 2006 and 2007 with respect to certain key financial measures. The comparisons
illustrated in the table are discussed in greater detail below.

Net service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
On-net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Off-net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-core revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Network operations expenses(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general, and administrative expenses(2) . . . . . . . . . . . . . . . . . .
Equity-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization expenses . . . . . . . . . . . . . . . . . . . . . . . .
Gains—lease obligations and asset sales . . . . . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year Ended
December 31,

2006

2007

(in thousands)

$149,071
105,275
34,416
9,380
80,106
46,593
10,509
58,414
509
(53,757)

$185,663
146,604
32,123
6,936
87,548
52,011
10,384
65,638
2,205
(31,025)

Percent
Change

24.5%
39.3%
(6.7)%
(26.1)%
9.3%
11.6%
(1.2)%
12.4%
333.2%
42.3%

(1) Excludes equity-based compensation expense of $315 and $208 in the years ended December 31,

2006 and 2007, respectively, which, if included would have resulted in a period-to-period change of
9.1%.

(2) Excludes equity-based compensation expense of $10,194 and $10,176 in the years ended

December 31, 2006 and 2007, respectively, which, if included would have resulted in a
period-to-period change of 9.5%.

Net Service Revenue. Our net service revenue increased 24.5% from $149.1 million for the year

ended December 31, 2006 to $185.7 million for the year ended December 31, 2007. The impact of
exchange rates resulted in approximately $4.2 million of the $36.6 million increase in revenues. For the
years ended December 31, 2006 and 2007, on-net, off-net and non-core revenues represented 70.6%,
23.1% and 6.3% and 79.0%, 17.3% and 3.7% of our net service revenues, respectively.

Our on-net revenues increased 39.3% from $105.3 million for the year ended December 31, 2006

to $146.6 million for the year ended December 31, 2007. Our on-net revenues increased as we
increased the number of our on-net customer connections by 43.9% from approximately 7,800 at
December 31, 2006 to approximately 11,200 at December 31, 2007. On-net customer connections
increased at a greater rate than on-net revenues due to a decline in the revenue per on-net customer
connection. This decline is partly attributed to a shift in the customer connection mix. Due to the
increase in the size of our sales force, we are now able to focus not only on customers who purchase
high-bandwidth connections, as we have done historically, but also on customers who purchase lower-
bandwidth connections. We expect to continue to focus our sales efforts on a broad mix of customers.
Additionally, on-net customers who cancel their service, in general, have greater revenue per
connection than new customers. These trends and, to a lesser extent, an increase in customers receiving
a discount for purchasing longer term contracts, resulted in a reduction to our revenue per on-net
connection.

Our off-net revenues decreased 6.7% from $34.4 million for the year ended December 31, 2006 to
$32.1 million for the year ended December 31, 2007. Our off-net customer connections declined 15.4%
from approximately 3,500 at December 31, 2006 to approximately 3,000 at December 31, 2007. Off-net
customer connections decreased at a greater rate than the decline in off-net revenues due to an
increase in the revenue per off-net customer connection. Off-net customers who cancel their service, in
general, have revenue per connection that is less than new off-net customers who generally purchase
higher-bandwidth connections. Additionally, a significant amount of our off-net revenues were acquired
revenues with a revenue per connection that is less than new off- net customers. Acquired revenues
have historically churned at a greater rate than new off net customers.

Our non-core revenues decreased 26.1% from $9.4 million for the year ended December 31, 2006

to $6.9 million for the year ended December 31, 2007. The number of our non-core customer
connections declined 20.3% from approximately 1,000 at December 31, 2006 to approximately 800 at
December 31, 2007. We do not actively market these acquired non-core services and expect that the net
service revenue associated with them will continue to decline.

Network Operations Expenses. Our network operations expenses, excluding equity-based

compensation expense, increased 9.3% from $80.1 million for the year ended December 31, 2006 to
$87.5 million for the year ended December 31, 2007. The increase is primarily attributable to an
increase in costs related to our network and facilities expansion activities partly offset by the decline in
network operations expenses associated with the decline in our off-net and non-core revenues. The
impact of exchange rates resulted in approximately $1.8 million of this $7.4 million increase in network
operations expenses.

Selling, General, and Administrative Expenses (‘‘SG&A’’). Our SG&A expenses, excluding equity-

based compensation expense, increased 11.6% from $46.6 million for the year ended December 31,
2006 to $52.0 million for the year ended December 31, 2007. SG&A expenses increased primarily from
the increase in salaries and related costs required to support our expanding sales and marketing efforts.
The impact of exchange rates resulted in approximately $1.4 million of this $5.4 million increase in
SG&A expenses.

Equity-based Compensation Expense. Equity-based compensation expense is related to restricted

stock and stock options. The total equity-based compensation expense decreased 1.2% from

$10.5 million for the year ended December 31, 2006 to $10.4 million for the year ending December 31,
2007. During 2007, we issued approximately 1.0 million shares of restricted stock to our employees.
These grants were valued at our closing stock price on the date of grant and will vest over periods
ranging from two to four years. These grants resulted in approximately $7.1 million in equity-based
compensation expense for the year ended December 31, 2007. The increase was partly offset by a
$6.8 million decrease in equity-based compensation expense associated with certain 2003 restricted
stock grants which ended in August 2006 when these shares became fully vested.

Depreciation and Amortization Expenses. Our depreciation and amortization expense increased
12.4% from $58.4 million for the year ended December 31, 2006 to $65.6 million for the year ended
December 31, 2007 due to an increase in deployed fixed assets.

Gains—lease obligations and asset sales.

In September 2007, we entered into a settlement

agreement under which we were released from our obligation under an abandoned facility lease
acquired in an acquisition. This settlement agreement resulted in a gain of approximately $2.1 million.
In September 2006, Cogent Spain negotiated modifications to an IRU capital lease that reduced its
quarterly IRU lease payments and extended the lease term. The modification to this IRU capital lease
resulted in a gain of approximately $0.3 million. In 2006, we sold a building and land for net proceeds
of $0.8 million. This sale resulted in a gain of approximately $0.3 million.

Buildings On-net. As of December 31, 2006 and 2007 we had a total of 1,107 and 1,217 on-net

buildings connected to our network, respectively.

Liquidity and Capital Resources

In assessing our liquidity, management reviews and analyzes our current cash balances, short-term

investments, accounts receivable, accounts payable, accrued liabilities, capital expenditure commitments,
and required capital lease, interest and debt payments and other obligations.

Cash Flows

The following table sets forth our consolidated cash flows for the years ended December 31, 2006,

2007, and 2008.

Year Ended December 31,

2006

2007

2008

Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) financing activities . . . . . . . . . . . . . .
Effect of exchange rates on cash . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 5,285
(19,478)
27,045
(93)

(in thousands)
$ 48,630
(30,864)
116,305
308

$ 54,336
(32,539)
(125,638)
(1,889)

Net increase (decrease) in cash and cash equivalents during period . .

$ 12,759

$134,379

$(105,730)

Net Cash Provided By Operating Activities. Our primary sources of operating cash are receipts
from our customers who are billed on a monthly basis for our services. Our primary uses of operating
cash are payments made to our vendors, employees and interest payments to our noteholders. Net cash
provided by operating activities was $5.3 million for the year ended December 31, 2006 compared to
net cash provided by operating activities of $48.6 million for 2007. The increase in cash provided by
operating activities was due to an increase in our operating profit and an improvement in the changes
in operating assets and liabilities from a use of cash of $11.6 million for the year ended December 31,
2006 to an increase of cash of $4.9 million for the year ended December 31, 2007. The increase in the
changes in operating assets and liabilities from the year ended December 31, 2006 to the year ended
December 31, 2007 was primarily due to the timing of certain vendor payments. Net cash provided by

operating activities was $48.6 million for the year ended December 31, 2007 compared to net cash
provided by operating activities of $54.3 million for 2008. The increase in cash provided by operating
activities is due to an increase in our operating profit partly offset by changes in operating assets and
liabilities from an increase of cash of $4.9 million for the year ended December 31, 2007 to an increase
of cash of $2.1 million for the year ended December 31, 2008.

Net Cash Used In Investing Activities. Net cash used in investing activities was $19.5 million for

the year ended December 31, 2006, $30.9 million for the year ended December 31, 2007 and
$32.5 million for the year ended December 31, 2008. Our primary use of investing cash during 2006
was $21.5 million for the purchases of property and equipment. Our primary uses of investing cash
during 2007 were $30.4 million for the purchases of property and equipment and $0.7 million for the
purchases of short-term investments. Our primary sources of investing cash in 2006 were $1.2 million
from the proceeds of short-term investments and $0.9 million from the proceeds of the sales of assets.
Our primary source of investing cash in 2007 was $0.3 million from the proceeds of the sales of assets.
Our primary use of investing cash during 2008 was $33.5 million for the purchases of property and
equipment. Our primary sources of investing cash in 2008 were $0.7 million from the proceeds of
short-term investments and $0.2 million from the proceeds of the sales of assets. The increases in
purchases of property and equipment from the year ended December 31, 2006 to the year ended
December 31, 2007 and from the year ended December 31, 2007 to the year ended December 31, 2008
were primarily due to our increase in our network expansion activities including geographic expansion
and adding more buildings to our network.

Net Cash Provided By (Used In) Financing Activities. Financing activities provided net cash of

$27.0 million for the year ended December 31, 2006 and $116.3 million for the year ended
December 31, 2007. Financing activities used cash of $125.6 million for the year ended December 31,
2008. Net cash from financing activities during 2006 resulted from $36.5 million of net proceeds from
our June 2006 public offering and $0.4 million from the proceeds from the exercises of stock options.
Net cash used in financing activities for 2006 included $9.9 million in principal payments under our
capital leases. Our primary source of financing cash for the year ended December 31, 2007 was
$195.1 million of net proceeds from the issuance of our 1.00% Convertible Senior Notes and
$1.1 million of proceeds from the exercises of stock options. Our primary use of financing cash for the
year ended December 31, 2007 was $59.9 million for the purchase of shares of our common stock,
$10.2 million for the repayment of our Allied Riser convertible subordinated notes on their June 15,
2007 maturity date and $9.8 million of principal payments under our capital lease obligations. Our
primary use of financing cash for the year ended December 31, 2008 was $59.3 million for the purchase
of shares of our common stock, $48.6 million for repurchases of our 1.00% Convertible Senior Notes in
a series of transactions and $18.0 million of principal payments under our capital lease obligations. The
increase in principal payments under our capital lease obligations from the year ended December 31,
2007 to the year ended December 31, 2008 is primarily due to our increase in our network expansion
activities including geographic expansion and adding more buildings to our network.

Indebtedness

Our total indebtedness, net of discount, at December 31, 2008 was $194.6 million and our total
cash and cash equivalents and short-term investments were $71.4 million. Our total indebtedness at
December 31, 2008 includes $104.2 million of capital lease obligations for dark fiber primarily under
15 - 25 year IRUs, of which approximately $5.9 million is considered a current liability.

Convertible Senior Notes

In June 2007, we issued 1.00% Convertible Senior Notes (the ‘‘Notes’’) due June 15, 2027, for an

aggregate principal amount of $200.0 million in a private offering for resale to qualified institutional
buyers pursuant to SEC Rule 144A. The Notes are unsecured and bear interest at 1.00% per annum.
The Notes will rank equally with any future senior debt and senior to any future subordinated debt and
will be effectively subordinated to all of our subsidiary’s existing and future liabilities and to any
secured debt that we may issue to the extent of the value of the collateral. Interest is payable in cash
semiannually in arrears on June 15 and December 15, of each year, beginning on December 15, 2007.
We received proceeds of approximately $195.1 million after deducting the original issue discount of
2.25% and issuance costs.

In 2008, we purchased $108.0 million of face value of our Notes for $48.6 million in cash in a

series of transactions. These transactions resulted in a gain of $57.6 million for the year ended
December 31, 2008. After these transactions there is $92.0 million of face value of our Notes
outstanding. We may purchase additional Notes.

The Notes are convertible into shares of our common stock at an initial conversion price of $49.18

per share, or 20.3355 shares for each $1,000 principal amount of Notes, subject to adjustment for
certain events as set forth in the indenture. Upon conversion of the Notes, we will have the right to
deliver shares of our common stock, cash or a combination of cash and shares of our common stock.
The Notes are convertible (i) during any fiscal quarter after the fiscal quarter ending September 30,
2007, if the closing sale price of our common stock for 20 or more trading days in a period of 30
consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter
exceeds 130% of the conversion price in effect on the last trading day of the immediately preceding
fiscal quarter, or (ii) specified corporate transactions occur, or (iii) the trading price of the Notes falls
below a certain threshold, or (iv) if we call the Notes for redemption, or (v) on or after April 15, 2027,
until maturity. In addition, following specified corporate transactions, we will increase the conversion
rate for holders who elect to convert Notes in connection with such corporate transactions, provided
that in no event may the shares issued upon conversion, as a result of adjustment or otherwise, result
in the issuance of more than 35.5872 common shares per $1,000 principal amount. The Notes include
an ‘‘Irrevocable Election of Settlement’’ whereby we may choose, in our sole discretion, and without
the consent of the holders of the Notes, to waive our right to settle the conversion feature in either
cash or stock or in any combination, at our option.

The Notes may be redeemed by us at any time after June 20, 2014 at a redemption price of 100%

of the principal amount plus accrued interest. Holders of the Notes have the right to require us to
repurchase for cash all or some of their Notes on June 15, 2014, 2017 and 2022 and upon the
occurrence of certain designated events at a redemption price of 100% of the principal amount plus
accrued interest.

Allied Riser Convertible Subordinated Notes

Our $10.2 million 7.50% convertible subordinated notes were due on June 15, 2007. These notes

and accrued interest were paid on June 15, 2007 with a portion of the proceeds from the Notes.

Common Stock Buyback Program

In June 2007 we used approximately $50.1 million of the net proceeds from our issuance of our
Notes to repurchase approximately 1.8 million shares of our common stock. In August 2007, our board
of directors approved a $50.0 million common stock buyback program. In June 2008, our board of
directors approved an additional $50.0 million of purchases of our common stock under the buyback
program to occur prior to December 31, 2009. In the years ended December 31, 2007 and 2008, we
purchased approximately 2.2 million and 4.4 million shares of our common stock, respectively, for

approximately $59.9 million and $59.3 million, respectively. All purchased common shares were
subsequently retired. As of December 31, 2008, there was approximately $30.8 million remaining under
the buyback program.

Contractual Obligations and Commitments

The following table summarizes our contractual cash obligations and other commercial

commitments as of December 31, 2008.

Payments due by period

Total

Less than
1 year

1 - 3 years

3 - 5 years

After
5 years

Long term debt(1) . . . . . . . . . . . . . . . . . . . . . .
Capital lease obligations . . . . . . . . . . . . . . . . . .
Operating leases(2) . . . . . . . . . . . . . . . . . . . . .
Unconditional purchase obligations(3) . . . . . . .

$ 97,037
194,971
195,398
36,612

920
16,663
37,261
14,903

(in thousands)
$ 1,840
32,160
50,067
2,551

$ 1,840
26,166
31,787
2,551

$ 92,437
119,982
76,283
16,607

Total contractual cash obligations . . . . . . . . . . .

$524,018

$69,747

$86,618

$62,344

$305,309

(1) The Notes are assumed to be outstanding until June 15, 2014 which is the earliest put date and

these amounts include interest and principal payment obligations.

(2) These amounts include $195.6 million of operating lease, maintenance, building access and tenant

license agreement obligations, reduced by sublease agreements of $0.2 million.

(3) As of December 31, 2008, we had committed to additional dark fiber IRU lease agreements

totaling approximately $27.9 million in future payments for fiber lease and maintenance services.
These amounts are included in unconditional purchase obligations and are to be paid in periods of
up to 20 years beginning once the related fiber is accepted.

Capital Lease Obligations. The capital lease obligations above were incurred in connection with

IRUs for inter-city and intra-city dark fiber underlying substantial portions of our network. These
capital leases are presented on our balance sheet at the net present value of the future minimum lease
payments, or $104.2 million at December 31, 2008. These leases generally have initial terms of 15 to
20 years.

Letters of Credit. We are also party to letters of credit totaling $0.9 million at December 31, 2008.
These obligations are fully secured by our restricted investments, and as a result, are excluded from the
contractual cash obligations above.

Future Capital Requirements

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

Any future acquisitions or other significant unplanned costs or cash requirements may require that

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

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

Off-Balance Sheet Arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, such as

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

Income taxes

Due to the uncertainty surrounding the realization of our net deferred tax asset, we have recorded

a valuation allowance for the full amount of our net deferred tax asset. As of December 31, 2008, we
have combined net operating loss carry-forwards of approximately $989 million. This amount includes
federal and state net operating loss carry-forwards in the United States of approximately $379 million
and net operating loss carry-forwards related to our European operations of approximately
$611 million. Section 382 of the Internal Revenue Code in the United States limits the utilization of
net operating losses when ownership changes, as defined by that section, occur. We have performed an
analysis of our Section 382 ownership changes and have determined that the utilization of certain of
our net operating loss carryforwards may be limited. This restricted amount includes the limitation on
annual utilization related to the remaining $183 million of federal and state net operating loss carry-
forwards of Allied Riser Communications Corporation that were acquired by us via a 2002 merger. The
net operating loss carryforwards in the United States will expire, if unused, between 2022 and 2027.
The net operating loss carry-forwards related to the European operations include $493 million that do
not expire and $115 million that expire beginning in 2016.

Critical Accounting Policies and Significant Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our

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

The accounting policies we believe to be most critical to understanding our financial results and

condition or that require complex, significant and subjective management judgments are discussed
below.

Revenue Recognition

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

customer life increases, we will recognize installation revenue over a longer period. We expense direct
costs associated with sales as incurred.

Allowances for Sales Credits and Unfulfilled Customer Purchase Obligations

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

obligations.

(cid:127) Our allowance for sales credits is recorded as a reduction to our service revenue to provide for
situations when customers are granted a service termination adjustment for amounts billed in
advance or a service level agreement credit or discount. This allowance is determined by actual
credits granted during the period and an estimate of unprocessed credits.

(cid:127) Our allowance for unfulfilled contractual customer purchase obligations is designed to account
for the possible non-payment of amounts under agreements that we have with certain of our
customers that place minimum purchase obligations on them. Although we vigorously seek
payments due pursuant to these purchase obligations, we have historically collected only a small
portion of these billed obligations. In order to allow for this, we reduce our gross service
revenue by the amount that has been invoiced to these customers. We reduce this allowance and
recognize the related service revenue only upon the receipt of cash payments in respect of these
invoices. This allowance is determined by the amount of unfulfilled contractual purchase
obligations invoiced to our customers and with respect to which we are continuing to seek
payment.

Valuation Allowances for Doubtful Accounts Receivable and Deferred Tax Assets

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

tax assets.

(cid:127) Our valuation allowance for uncollectible accounts receivable is designed to account for the

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

(cid:127) Our valuation allowance for our net deferred tax asset reflects the uncertainty surrounding the
realization of our net operating loss carry-forwards and our other deferred tax assets. To reflect
for the uncertainty of future taxable income we have recorded a valuation allowance for the full
amount of our net deferred tax asset.

Convertible Senior Notes

We evaluated the embedded conversion option of our Notes in accordance with SFAS No. 133,
‘‘Accounting for Derivative Instruments and Hedging Activities,’’ EITF Issue No. 00-19 ‘‘Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in a Company’s Own Stock’’ and
EITF Issue No. 01-6 ‘‘The Meaning of Indexed to a Company’s Own Stock.’’ We concluded that the
embedded conversion option contained within the Notes should not be accounted for separately
because the conversion option is indexed to our common stock and would be classified within
stockholders’ equity, if issued on a standalone basis.

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

Equity-based Compensation

Generally we grant options for shares of our common stock to all new employees with a strike
price equal to the market value at the grant date. We grant shares of restricted stock to our senior
management team, board of directors and to certain other employees. We determine the fair value of
grants of restricted stock by the closing trading price of our common stock on the grant date. Grants of
shares of restricted stock vest over periods ranging from immediate vesting to over a four-year period.
Compensation expense for all awards is recognized ratably over the service period.

The accounting for stock option compensation expense requires us to make additional estimates

and judgments that affect our financial statements. These estimates include the following.

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

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

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

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

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

Other Accounting Policies

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

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

We estimate our litigation accruals based upon our estimate of the expected outcome after

consultation with legal counsel.

We estimate our accruals for disputed leased circuit obligations based upon the nature and age of

the dispute. Our network costs are impacted by the timing and amounts of disputed circuit costs. We
generally record these disputed amounts when billed by the vendor and reverse these amounts when
the vendor credit has been received or the dispute has otherwise been resolved.

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

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, ‘‘Fair Value Measurements’’ (‘‘SFAS 157’’).

SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with
generally accepted accounting principles, and expands disclosures about fair value measurements. In
February 2008, the FASB issued FSP No. 157-1, ‘‘Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for
Purposes of Lease Classification or Measurement under Statement 13’’ and FSP No. 157-2, ‘‘Effective
Date of FASB Statement No. 157’’ as amendments to SFAS 157, which exclude lease transactions from
the scope of SFAS 157 and also defer the effective date of the adoption of SFAS 157 for non-financial
assets and non-financial liabilities that are nonrecurring. The provisions of SFAS 157 are effective for
the fiscal year beginning January 1, 2008, except for certain non-financial assets and liabilities for which
the effective date has been deferred to January 1, 2009. The adoption of SFAS 157 and its related
pronouncements did not and are not expected to have a material effect on our consolidated financial
position, results of operations or cash flows.

In May 2008, the FASB issued FASB Staff Position APB 14-1, ‘‘Accounting for Convertible Debt

Instruments That May Be Settled in Cash Upon Conversion (including partial cash settlement)’’ (‘‘FSP
APB 14-1’’). FSP APB 14-1 requires the issuer of certain convertible debt instruments that may be
settled in cash on conversion to separately account for the liability (debt) and equity (conversion
option) components of the instrument in a manner that reflects the issuer’s nonconvertible debt
borrowing rate. Upon conversion of our Convertible Senior Notes, we have the right to deliver shares
of our common stock, cash or a combination of cash and shares of our common stock. As a result, our
accounting for our Convertible Senior Notes will be impacted by the adoption of FSP APB 14-1. The
adoption of FSP APB 14-1 will result in a significant increase to the discount on our Notes with a
corresponding increase to stockholder’s equity. The adoption of FSP APB 14-1 will also result in an
increase to our interest expense from the amortization of the increase to the discount on our Notes.
We will be required to adopt FSP APB 14-1 on January 1, 2009 and will be required to retroactively
restate all prior periods since the June 2007 issuance of the Notes. The incremental non-cash interest
expense required to be recognized (due to an increase in debt discount) will be material. In addition,
the gains recognized on debt extinguishment may change as a result of the adoption of FSP APB 14-1.

In June 2008, the FASB issued EITF No. 07-5, ‘‘Determining whether an Instrument (or
Embedded Feature) is Indexed to an Entity’s Own Stock (‘‘EITF 07-5’’). EITF 07-5 applies to any
freestanding financial instrument or embedded feature that has all the characteristics of a derivative, as
defined. If an instrument, or an embedded feature, is not considered indexed to the issuer’s stock
under EITF 07-5, that instrument is not eligible for equity classification and would be classified as an
asset or liability and remeasured at fair value through earnings. We will be required to adopt
EITF 07-5 on January 1, 2009 with the cumulative effect of adoption adjusted to the opening balance
of retained earnings. We are currently evaluating the impact of adopting EITF 07-5.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to certain market risks. These risks, which include interest rate risk and foreign

currency exchange risk, arise in the normal course of business rather than from trading activities.

Interest Rate Risk

Our cash flow exposure due to changes in interest rates related to our debt is limited as our 1.00%
$92.0 million of Convertible Senior Notes (the ‘‘Notes’’) have a fixed interest rate. The fair value of the
Notes may increase or decrease for various reasons, including fluctuations in the market price of our
common stock, fluctuations in market interest rates and fluctuations in general economic conditions.
Based upon the quoted market price at December 31, 2008, the fair value of our Notes was
approximately $45.1 million.

Our interest income is sensitive to changes in the general level of interest rates. However, based

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

Foreign Currency Exchange Risk

Our European and Canadian operations expose us to potentially unfavorable adverse movements
in foreign currency rate changes. We have not entered into forward exchange contracts related to our
foreign currency exposure. While we record financial results from our European and Canadian
operations in Euros and the Canadian dollar, respectively, these results are reflected in our
consolidated financial statements in U.S. dollars. The assets and liabilities associated with our European
and Canadian operations are translated into U.S. dollars and reflected in our consolidated financial
statements in U.S. dollars. Therefore, our reported results are exposed to fluctuations in the exchange
rates between the U.S. dollar and the Euro and the Canadian dollar. In addition, we fund certain cash
flow requirements of our European operations in U.S. dollars. Accordingly, in the event that the Euro
strengthens versus the dollar to a greater extent than planned the revenues, expenses and cash flow
requirements associated with our European operations may be significantly higher in U.S.-dollar terms
than planned.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets as of December 31, 2007 and 2008 . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for the Years Ended December 31, 2006, December 31,

2007 and December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31,

2006, December 31, 2007 and December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, December 31,

2007 and December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Page

39
40

44
45

Report of Independent Registered Public Accounting Firm

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

We have audited the accompanying consolidated balance sheets of Cogent Communications

Group, Inc. and subsidiaries (the ‘‘Company’’) as of December 31, 2007 and 2008, and the related
consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the
three years in the period ended December 31, 2008. Our audits also included the financial statement
schedule listed in the index at 15(a) 2. These financial statements and schedule are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these financial statements
and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects,

the consolidated financial position of Cogent Communications Group, Inc. and subsidiaries at
December 31, 2007 and 2008, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 2008, in conformity with U.S. generally
accepted accounting principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Cogent Communications Group, Inc.’s internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 2, 2009 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

McLean, VA
March 2, 2009

COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2007 AND 2008

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short term investments—restricted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net of allowance for doubtful accounts of $1,159 and

$1,914, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . .

Prepaid expenses and other current assets

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment:
Property and equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . .

2007

2008

$ 177,021
812

$ 71,291
62

21,760
6,636

206,229

22,174
6,389

99,916

561,907
(316,487)

618,008
(374,069)

Total property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits and other assets ($1,048 and $1,091 restricted, respectively) . . . . . . .

245,420
3,676

243,939
3,986

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 455,325

$ 347,841

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued and other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current maturities, capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . .

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital lease obligations, net of current maturities . . . . . . . . . . . . . . . . . . . . .
Convertible senior notes, net of discount of $4,133 and 1,611, respectively . . . .
Other long term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 12,868
12,891
7,717

$ 12,795
14,756
5,940

33,476
84,857
195,867
2,295

316,495

33,491
98,253
90,367
3,374

225,485

Commitments and contingencies
Stockholders’ equity:
Common stock, $0.001 par value; 75,000,000 shares authorized; 47,929,874 and
44,318,949 shares issued and outstanding, respectively . . . . . . . . . . . . . . . . .
Additional paid-in capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock purchase warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income—foreign currency translation

48
430,402
764

44
390,181
764

adjustment

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,600
(295,984)

572
(269,205)

Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

138,830

122,356

Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 455,325

$ 347,841

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

COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2006, DECEMBER 31, 2007 AND DECEMBER 31, 2008

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

Service revenue, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses:
Network operations (including $315, $208 and $328 of

equity-based compensation expense, respectively, exclusive
of amounts shown separately) . . . . . . . . . . . . . . . . . . . . .

Selling, general, and administrative (including $10,194,
$10,176 and $17,548 of equity-based compensation
expense, and $2,584, $2,005 and $4,577 of bad debt
expense, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . .

2006

2007

2008

149,071

185,663

215,489

80,421

87,756

93,055

56,787
—
58,414

62,187
—
65,638

80,465
1,592
62,589

Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .

195,622

215,581

237,701

Operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gains—purchases of senior convertible notes . . . . . . . . . . . .
Gains—lease obligation restructurings . . . . . . . . . . . . . . . . .
Gains—disposition of assets . . . . . . . . . . . . . . . . . . . . . . . .
Interest income and other . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net (loss) income before income taxes . . . . . . . . . . . . . . . . .
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Basic net (loss) income per common share . . . . . . . . . . . . . .

Diluted net (loss) income per common share . . . . . . . . . . . .

(46,551)
—
255
254
2,969
(10,684)

(53,757)
—

(29,918)
—
2,110
95
6,914
(10,226)

(31,025)
—

(22,212)
57,568
—
178
3,847
(11,066)

28,315
(1,536)

(53,757) $

(31,025) $

26,779

(1.16) $

(0.65) $

(1.16) $

(0.65) $

0.60

0.59

Weighted-average common shares—basic . . . . . . . . . . . . . . .

46,343,372

47,800,159

44,563,727

Weighted-average common shares—diluted . . . . . . . . . . . . .

46,343,372

47,800,159

45,623,557

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

COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2006 DECEMBER 31, 2007 AND DECEMBER 31, 2008

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

Balance at December 31, 2005 . . . . .
Total, December 31, 2005

Forfeitures of shares granted to

Common Stock

Amount

Additional
Paid-in
Capital

Deferred
Compensation

Treasury
Stock

Stock
Purchase
Warrants

44,092,652

$44

$440,500

$(9,680)

$(90)

$764

employees . . . . . . . . . . . . . . . .

(646) —

—

Adoption of SFAS 123(R)—
reclassification of deferred
compensation . . . . . . . . . . . . .
Equity-based compensation . . . . .
Foreign currency translation . . . . .
Issuances of common stock, net . .
Exercises of options
. . . . . . . . . .
Treasury stock retirement . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . .

Balance at December 31, 2006 . . . . .
Total, December 31, 2006

Forfeitures of shares granted to

employees . . . . . . . . . . . . . . . .
Equity-based compensation . . . . .
Foreign currency translation . . . . .
Issuances of common stock, net . .
Exercises of options
. . . . . . . . . .
Common stock purchases and

—
—
—
4,732,500
103,602
—
—

48,928,108

—
—
—
5
—
—
—

(22,659) —
—
—
1
—

—
—
1,033,404
216,311

retirement . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . .

(2,225,290)
—

(2)
—

47,929,874

(9,680)
10,509
—
36,474
427
(90)
—

478,140

—
11,105
—
—
1,103

(59,946)
—

9,680
—
—
—
—
—
—

—

—
—
—
—
—

—
—

430,402

$ —

Balance at December 31, 2007 . . . . .
Total, December 31, 2007
Forfeitures of shares granted to

employees . . . . . . . . . . . . . . . . . .
Equity-based compensation . . . . . . .
Foreign currency translation . . . . . .
Issuances of common stock, net . . . .
Exercises of options . . . . . . . . . . . .
Common stock purchases and

(17,596) —
—
—
—
—

—
—
715,610
63,931

—
18,901
—
—
148

—
—
—
—
—

—
—

—

—
—
—
—
—
90
—

—

—
—
—
—
—

—
—

—

—
—
—
—
—

—
—

—

—
—
—
—
—
—
—

764

—
—
—
—
—

—
—

764

—
—
—
—
—

—
—

retirement

. . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . .

(4,372,870)
—

(4)
—

(59,270)
—

Balance at December 31, 2008 . . . . .

44,318,949

$44

$390,181

$ —

$764

Total, December 31, 2008

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

COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2006 DECEMBER 31, 2007 AND DECEMBER 31, 2008

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

Balance at December 31, 2006 . . . . . . . . . . . . . . .
Total, Year Ended December 31, 2006 . . . . . . . . . .

1,638

(264,959)

215,632

Balance at December 31, 2005 . . . . . . . . . . . . . . .
Total, Year Ended December 31, 2005 . . . . . . . . . .

Forfeitures of shares granted to employees . . . .
Adoption of SFAS 123(R)—reclassification of

deferred compensation . . . . . . . . . . . . . . . . .
Equity-based compensation . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . . . .
Issuances of common stock, net . . . . . . . . . . . .
Exercises of options . . . . . . . . . . . . . . . . . . . . .
Treasury stock retirement . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Forfeitures of shares granted to employees . . . .
Equity-based compensation . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . . . .
Issuances of common stock, net . . . . . . . . . . . .
Exercises of options . . . . . . . . . . . . . . . . . . . . .

. . . . .
Common stock purchases and retirement
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Balance at December 31, 2007 . . . . . . . . . . . . . . .
Total, Year Ended December 31, 2007 . . . . . . . . . .

Forfeitures of shares granted to employees . . . . . .
Equity-based compensation . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . . . . .
Issuances of common stock, net . . . . . . . . . . . . . .
Exercises of options . . . . . . . . . . . . . . . . . . . . . .
Common stock purchases and retirement . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Foreign
Currency
Translation
Adjustment

Accumulated
Deficit

Total
Stockholder’s
Equity

665

$(211,202)

$221,001

Comprehensive
Loss

$
(68,368)

—

—
—
973
—
—
—
—

—
—
1,962
—
—

—
—

—
—
—
—
—
—
(53,757)

—
10,509
973
36,479
427
—
(53,757)

—
—
—
—
—

—
11,105
1,962
1
1,103

—
(31,025)

(59,948)
(31,025)

—
(31,025)

3,600

(295,984)

138,830

—
—
(3,028)
—
—
—
—

—
—
—
—
—
—
26,779

—
18,901
(3,028)
—
148
(59,274)
26,779

—
—
973
—
—
—
(53,757)

$(52,784)

—
—
1,962
—
—

$(29,063)

—
—
(3,028)
—
—
—
26,779

$ 23,751

Balance at December 31, 2008 . . . . . . . . . . . . . . .

572

$(269,205)

$122,356

Total, Year Ended December 31, 2008 . . . . . . . . . .

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

COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2006, DECEMBER 31, 2007 AND DECEMBER 31, 2008

(IN THOUSANDS)

2006

2007

2008

Cash flows from operating activities:
Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(53,757) $ (31,025) $ 26,779

Adjustments to reconcile net (loss) income to net cash provided by operating

activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset impairment
Amortization of debt discount—convertible notes
. . . . . . . . . . . . . . . . . . .
Equity-based compensation expense (net of amounts capitalized) . . . . . . . . .
Gains—purchases of senior convertible notes
. . . . . . . . . . . . . . . . . . . . . .
Gains—lease restructurings dispositions of assets and other, net . . . . . . . . . .

Changes in assets and liabilities:

Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable, accrued liabilities and other long-term liabilities . . . . . . . .

58,414
—
2,265
10,509
—
(540)

(2,758)
(1,321)
563
(8,090)

65,638
—
1,576
10,384
—
(2,853)

(399)
(679)
1,003
4,985

62,589
1,592
541
17,876
(57,568)
(138)

(1,273)
495
(537)
3,980

Net cash provided by operating activities

. . . . . . . . . . . . . . . . . . . . . . . . .

5,285

48,630

54,336

Cash flows from investing activities:
Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturities (purchases) of short-term investments . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from asset sales

(21,526)
(100)
1,203
945

(30,389)
—
(732)
257

(33,510)
—
750
221

Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(19,478)

(30,864)

(32,539)

Cash flows from financing activities:
Proceeds from issuance of senior convertible notes, net . . . . . . . . . . . . . . . . .
Purchases of senior convertible notes
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of convertible subordinated notes . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of capital lease obligations
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of common stock, net . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from exercises of common stock options . . . . . . . . . . . . . . . . . . . . .

— 195,147
—
—
— (10,187)
(9,809)
—
— (59,949)
1,103
427

(9,861)
36,479

—
(48,553)
—
(17,959)
—
(59,273)
147

Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . .

27,045

116,305

(125,638)

Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . .

(93)

308

(1,889)

Net increase (decreases) in cash and cash equivalents . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, beginning of year . . . . . . . . . . . . . . . . . . . . . . . .

12,759
29,883

134,379
42,642

(105,730)
177,021

Cash and cash equivalents, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 42,642

$177,021

$ 71,291

Supplemental disclosures of cash flow information:
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash financing activities—
Capital lease obligations incurred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 12,235
—

9,248
—

$ 10,669
1,720

2,087

11,498

32,398

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

COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006, 2007 and 2008

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

Description of business

Cogent Communications Group, Inc. (the ‘‘Company’’) is a Delaware corporation and is

headquartered in Washington, DC. The Company is a facilities-based provider of low-cost, high-speed
Internet access and Internet Protocol (‘‘IP’’) communications services. The Company’s network is
specifically designed and optimized to transmit data using IP. The Company delivers its services to
small and medium-sized businesses, communications service providers and other bandwidth-intensive
organizations through approximately 17,800 customer connections in North America and Europe.

The Company offers on-net Internet access services exclusively through its own facilities, which run

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

In addition to providing on-net services, the Company also provides Internet connectivity to

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

Summary of Significant Accounting Policies

Principles of consolidation

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

Use of estimates

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

COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2006, 2007 and 2008

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

Revenue recognition and allowance for doubtful accounts

The Company recognizes revenue in accordance with Staff Accounting Bulletin No. 104, ‘‘Revenue

Recognition.’’ The Company’s service offerings consist of telecommunications services provided under
month-to-month or annual contracts billed monthly in advance. Net revenues from telecommunication
services are recognized when the services are performed, evidence of an arrangement exists, the fee is
fixed and determinable and collection is probable. The probability of collection is determined by an
analysis of a new customer’s credit history and historical payment patterns for existing customers.
Service discounts and incentives related to telecommunication services are recorded as a reduction of
revenue when granted. Fees billed in connection with customer installations are deferred and
recognized ratably over the estimated customer life determined by a historical analysis of customer
retention. The Company expenses the direct costs associated with sales as incurred.

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

The Company establishes a valuation allowance for doubtful accounts and other sales credit

adjustments. Valuation allowances for sales credits are established through a reduction of revenue,
while valuation allowances for doubtful accounts are established through a charge to selling, general
and administrative expenses. The Company assesses the adequacy of these reserves by evaluating
general factors, such as the length of time individual receivables are past due, historical collection
experience, and changes in the credit worthiness of its customers. If circumstances relating to specific
customers change or economic conditions change such that the Company’s past collection experience
and assessment of the economic environment are no longer appropriate, the Company’s estimate of the
recoverability of its trade receivables could be impacted.

Network operations

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

Foreign currency translation adjustment and comprehensive income (loss)

The consolidated financial statements of Cogent Canada, and Cogent Europe, are translated into

U.S. dollars using the period-end foreign currency exchange rates for assets and liabilities and the
average foreign currency exchange rates for revenues and expenses. Gains and losses on translation of

COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2006, 2007 and 2008

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

the accounts of the Company’s non-U.S. operations are accumulated and reported as a component of
other comprehensive income (loss) in stockholders’ equity.

Statement of Financial Accounting Standards (‘‘SFAS’’) No. 130, ‘‘Reporting of Comprehensive

Income’’ requires ‘‘comprehensive income’’ and the components of ‘‘other comprehensive income’’ to
be reported in the financial statements and/or notes thereto. The Company’s only components of
‘‘other comprehensive income’’ are currency translation adjustments for all periods presented.

Financial instruments

The Company considers all highly liquid investments with an original maturity of three months or

less at purchase to be cash equivalents. The Company determines the appropriate classification of its
investments at the time of purchase and evaluates such designation at each balance sheet date. At
December 31, 2007 and 2008, the Company’s investments consisted of money market accounts
(included in cash equivalents) and certificates of deposit.

At December 31, 2007 and 2008, the carrying amount of cash and cash equivalents, short-term

investments, accounts receivable, prepaid and other current assets, accounts payable, and accrued
expenses approximated fair value because of the short-term nature of these instruments. The Company
measures its cash equivalents (money market funds) at fair value based upon quoted market prices
(Level 1 under SFAS No. 157, ‘‘Fair Value Measurements’’). Based upon the quoted market price at
December 31, 2008, the fair value of the Company’s $92.0 million convertible senior notes was
approximately $45.1 million.

Short-term investments

Short-term investments consist of certificates of deposit with original maturities beyond three
months, but less than twelve months. Such short-term investments are carried at amortized cost, which
approximates fair value due to the short period of time to maturity.

The Company was party to letters of credit totaling approximately $1.6 million as of December 31,

2007 and $0.9 million as of December 31, 2008. These letters of credit are secured by certificates of
deposit and money market funds of approximately $1.9 million at December 31, 2007 and $1.2 million
as of December 31, 2008, that are restricted and included in short-term investments and other assets.

Credit risk

The Company’s assets that are exposed to credit risk consist of its cash and cash equivalents,
short-term investments, other assets and accounts receivable. As of December 31, 2007 and 2008,
approximately $171.9 million and $59.6 million of the Company’s cash equivalents were invested in
money market funds. The largest amount in an individual fund was $50.7 million at December 31, 2007
and $26.1 million at December 31, 2008. The Company places its cash equivalents and short-term
investments in instruments that meet high-quality credit standards as specified in the Company’s
investment policy guidelines. Accounts receivable are due from customers located in major
metropolitan areas in the United States, Europe and Canada. Receivables from the Company’s net
centric (wholesale) customers are subject to a higher degree of credit risk than other customers.

COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2006, 2007 and 2008

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

Property and equipment

Property and equipment are recorded at cost and depreciated once deployed using the straight-line

method over the estimated useful lives of the assets. Useful lives are determined based on historical
usage with consideration given to technological changes and trends in the industry that could impact
the asset utilization. System infrastructure costs include the capitalized compensation costs of
employees directly involved with construction activities and costs incurred by third party contractors.
Assets and liabilities under capital leases are recorded at the lesser of the present value of the
aggregate future minimum lease payments or the fair value of the assets under lease. Leasehold
improvements include costs associated with building improvements. The Company determines the
number of renewal option periods, if any, included in the lease term for purposes of amortizing
leasehold improvements based upon its assessment at the inception of the lease of the number of
option periods that are reasonably assured in accordance with SFAS No. 13 ‘‘Accounting for Leases.’’
Expenditures for maintenance and repairs are expensed as incurred.

Depreciation and amortization periods are as follows:

Type of asset

Depreciation or amortization period

Indefeasible rights of use (IRUs) . . . . . .

Network equipment . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . .
Software . . . . . . . . . . . . . . . . . . . . . . . .
Owned buildings . . . . . . . . . . . . . . . . . .
Office and other equipment . . . . . . . . . .
System infrastructure . . . . . . . . . . . . . . .

Shorter of useful life or IRU lease
agreement; generally 15 to 20 years,
beginning when the IRU is ready for use
3 to 8 years
Shorter of lease term or useful life
5 years
40 years
3 to 7 years
5 to 10 years

Long-lived assets

The Company’s long-lived assets include property and equipment and identifiable intangible assets.

These long-lived assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount should be addressed pursuant to SFAS No. 144, ‘‘Accounting for the
Impairment or Disposal of Long-Lived Assets.’’ Pursuant to SFAS No. 144, impairment is determined
by comparing the carrying value of these long-lived assets to management’s probability weighted
estimate of the future undiscounted cash flows expected to result from the use of the assets. In the
event an impairment exists, a loss is recognized based on the amount by which the carrying value
exceeds the fair value of the asset, which would be determined by using quoted market prices or
valuation techniques such as the discounted present value of expected future cash flows, appraisals, or
other pricing models. Management believes that no such impairment existed as of December 31, 2007
or 2008. In the event there are changes in the planned use of the Company’s long-term assets or the
Company’s expected future undiscounted cash flows are reduced significantly, the Company’s
assessment of its ability to recover the carrying value of these assets under SFAS No. 144 could change.

COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2006, 2007 and 2008

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

Asset retirement obligations

In accordance with SFAS No. 143, ‘‘Accounting for Asset Retirement Obligations,’’ the fair value of

a liability for an asset retirement obligation is recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset. The Company records changes in the liability for an
asset retirement obligation due to passage of time using the effective interest rate method. The interest
rate used to measure that change is the credit-adjusted risk-free rate that existed when the liability was
initially measured.

Convertible Senior Notes

The Company evaluated the embedded conversion option of its 1.00% Convertible Senior Notes
(the ‘‘Notes’’) in accordance with SFAS No. 133, ‘‘Accounting for Derivative Instruments and Hedging
Activities’’, EITF Issue No. 00-19 ‘‘Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in a Company’s Own Stock’’ and EITF Issue No. 01-6 ‘‘The Meaning of Indexed to
a Company’s Own Stock.’’ The Company concluded that the embedded conversion option contained
within the Notes should not be accounted for separately because the conversion option is indexed to
the Company’s common stock and would be classified within stockholders’ equity, if issued on a
standalone basis.

The Company also evaluated the terms of the Notes for a beneficial conversion feature in
accordance with EITF No. 98-5, ‘‘Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios’’ and EITF No. 00-27, ‘‘Application of
Issue 98-5 to Certain Convertible Instruments.’’ The Company concluded that there was no beneficial
conversion feature at the commitment date based on the conversion rate of the Notes relative to the
commitment date stock price.

Equity-based compensation

The Company follows the provisions of SFAS No. 123(R), ‘‘Share-Based Payment’’

(‘‘SFAS 123(R)’’), to record compensation expense for its equity-based compensation. SFAS 123(R)
requires that all share-based payments to employees be recognized in the consolidated statements of
operations based on their grant date fair values with the expense being recognized over the requisite
service period. See Note 8 for additional information.

Income taxes

The Company accounts for income taxes in accordance with SFAS No. 109, ‘‘Accounting for
Income Taxes.’’ Under SFAS No. 109, deferred tax assets or liabilities are computed based upon the
differences between financial statement and income tax bases of assets and liabilities using the enacted
marginal tax rate. Deferred income tax expense or benefits are based upon the changes in the assets or
liability from period to period.

In June 2006, the Financial Accounting Standards Board (‘‘FASB’’) issued FASB Interpretation No.

(‘‘FIN’’) 48, ‘‘Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement
No. 109.’’ FIN No. 48 requires that management determine whether a tax position is more likely than

COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2006, 2007 and 2008

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

not to be sustained upon examination based on the technical merits of the position. Once it is
determined that a position meets this recognition threshold, the position is measured to determine the
amount of benefit to be recognized in the financial statements. The Company adopted the provisions of
FIN No. 48 on January 1, 2007. As a result of adopting FIN No. 48, the Company did not recognize
any previously unrecognized tax positions. The adoption of FIN No. 48 did not have a material effect
on the Company’s results of operations or financial position. The Company’s policy is to recognize
interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.
There was no interest expense or expense associated with penalties recognized during the years ended
December 31, 2007 and 2008.

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and

various state and foreign jurisdictions. The Company is subject to U.S. federal tax and state tax
examinations for years from 2005 to 2008. The Company is subject to tax examinations in its foreign
jurisdictions generally for years from 2000 to 2008. Management does not believe there will be any
material changes in its unrecognized tax positions over the next 12 months.

Basic and diluted net loss per common share

Net (loss) income per share is presented in accordance with the provisions of SFAS No. 128
‘‘Earnings per Share.’’ SFAS No. 128 requires a presentation of basic earnings per share (‘‘EPS’’) and
diluted EPS. Basic EPS excludes dilution for common stock equivalents and is computed by dividing
net income or (loss) available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS is based on the weighted-average number of shares of
common stock outstanding during each period, adjusted for the effect of common stock equivalents, if
dilutive.

Shares of restricted stock are included in the computation of basic EPS as they vest and are

included in diluted EPS, to the extent they are dilutive, determined using the treasury stock method. As
of December 31, 2006 and 2007, 0.4 million and 1.2 million unvested shares of restricted common
stock, respectively, are not included in the computation of diluted (loss) income per share, as the effect
would be anti-dilutive.

Using the ‘‘if-converted’’ method, the shares issuable upon conversion of the Company’s 1.00%
Convertible Senior Notes (the ‘‘Notes’’) were anti-dilutive for the years ended December 31, 2007 and
2008. Accordingly, the impact has been excluded from the computation of diluted income or (loss) per
share. The Notes are convertible into shares of the Company’s common stock at an initial conversion
price of $49.18 per share, yielding 4.1 million common shares, as of December 31, 2007 and 1.9 million
shares at December 31, 2008, subject to certain adjustments set forth in the indenture.

The Company computes the dilutive effect of outstanding options using the treasury stock method.
For the years ended December 31, 2006, 2007 and 2008 options to purchase 1.2 million, 1.1 million and
0.2 million shares of common stock, respectively, at weighted-average exercise prices of $2.73, $5.75 and
$20.30 per share, respectively, are not included in the computation of diluted (loss) per share as the
effect would be anti-dilutive.

COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2006, 2007 and 2008

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

The following details the determination of the diluted weighted average shares for the year ended

December 31, 2008:

Weighted average common shares outstanding—basic . . . . . . . . . . .
Dilutive effect of restricted stock . . . . . . . . . . . . . . . . . . . . . . . . .
Dilutive effect of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . .

44,563,727
341,861
717,969

Weighted average shares—diluted . . . . . . . . . . . . . . . . . . . . . . . . .

45,623,557

Year Ended
December 31, 2008

Recent accounting pronouncements

In September 2006, the FASB issued SFAS No. 157, ‘‘Fair Value Measurements’’ (‘‘SFAS 157’’).

SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with
generally accepted accounting principles, and expands disclosures about fair value measurements. In
February 2008, the FASB issued FSP No. 157-1, ‘‘Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for
Purposes of Lease Classification or Measurement under Statement 13’’ and FSP No. 157-2, ‘‘Effective
Date of FASB Statement No. 157’’ as amendments to SFAS 157, which exclude lease transactions from
the scope of SFAS 157 and also defers the effective date of the adoption of SFAS 157 for non-financial
assets and non-financial liabilities that are nonrecurring. The provisions of SFAS 157 are effective for
the fiscal year beginning January 1, 2008, except for certain non-financial assets and liabilities for which
the effective date has been deferred to January 1, 2009. The adoption of SFAS 157 and its related
pronouncements did not have a material effect on the Company’s consolidated financial position,
results of operations or cash flows.

In May 2008, the FASB issued FASB Staff Position APB 14-1, ‘‘Accounting for Convertible Debt

Instruments That May Be Settled in Cash Upon Conversion (including partial cash settlement)’’ (‘‘FSP
APB 14-1’’). FSP APB 14-1 requires the issuer of certain convertible debt instruments that may be
settled in cash on conversion to separately account for the liability (debt) and equity (conversion
options) components of the instrument in a manner that reflects the issuer’s nonconvertible debt
borrowing rate. Upon conversion of the Company’s Notes, the Company has the right to deliver shares
of its common stock, cash or a combination of cash and shares of its common stock. As a result, the
Company’s accounting for its Notes will be impacted by the adoption of FSP APB 14-1. The adoption
of FSP APB 14-1 will result in a significant increase to the discount on the Company’s Notes with a
corresponding increase to stockholder’s equity. The adoption of FSP APB 14-1 will also result in an
increase to the Company’s interest expense from the amortization of the increase to the discount on
the Company’s Notes. The Company will be required to adopt FSP APB 14-1 on January 1, 2009 and
will be required to retroactively restate all prior periods since the June 2007 issuance of the Notes. The
incremental non-cash interest expense required to be recognized (due to an increase in debt discount)
will be material. In addition, the gains recognized on debt extinguishment may change as a result of the
adoption of FSP APB 14-1.

In June 2008, the FASB issued EITF No. 07-5, ‘‘Determining whether an Instrument (or
Embedded Feature) is Indexed to an Entity’s Own Stock (‘‘EITF 07-5’’). EITF 07-5 applies to any

COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2006, 2007 and 2008

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

freestanding financial instrument or embedded feature that has all the characteristics of a derivative, as
defined. If an instrument, or an embedded feature, is not considered indexed to the issuer’s stock
under EITF 07-5, that instrument is not eligible for equity classification and would be classified as an
asset or liability an remeasured at fair value through earnings. The Company will be required to adopt
EITF 07-5 on January 1, 2009 with the cumulative effect of adoption adjusted to the opening balance
of retained earnings. The Company is currently evaluating the impact of adopting EITF 07-5.

2. Property and equipment:

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

Owned assets:
Network equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . .
System infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . .
Office and other equipment
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Less—Accumulated depreciation and amortization . . . . . . . .

Assets under capital leases:
IRUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less—Accumulated depreciation and amortization . . . . . . . .

December 31,

2007

2008

$ 267,538
75,865
42,344
7,867
8,720
1,623
139

$ 283,872
82,754
46,445
8,708
8,887
1,564
133

404,096
(272,321)

432,363
(319,394)

131,775

112,969

157,811
(44,166)

185,645
(54,675)

113,645

130,970

Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . .

$ 245,420

$ 243,939

Depreciation and amortization expense related to property and equipment and capital leases was
$56.8 million, $64.5 million and $62.6 million, for the years ended December 31, 2006, 2007 and 2008,
respectively.

Capitalized labor and related costs

The Company capitalizes the compensation cost of employees directly involved with its
construction activities. In 2006, 2007 and 2008, the Company capitalized compensation cost of
$2.1 million, $3.5 million and $4.1 million respectively. These amounts are included in system
infrastructure costs.

COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2006, 2007 and 2008

2. Property and equipment: (Continued)

During the first quarter of 2008, the Company identified certain immaterial errors in its accounting

for IRU capital leases and the related assets and liabilities that affected certain prior periods. The
cumulative effect of these errors was corrected in the three months ended March 31, 2008. The net
impact of the corrections on the three months ended March 31, 2008 was a $1.4 million increase in the
net loss and a $1.4 million decrease in net assets. The correction of these errors increased depreciation
expense by $0.4 million, decreased interest expense by $0.6 million and resulted in an asset impairment
charge of $1.6 million in the three months ended March 31, 2008. The impaired IRU asset was no
longer in use and the Company has obtained alternative dark fiber that serves the related facilities and
customers. As of December 31, 2008, the Company’s balance sheet includes a capital lease liability
including accrued interest totaling $2.5 million related to this IRU as the requirements for the
extinguishment of such liability had not been met and payments with the vendor are in dispute. The
correction of these errors also increased IRU assets by $5.7 million and increased capital lease
obligations by $8.1 million as of January 1, 2008. The Company concluded that the impact of these
errors was not material to the consolidated financial statements for any prior interim or annual period,
nor were they material to the first quarter of 2008 or the year ended December 31, 2008.

3. Accrued and other liabilities:

The Company provides for asset retirement obligations for certain points of presence in its
networks. The balance (recorded in other long-term liabilities) was $1.2 million at December 31, 2007
and 2008. Accrued and other current liabilities as of December 31 consist of the following (in
thousands):

2007

2008

General operating expenditures . . . . . . . . . . . . . . . . . . . . . . . . .
Acquired unused lease obligations . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue—current portion . . . . . . . . . . . . . . . . . . . . . .
Payroll and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes—non-income based . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 4,976
70
1,642
2,634
985
2,584

$ 5,618
—
2,675
2,632
850
2,981

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$12,891

$14,756

4. Long-term debt:

Convertible Senior Notes

In June 2007, the Company issued its 1.00% Convertible Senior Notes (the ‘‘Notes’’) due June 15,

2027, for an aggregate principal amount of $200.0 million in a private offering for resale to qualified
institutional buyers pursuant to SEC Rule 144A. The Notes are unsecured and bear interest at 1.00%
per annum. The Notes will rank equally with any future senior debt and senior to any future
subordinated debt and will be effectively subordinated to all existing and future liabilities of the
Company’s subsidiaries and to any secured debt the Company may issue, to the extent of the value of
the collateral. Interest is payable in cash semiannually in arrears on June 15 and December 15, of each
year, beginning on December 15, 2007. The Company received net proceeds from the issuance of the

COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2006, 2007 and 2008

4. Long-term debt: (Continued)

Notes of approximately $195.1 million, after deducting the original issue discount of 2.25% and
issuance costs. The discount and other issuance costs are being amortized to interest expense using the
effective interest method through June 15, 2014, which is the earliest put date.

Conversion Process and Other Terms of the Notes

The Notes are convertible into shares of the Company’s common stock at an initial conversion

price of $49.18 per share, or 20.3355 shares for each $1,000 principal amount of Notes, subject to
adjustment for certain events as set forth in the indenture. Depending upon the price of the Company’s
common stock at the time of conversion, holders of the Notes will receive additional shares of the
Company’s common stock. Upon conversion of the Notes, the Company will have the right to deliver
shares of its common stock, cash or a combination of cash and shares of its common stock. The Notes
are convertible (i) during any fiscal quarter after the fiscal quarter ending September 30, 2007, if the
closing sale price of the Company’s common stock for 20 or more trading days in a period of 30
consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter
exceeds 130% of the conversion price in effect on the last trading day of the immediately preceding
fiscal quarter, or (ii) specified corporate transactions occur, or (iii) the trading price of the Notes falls
below a certain threshold, or (iv) if the Company calls the Notes for redemption, or (v) on or after
April 15, 2027, until maturity. In addition, following specified corporate transactions, the Company will
increase the conversion rate for holders who elect to convert notes in connection with such corporate
transactions, provided that in no event may the shares issued upon conversion, as a result of adjustment
or otherwise, result in the issuance of more than 35.5872 common shares per $1,000 principal amount.
The Notes include an ‘‘Irrevocable Election of Settlement’’ whereby the Company may choose, in its
sole discretion, and without the consent of the holders of the Notes, to waive its right to settle the
conversion feature in either cash or stock or in any combination at its option. The Notes may be
redeemed by the Company at any time after June 20, 2014 at a redemption price of 100% of the
principal amount plus accrued interest. Holders of the Notes have the right to require the Company to
repurchase for cash all or some of their notes on June 15, 2014, 2017 and 2022 and upon the
occurrence of certain designated events at a redemption price of 100% of the principal amount plus
accrued interest.

Registration Rights

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

COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2006, 2007 and 2008

4. Long-term debt: (Continued)

Purchases of Notes

In 2008, the Company purchased $108.0 million of face value of the Notes for $48.6 million in cash

in a series of transactions. These transactions resulted in a gain of $57.6 million for the year ended
December 31, 2008. After these transactions, there is $92.0 million of face value of the Notes
outstanding.

Convertible Subordinated Notes—Allied Riser

The Company’s $10.2 million 7.50% convertible subordinated notes were recorded at their fair

value of approximately $2.9 million in connection with the Allied Riser merger in 2002. The discount
was amortized to interest expense through the maturity date. The notes and accrued interest were fully
paid on their maturity date in June 2007.

5. Income taxes:

The provision for income taxes relates only to the United States and is comprised of the following

(in thousands) on a net basis:

Current provision
Federal income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred provision
Utilization of net operating losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2008

593
943

9,023
(9,023)

Total income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1,536

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

December 31

2007

2008

Net operating loss carry-forwards . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Start-up expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity-based compensation . . . . . . . . . . . . . . . . . . . . . . . . .
Alternative minimum tax credit . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities and other . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 344,145
(26,007)
3,160
6,060
—
77
(327,435)

$ 330,057
(14,028)
3,239
6,128
571
1,406
(327,373)

Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

— $

—

Due to the uncertainty surrounding the realization of its net deferred tax asset, the Company has

recorded a valuation allowance for the full amount of its net deferred tax asset. As of December 31,
2008, the Company has combined net operating loss carry-forwards of approximately $989 million. This

COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2006, 2007 and 2008

5. Income taxes: (Continued)

amount includes federal and state net operating loss carry-forwards in the United States of
approximately $379 million and net operating loss carry-forwards related to its European operations of
approximately $611 million. Section 382 of the Internal Revenue Code in the United States limits the
utilization of net operating losses when ownership changes, as defined by that section, occur. The
Company has performed an analysis of its Section 382 ownership changes and has determined that the
utilization of certain of its net operating loss carryforwards may be limited. This restricted amount
includes the limitation on annual utilization related to the remaining $183 million of federal and state
net operating loss carry-forwards of Allied Riser Communications Corporation that were acquired by
the Company via merger in 2002. The net operating loss carryforwards in the United States will expire,
if unused, between 2022 and 2027. The net operating loss carry-forwards related to the European
operations include $493 million that do not expire and $115 million that expire beginning in 2016.

In the normal course of business the Company takes positions on its tax returns that may be
challenged by taxing authorities. Although the Company believes it has support for the positions taken
on its tax return, the Company has recorded a liability for its best estimate of the probable loss on
certain of these transactions. This $0.5 million liability is included in other long-term liabilities in the
accompanying balance sheet as of December 31, 2008. The Company does not expect the final
resolution of tax examinations to have a material impact on the Company’s financial results.

The following is a reconciliation of the Federal statutory income tax rate to the effective rate

reported in the financial statements.

Federal income tax benefit at statutory rates . . . . . . . . . . . .
State income tax benefit at statutory rates, net of Federal

benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impact of foreign operations . . . . . . . . . . . . . . . . . . . . . . . .
Non-deductible expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .
Alternative minimum tax . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in valuation allowance . . . . . . . . . . . . . . . . . . . . . . .

2006

2007

2008

34.0% 34.0% 35.0%

4.0
(0.6)
7.5
—
(44.9)

4.0
(0.8)
4.7
—
(41.9)

3.9
(49.3)
13.9
2.1
(0.2)

Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . .

—% —% 5.4%

6. Commitments and contingencies:

Capital leases—fiber lease agreements

The Company has entered into lease agreements with several providers for dark fiber primarily

under 15 - 20 year IRUs with additional renewal terms. These IRUs connect the Company’s
international backbone fibers with the multi-tenant office buildings and the customers served by the
Company. Once the Company has accepted the related fiber route, leases that meet the criteria for

COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2006, 2007 and 2008

6. Commitments and contingencies: (Continued)

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

For the year ending December 31,

2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total minimum lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less—amounts representing interest . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Present value of minimum lease obligations . . . . . . . . . . . . . . . . . . . . . . .
Current maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 16,663
18,989
13,171
13,290
12,876
119,982

194,971
(90,778)

104,193
(5,940)

Capital lease obligations, net of current maturities . . . . . . . . . . . . . . . . . .

$ 98,253

Capital lease obligation amendments

Cogent Spain negotiated modifications to certain of its IRU capital lease obligations in 2006. This

modification reduced the IRU lease payments and extended the lease term and resulted in a gain of
approximately $0.3 million.

Current and potential litigation

The Company is involved in disputes with certain telephone companies that provide it local circuits

or leased optical fibers. The total amount claimed by these vendors is approximately $2.4 million. The
Company does not believe any of these amounts are owed to these providers and intends to vigorously
defend its position and believes that it has adequately reserved for any potential liability.

On September 2, 2008, Sprint Communications L. P. (a subsidiary of Sprint-Nextel Corporation)

filed suit against the Company in the Circuit court of Fairfax County, Virginia seeking payment for
services allegedly provided by Sprint related to the exchange of Internet traffic by Sprint and the
Company. Sprint sought $1.9 million and additional amounts. The lawsuit has been dismissed.

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

In the normal course of business the Company is involved in other legal activities and claims.
Because such matters are subject to many uncertainties and the outcomes are not predictable with
assurance, the liability related to these legal actions and claims cannot be determined with certainty.

COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2006, 2007 and 2008

6. Commitments and contingencies: (Continued)

Management does not believe that such claims and actions will have a material impact on the
Company’s financial condition or results of operations.

Operating leases, maintenance and tenant license agreements

The Company leases office space, network equipment sites, and facilities under operating leases.

The Company also enters into building access agreements with the landlords of multi- tenant office
buildings. The Company pays fees for the maintenance of its leased dark fiber and in certain cases the
Company connects its customers to its network under operating lease commitments for fiber. Future
minimum annual payments under these arrangements are as follows (in thousands):

For the year ending December 31,

$ 37,395
27,652
22,506
18,132
13,655
76,283

$195,623

Expenses related to these arrangements was $33.8 million in 2006, $40.5 million in 2007 and

$44.9 million in 2008. The Company has sublet certain office space and facilities. Future minimum
payments under these sub-lease agreements are approximately $0.1 million, and $0.1 million, for the
years ending December 31, 2009 and December 31, 2010, respectively.

Unconditional purchase obligations

Unconditional purchase obligations for equipment and services totaled approximately $8.7 million

at December 31, 2008 and are expected to be fulfilled within one year. As of December 31, 2008 the
Company had committed to additional dark fiber IRU lease agreements totaling approximately
$27.9 million in future payments for fiber lease and maintenance payments to be paid over periods of
up to 20 years. These obligations begin when the related fiber is accepted, which is expected to occur
in 2009. Future minimum payments under these obligations are approximately, $6.1 million,
$1.3 million, $1.3 million, $1.3 million, and $1.3 million for the years ending December 31, 2008 to
December 31, 2012 and approximately $16.6 million, thereafter.

Defined contribution plan

The Company sponsors a 401(k) defined contribution plan that, effective in August 2007, provides

for a Company match. The Company match for 2007 and 2008 was approximately $0.1 million and
$0.3 million, respectively and was paid in cash.

COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2006, 2007 and 2008

7. Stockholders’ equity:

Authorized shares

The Company has 75.0 million of authorized $0.001 par value common shares and 10,000

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

Common Stock Buybacks

In June 2007 the Company used approximately $50.1 million of the net proceeds from the issuance

of its $200.0 million Convertible Senior Notes to repurchase approximately 1.8 million shares of its
common stock. In August 2007, the Company’s board of directors approved a $50.0 million common
stock buyback program (the ‘‘Buyback Program’’). In June 2008, the Company’s board of directors
approved an additional $50.0 million of purchases of its common stock under the Buyback Program.
The purchases are to occur prior to December 31, 2009. In the years ended December 31, 2007 and
2008, the Company purchased approximately 2.2 million and 4.4 million shares of its common stock,
respectively, for approximately $59.9 million and $59.3 million, respectively. All purchased common
shares were subsequently retired. As of December 31, 2008, there was approximately $30.8 million
remaining under the Buyback Program.

Treasury stock retirement

In September 2006, the Company retired its 61,462 shares of treasury stock. As a result,

$0.1 million of treasury stock was offset against additional paid-in-capital.

Public offering

On June 7, 2006, the Company sold 4.35 million shares of common stock at $9.00 per share and

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

Allied Riser Warrants

In connection with the February 2002 merger with Allied Riser, the Company assumed warrants
issued by Allied Riser that convert into approximately 5,200 shares of the Company’s common stock.
All warrants are exercisable at exercise prices ranging from $0 to $230 per share. These warrants were
issued in 1999 and 2000 and have terms of ten years. The warrants were valued at the merger date at
approximately $0.8 million using the Black Scholes method of valuation and were recorded as stock
purchase warrants in the accompanying balance sheets.

COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2006, 2007 and 2008

8. Stock option and award plan:

Incentive Award Plan

The compensation committee of the board of directors adopted and the stockholders approved, the
Company’s 2004 Incentive Award Plan, as amended (the ‘‘Award Plan’’). Stock options granted under the
Award Plan generally vest over a four-year period and have a term of ten years. Grants of shares of
restricted stock granted under the Award Plan vest over periods ranging from immediate vesting to over a
four-year period. Awards with graded vesting terms are recognized on a straight line basis. Certain option
and share grants provide for accelerated vesting if there is a change in control, as defined. For grants of
restricted stock, when an employee terminates prior to full vesting the employee retains their vested shares
and the employees’ unvested shares are returned to the plan. For grants of options for common stock,
when an employee terminates prior to full vesting the employee may elect to exercise their vested options
for a period of ninety days and any unvested options are returned to the plan. Compensation expense for
all awards is recognized ratably over the service period. Shares issued to satisfy awards are provided from
the Company’s authorized shares. As of December 31, 2008, of the 5.8 million authorized shares under the
Award Plan there were a total of 233,000 shares available for grant.

The weighted-average per share grant date fair value of options for common stock was $6.16 in

2006, $12.27 in 2007 and $7.20 in 2008. The following assumptions were used for determining the fair
value of options granted in the three years ended December 31, 2008:

Black-Scholes Assumptions

Year Ended
December 31, 2006

Year Ended
December 31, 2007

Year Ended
December 31, 2008

Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility—average . . . . . . . . . . . . . . . .
Risk-free interest rate—average . . . . . . . . . . . . . .
Expected life of the option term (in years) . . . . . .

0.0%
58.2%
4.8%
5.0

0.0%
55.1%
4.5%
5.9

0.0%
62.1%
2.9%
5.3

Stock option activity under the Company’s Award Plan during the period from December 31, 2007

to December 31, 2008, was as follows:

Outstanding at December 31, 2007 . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised—intrinsic value $0.8 million; cash received

Number of
Options

Weighted-
average
exercise
price

$ 5.75
1,120,854
123,470
$13.11
(86,139) $20.18

$0.1 million . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(63,931) $ 2.30

Outstanding at December 31, 2008—$4.1 million intrinsic value
and 6.5 years weighted-average remaining contractual term . .

1,094,254

$ 5.65

Exercisable at December 31, 2008—$4.0 million intrinsic value

and 5.9 years weighted-average remaining contractual term . .

873,890

$ 3.30

Expected to vest—$4.0 million intrinsic value and 6.1 years

weighted-average remaining contractual term . . . . . . . . . . . .

938,088

$ 4.09

COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2006, 2007 and 2008

8. Stock option and award plan: (Continued)

For the years ended December 31, 2006, 2007 and 2008, the Company’s employees exercised
options for approximately 104,000, 213,000 and 64,000 common shares, respectively. Stock options
outstanding and exercisable under the Award Plan by price range at December 31, 2008 were as
follows:

Range of Exercise Prices

Number
Outstanding
12/31/2008

Weighted
Average
Remaining
Contractual
Life (years)

Weighted-
Average
Exercise
Price

Number
Exercisable As
of 12/31/2008

Weighted-
Average
Exercise
Price

$0.00 to $0.00 (granted below market

value) . . . . . . . . . . . . . . . . . . . . . . . . . .
$4.36 to $6.00 . . . . . . . . . . . . . . . . . . . . . .
$6.20 to $25.46 . . . . . . . . . . . . . . . . . . . . .
$25.65 to $33.56 . . . . . . . . . . . . . . . . . . . .

580,342
237,472
265,228
11,212

$0.00 to $33.56 . . . . . . . . . . . . . . . . . . . . .

1,094,254

5.69
6.14
8.21
7.51

6.42

$ 0.00
$ 5.33
$17.29
$29.41

$ 5.65

580,342
194,615
94,143
4,790

873,890

$ 0.00
$ 5.47
$17.82
$29.69

$ 3.30

Compensation expense related to stock options and restricted stock was approximately

$10.5 million, $10.4 million and $17.9 million for the years ended December 31, 2006, December 31,
2007 and December 31, 2008, respectively. As of December 31, 2008 there was approximately
$19.4 million of total unrecognized compensation cost related to non-vested equity-based compensation
awards. That cost is expected to be recognized over a weighted average period of approximately twenty-
eight months.

A summary of the Company’s non-vested restricted stock awards as of December 31, 2008 and the

changes during the year ended December 31, 2008 is as follows:

Non-vested awards

Non-vested at December 31, 2007 . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,202,019
715,610
(242,298)
(17,594)

Non-vested at December 31, 2008 . . . . . . . . . . . . . . . . . . . .

1,657,737

Weighted-
Average
Grant Date
Fair Value

$22.64
$22.59
$13.36
$25.46

$23.99

The weighted average per share grant date fair value of restricted stock granted to employees was
$18.63 in 2006 (382,500 shares), $25.08 in 2007 (1,033,404 shares) and $22.59 in 2008 (715,610 shares).
The fair value was determined using the quoted market price of the Company’s common stock on the
date of grant. The fair value of shares of restricted stock vested in the years ending December 31, 2006,
2007 and 2008 was approximately $4.1 million, $4.3 million, and $3.6 million respectively.

COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2006, 2007 and 2008

9. Related party transactions:

Office lease and equipment purchases

The Company’s headquarters is located in an office building owned by a partnership (6715

Kenilworth Avenue Partnership). The two owners of the partnership are the Company’s Chief
Executive Officer, who has a 51% interest in the partnership and his wife, who has a 49% interest in
the partnership. The Company paid $0.4 million in 2006, $0.6 million in 2007 and $0.6 million in 2008
in rent and related costs (including taxes and utilities) to this partnership under a lease that expires in
August 2012. The dollar value of the Company’s Chief Executive Officer’s interest in the lease
payments in 2008 was $0.3 million. The dollar value of his wife’s interest in the lease payment in 2008
was $0.3 million. If the Company’s Chief Executive Officer’s interest is combined with that of his wife
then the total dollar value of his interest in the lease payments in 2008 was $0.6 million.

In 2007 and 2008, the Company purchased approximately $0.2 million and $0.1 million of

equipment from an equipment vendor. One of the Company’s directors is also a director of the
equipment vendor.

10. Geographic information:

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

Years Ended December 31,

2006

2007

2008

Service Revenue, net
North America . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$117,475
31,596

$144,696
40,967

$167,316
48,173

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$149,071

$185,663

$215,489

Long lived assets, net
North America . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$198,621
46,964

$245,585

$197,640
46,473

$244,113

December 31, 2007

December 31, 2008

COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2006, 2007 and 2008

11. Quarterly financial information (unaudited):

Service revenue, net . . . . . . . . . . . . . . . . . . . . .
Network operations, including equity-based

compensation expense . . . . . . . . . . . . . . . . . .
Operating loss . . . . . . . . . . . . . . . . . . . . . . . . .
Gains—asset sales and lease obligations . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss per common share—basic and diluted . .
Weighted-average number of shares

Three months ended

March 31,
2007

June 30,
2007

September 30, December 31,

2007

(in thousands, except share and per share amounts)
43,621

46,969

45,108

49,965

21,064
(7,482)
13
(9,404)
(0.19)

21,502
(7,743)
—
(9,192)
(0.19)

22,771
(7,941)
2,110
(5,423)
(0.12)

22,460
(6,753)
82
(7,006)
(0.15)

outstanding—basic and diluted . . . . . . . . . . . .

48,655,385

48,378,853

47,073,070

46,885,843

Three months ended

March 31,
2008(1)

June 30,
2008

September 30, December 31,

2008

Service revenue, net . . . . . . . . . . . . . . . . . . . . .
Network operations, including equity-based

compensation expense . . . . . . . . . . . . . . . . . .
Operating loss . . . . . . . . . . . . . . . . . . . . . . . . .
Gains—asset sales, lease obligations and

purchases of convertible notes . . . . . . . . . . . .
Net (loss) income . . . . . . . . . . . . . . . . . . . . . . .
Net (loss) income available to common for

diluted earnings per share . . . . . . . . . . . . . . .
Net (loss) income per common share—basic . . . .
Net (loss) income per common share—diluted . .
Weighted-average number of shares

(in thousands, except share and per share amounts)
52,110

53,859

54,594

54,926

22,043
(8,711)

16
(9,540)

(9,540)
(0.21)
(0.21)

23,035
(3,535)

126
(5,553)

(5,553)
(0.12)
(0.12)

24,139
(5,385)

23,838
(4,581)

9,769
2,073

2,073
0.05
0.05

47,835
39,799

40,169
0.93
0.88

outstanding—basic . . . . . . . . . . . . . . . . . . . . .

46,265,575

45,397,919

43,593,205

42,799,786

Weighted-average number of shares

outstanding—diluted . . . . . . . . . . . . . . . . . . .

46,265,575

45,397,919

44,276,989

45,823,578

(1) See Note 2 for discussion of the correction of certain immaterial errors relating to prior periods

recorded during the three month period ended March 31, 2008.

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

FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

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

As required by SEC Rule 13a-15(b), an evaluation was performed under the supervision and with

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

There has been no change in our internal controls over financial reporting during our most recent

fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal
controls over financial reporting.

MANAGEMENT’S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING

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

We are responsible for establishing and maintaining a system of internal control over financial

reporting, which is intended to provide reasonable assurance to our management and Board of
Directors regarding the reliability of our financial statements. The system includes but is not limited to:

(cid:127) a documented organizational structure and division of responsibility;

(cid:127) established policies and procedures, including a code of conduct to foster a strong ethical

climate which is communicated throughout the company;

(cid:127) regular reviews of our financial statements by qualified individuals; and

(cid:127) the careful selection, training and development of our people.

There are inherent limitations in the effectiveness of any system of internal control, including the

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

We have assessed our internal control system in relation to criteria for effective internal control
over financial reporting described in ‘‘Internal Control-Integrated Framework’’ issued by the Committee
of Sponsoring Organizations (COSO) of the Treadway Commission. Based upon these criteria, we
believe that, as of December 31, 2008, our system of internal control over financial reporting was
effective.

The independent registered public accounting firm, Ernst & Young LLP, has audited our 2008
financial statements. Ernst & Young LLP was given unrestricted access to all financial records and
related data, including minutes of all meetings of stockholders, the Board of Directors and committees
of the Board. Ernst & Young LLP has issued an unqualified report on our 2008 financial statements as
a result of the audit and also has issued an unqualified report on our internal control over financial
reporting which is attached hereto.

Cogent Communications Group, Inc.

March 2, 2009

By:

/s/ DAVID SCHAEFFER

David Schaeffer
Chief Executive Officer

/s/ THADDEUS WEED

Thaddeus Weed
Chief Financial Officer

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

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

We have audited Cogent Communications Group, Inc.’s internal control over financial reporting as
of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).
Cogent Communications Group, Inc.’s management is responsible for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over
financial reporting included in the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over
financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained
in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable

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

Because of its inherent limitations, internal control over financial reporting may not prevent or

detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.

In our opinion, Cogent Communications Group, Inc. maintained, in all material respects, effective

internal control over financial reporting as of December 31, 2008, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting

Oversight Board (United States), the consolidated balance sheets of Cogent Communications
Group, Inc. and subsidiaries as of December 31, 2007 and 2008, and the related consolidated
statements of operations, changes in stockholders’ equity, and cash flows for each of the three years in
the period ended December 31, 2008 of Cogent Communications Group, Inc. and subsidiaries and our
report dated March 2, 2009 expressed an unqualified opinion thereon.

McLean, VA
March 2, 2009

/s/ Ernst & Young LLP

ITEM 9B. OTHER INFORMATION

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this Item 10 is incorporated in this report by reference to the

information set forth under the captions entitled ‘‘Election of Directors,’’ ‘‘The Board of Directors and
Committees,’’ and ‘‘Section 16(a) Beneficial Ownership Reporting Compliance’’ in the 2009 Proxy
Statement for the 2009 Annual Meeting of Stockholders, which is expected to be filed with the
Commission within 120 days after the close of our fiscal year.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item 11 is incorporated in this report by reference to the

information set forth under the captions entitled ‘‘The Board of Directors and Committees,’’
‘‘Executive Compensation’’, ‘‘Employment Agreements’’, ‘‘Compensation Committee Report on
Executive Compensation,’’ and ‘‘Compensation Committee Interlocks and Insider Participation’’ in the
2009 Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item 12 is incorporated in this report by reference to the
information set forth under the caption ‘‘Security Ownership of Certain Beneficial Owners and
Management’’ in the 2009 Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item 13 is incorporated in this report by reference to the

information set forth under the caption ‘‘Certain Transactions’’ in the 2009 Proxy Statement.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item 14 is incorporated in this report by reference to the
information set forth under the caption ‘‘Relationship With Independent Public Accountants’’ in the
2009 Proxy Statement.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)

1. Financial Statements. A list of financial statements included herein is set forth in the

Index to Financial Statements appearing in ‘‘ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA.’’

2. Financial Statement Schedules. The Financial Statement Schedule described below is

filed as part of the report.

Description

Schedule II—Valuation and Qualifying Accounts.
All other financial statement schedules are not required under the relevant instructions
or are inapplicable and therefore have been omitted.

(b) Exhibits

2.1 Agreement and Plan of Merger, dated as of January 2, 2004, among Cogent Communications

Group, Inc., Lux Merger Sub, Inc. and Symposium Gamma, Inc. (previously filed as Exhibit 2.1
to our Periodic Report on Form 8-K, filed on January 8, 2004, and incorporated herein by
reference)

2.2 Agreement and Plan of Merger, dated as of March 30, 2004, among Cogent Communications
Group, Inc., DE Merger Sub, Inc. and Symposium Omega, Inc. (incorporated by reference to
Exhibits 2.6 of our Annual Report on Form 10-K for the year ended December 31, 2003, filed
on March 30, 2004)

2.3 Agreement and Plan of Merger, dated as of August 12, 2004, among Cogent Communications

Group, Inc., Marvin Internet, Inc., and UFO Group, Inc. (previously filed as Exhibit 2.6 to our
Annual Report on Form 10-K, filed on March 31, 2005, and incorporated herein by reference)

2.4 Asset Purchase Agreement, dated as of September 15, 2004, between Global Access

telecommunications Inc., Symposium Gamma, Inc. and Cogent Communications Group, Inc.
(previously filed as Exhibit 2.7 to our Annual Report on Form 10-K, filed on March 31, 2005,
and incorporated herein by reference)

2.5 Agreement and Plan of Merger, dated as of October 26, 2004, among Cogent Communications
Group, Inc., Cogent Potomac, Inc. and NVA Acquisition, Inc. (previously filed as Exhibit 2.8 to
our Annual Report on Form 10-K, filed on March 31, 2005, and incorporated herein by
reference)

2.6 Agreement for the Purchase and Sale of Assets, dated December 1, 2004, among Cogent

Communications Group, Inc., SFX Acquisition, Inc. and Verio Inc. (previously filed as
Exhibit 2.9 to our Annual Report on Form 10-K, filed on March 31, 2005, and incorporated
herein by reference)

3.1 Fifth Amended and Restated Certificate of Incorporation (previously filed as Exhibit 3.1 to our
Annual Report on Form 10-K, filed on March 31, 2005, and incorporated herein by reference)

3.2 Amended and Restated Bylaws in effect from September 17, 2007 (previously filed as

Exhibit 3.1 to our Quarterly Report on Form 10-Q, filed on November 8, 2007, and
incorporated herein by reference)

4.1

Indenture related to the Convertible Senior Notes due 2027, dated as June 11, 2007, between
Cogent Communications Group, Inc. and Wells Fargo Bank, N.A., as trustee (including form of
1.00% Convertible Senior Notes due 2027) (previously filed as Exhibit 4.1 to our Periodic
Report on Form 8-K, filed on June 12, 2007, and incorporated herein by reference)

4.2 Form of 1.00% Convertible Senior Notes due 2027 ((previously filed as Exhibit A to the

Exhibit 4.1 to our Periodic Report on Form 8-K, filed on June 12, 2007, and incorporated
herein by reference)

4.3 Registration Rights Agreement, dated as of June 11, 2007, by and among Cogent

Communications Group, Inc. and Bear, Stearns & Co. Inc., UBS Securities LLC, RBC Capital
Markets Corporation and Cowen and Company, LLC (previously filed as Exhibit 4.3 to our
Periodic Report on Form 8-K, filed on June 12, 2007, and incorporated herein by reference)

10.1

Seventh Amended and Restated Registration Rights Agreement of Cogent Communications
Group, Inc., dated October 26, 2004 (previously filed as Exhibit 10.2 to our Annual Report on
Form 10-K, filed on March 31, 2005, and incorporated herein by reference)

10.2 Fiber Optic Network Leased Fiber Agreement, dated February 7, 2000, by and between Cogent
Communications, Inc. and Metromedia Fiber Network Services, Inc., as amended July 19, 2001
(incorporated by reference to Exhibit 10.1 to our Registration Statement on Form S-4,
Commission File No. 333-71684, filed on October 16, 2001)*

10.3 Dark Fiber IRU Agreement, dated April 14, 2000, between WilTel Communications, Inc. and

Cogent Communications, Inc., as amended June 27, 2000, December 11, 2000, January 26,
2001, and February 21, 2001 (incorporated by reference to Exhibit 10.2 to our Registration
Statement on Form S-4, Commission File No. 333-71684, filed on October 16, 2001)*

10.4 David Schaeffer Employment Agreement with Cogent Communications Group, Inc., dated

February 7, 2000 (incorporated by reference to Exhibit 10.6 to our Registration Statement on
Form S-4, Commission File No. 333-71684, filed on October 16, 2001)

10.5 Form of Restricted Stock Agreement relating to Series H Participating Convertible Preferred
Stock (incorporated by reference to Exhibit 10.2 to our Registration Statement on Form S-8,
Commission File No. 333-108702, filed on September 11, 2003)

10.6 Lease for Headquarters Space by and between 6715 Kenilworth Avenue Partnership and

Cogent Communications Group, Inc., dated September 1, 2000 (incorporated by reference to
Exhibit 10.10 to our Registration Statement on Form S-4, Commission File No. 333-71684, filed
on October 16, 2001)

10.7 Renewal of Lease for Headquarters Space, by and between 6715 Kenilworth Avenue

Partnership and Cogent Communications Group, Inc., dated August 5, 2003 (incorporated by
reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q, filed on November 14, 2003)

10.8 The Amended and Restated Cogent Communications Group, Inc. 2000 Equity Plan

(incorporated by reference to Exhibit 10.12 to our Registration Statement on Form S-4,
Commission File No. 333-71684, filed on October 16, 2001)

10.9

10.10

2003 Incentive Award Plan of Cogent Communications Group, Inc. (incorporated by reference
to Exhibit 10.1 to our Registration Statement on Form S-8, Commission File No. 333-108702,
filed on September 11, 2003)

2004 Incentive Award Plan of Cogent Communications Group, Inc. (as amended and restated
through June 20, 2007) (incorporated by reference to Exhibit 10.10 to our Annual Report on
Form 10-K, filed on February 27, 2008)

10.11 Dark Fiber Lease Agreement dated November 21, 2001, by and between Cogent

Communications, Inc. and Qwest Communications Corporation (incorporated by reference to
Exhibit 10.13 to our Registration Statement on Form S-4, as amended by a Form S-4/A
(Amendment No. 2), Commission File No. 333-71684, filed on December 7, 2001)

10.12 Robert N. Beury, Jr. Employment Agreement with Cogent Communications Group, Inc., dated
June 15, 2000 (incorporated by reference to Exhibit 10.20 to our Annual Report on Form 10-K,
filed on March 31, 2003)

10.13 Mark Schleifer Employment Agreement with Cogent Communications Group, Inc., dated
September 18, 2000 (incorporated by reference to Exhibit 10.21 to our Annual Report on
Form 10-K, filed on March 31, 2003)

10.14 R. Reed Harrison Employment Agreement with Cogent Communications Group, Inc., dated

July 1, 2004 (incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q,
filed on August 16, 2004)

10.15 Brad Kummer Employment Agreement with Cogent Communications Group, Inc., dated

January 11, 2000, (incorporated by reference to Exhibit 10.23 to our Registration Statement on
Form S-1, Commission File No. 333-122821, filed on February 14, 2005)

10.16 Extension of Lease for Headquarters Space, by and between 6715 Kenilworth Avenue

Partnership and Cogent Communications Group, Inc., dated February 3, 2005 (previously filed
as Exhibit 10.27 to our Annual Report on Form 10-K, filed on March 31, 2005, and
incorporated herein by reference)

10.17 Notice of Grant, dated November 4, 2005, made to David Schaeffer (previously filed as

Exhibit 10.1 to our Periodic Report on Form 8-K, filed on November 7, 2005, and incorporated
herein by reference)

10.18 Extension of Lease for Headquarters Space to August 31, 2006, by and between 6715

Kenilworth Avenue Partnership and Cogent Communications Group, Inc., dated July 21, 2005
(previously filed as Exhibit 10.1 to our Quarterly Report on Form 10-K, filed on August 15,
2005, and incorporated herein by reference)

10.19 Option for extension of Lease for Headquarters Space to August 31, 2007, by and between

6715 Kenilworth Avenue Partnership and Cogent Communications Group, Inc., dated July 21,
2005 (previously filed as Exhibit 10.2 to our Quarterly Report on Form 10-K, filed on
August 15, 2005, and incorporated herein by reference)

10.20 Extension of Lease for headquarters space to August 31, 2010, by and between 6715 Kenilworth

Avenue Partnership and Cogent Communications Group, Inc., dated June 20, 2006 (previously
filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q, filed on August 8, 2006, and
incorporated herein by reference)

10.21

Jeffery S. Karnes Employment Agreement with Cogent Communications Group, Inc., dated
May 17, 2004 (previously filed as Exhibit 10.25 to our Annual Report on Form 10-K, filed on
March 14, 2007, and incorporated herein by reference)

10.22 David Schaeffer Amendment No. 2 to Employment Agreement with Cogent Communications

Group, Inc., dated as of March 12, 2007 (previously filed as Exhibit 10.26 to our Annual
Report on Form 10-K, filed on March 14, 2007, and incorporated herein by reference)

10.23 Robert N. Beury, Jr. Employment Agreement with Cogent Communications Group, Inc., dated

as of March 12, 2007 (previously filed as Exhibit 10.27 to our Annual Report on Form 10-K,
filed on March 14, 2007, and incorporated herein by reference)

10.24 Thaddeus G. Weed Employment Agreements, dated September 25, 2003 through October 26,

2006 (previously filed as Exhibit 10.28 to our Annual Report on Form 10-K, filed on March 14,
2007, and incorporated herein by reference)

10.25 Amendment No. 3 to Employment Agreement of Dave Schaeffer, dated as of August 7, 2007

(previously filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q, filed on August 8,
2007, and incorporated herein by reference)

10.26 Form of Restricted Stock Agreement made to Vice Presidents and certain other employees on
January 1, 2008) (incorporated by reference to Exhibit 10.26 to our Annual Report on
Form 10-K, filed on February 27, 2008)

10.27 Form of Restricted Stock Agreement made to Mr. Schaeffer on January 1, 2008) (incorporated
by reference to Exhibit 10.27 to our Annual Report on Form 10-K, filed on February 27, 2008)

10.28 Extension of Lease for headquarters space to August 31, 2012 and addition of 3rd floor office

space, by and between 6715 Kenilworth Avenue Partnership and Cogent Communications
Group, Inc., dated as of August 7, 2008 (previously filed as Exhibit 10.1 to our Quarterly
Report on Form 10-Q, filed on August 8, 2008, and incorporated herein by reference)

21.1

Subsidiaries (filed herewith)

23.1 Consent of Ernst & Young LLP (filed herewith)

31.1 Certification of Chief Executive Officer (filed herewith)

31.2 Certification of Chief Financial Officer (filed herewith)

32.1 Certification of Chief Executive Officer (filed herewith)

32.2 Certification of Chief Financial Officer (filed herewith)

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

Schedule II

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

Description

Allowance for doubtful accounts (deducted from accounts

receivable)

Balance at
Beginning of
Period

Charged to
Costs and
Expenses(a)

Deductions

Balance at
End of
Period

Year ended December 31, 2006 . . . . . . . . . . . . . . . . . .
Year ended December 31, 2007 . . . . . . . . . . . . . . . . . .
Year ended December 31, 2008 . . . . . . . . . . . . . . . . . .

$1,437
$1,233
$1,159

$ 3,410
$ 2,705
$ 5,677

$ 3,614
$ 2,779
$ 4,922

$1,233
$1,159
$1,914

Allowance for Unfulfilled Customer Purchase Obligations

(deducted from accounts receivable)

Year ended December 31, 2006 . . . . . . . . . . . . . . . . . .
Year ended December 31, 2007 . . . . . . . . . . . . . . . . . .
Year ended December 31, 2008 . . . . . . . . . . . . . . . . . .

Lease restructuring accrual
Year ended December 31, 2006 . . . . . . . . . . . . . . . . . .
Year ended December 31, 2007 . . . . . . . . . . . . . . . . . .

$ 405
$ 584
$1,107

$1,552
$ 393

$ 1,585
$ 2,134
$24,481

$ 1,406
$ 1,611
$24,257

$ 584
$1,107
$1,331

$
$

114
7

$ 1,273
400
$

$ 393
$ —

(a) Bad debt expense, net of recoveries, was approximately $2.6 million for the year ended

December 31, 2006, $2.0 million for the year ended December 31, 2007 and $4.6 million for the
year ended December 31, 2008.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the

registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

SIGNATURES

COGENT COMMUNICATIONS GROUP, INC.

Dated: March 2, 2009

By: /s/ DAVID SCHAEFFER

Name: David Schaeffer
Title: Chairman and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed

below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.

Signature

Title

Date

/s/ DAVID SCHAEFFER

David Schaeffer

Chairman and Chief Executive Officer
(Principal Executive Officer)

March 2, 2009

/s/ THADDEUS G. WEED

Thaddeus G. Weed

Chief Financial Officer (Principal
Financial and Accounting Officer)

March 2, 2009

/s/ EREL MARGALIT

Erel Margalit

/s/ TIMOTHY WEINGARTEN

Timothy Weingarten

/s/ STEVEN BROOKS

Steven Brooks

/s/ RICHARD T. LIEBHABER

Richard T. Liebhaber

/s/ DAVID BLAKE BATH

David Blake Bath

/s/ LEWIS H. FERGUSON III

Lewis H. Ferguson III

Director

March 2, 2009