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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

for the quarterly period ended June 30, 2010

for the transition period from               to              

Commission File Number 000-21091

FIBERTOWER CORPORATION

(Exact name of registrant as specified in its charter)

185 Berry Street

Suite 4800

San Francisco, CA 94107

(Address of principal executive offices)

(415) 659-3500

(Registrant’s telephone number, including area code)

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

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

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

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

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date: The registrant had 49,963,763 shares of its common stock outstanding as of July 30, 2010.

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FIBERTOWER CORPORATION

INDEX

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ITEM 1.   FINANCIAL STATEMENTS

FIBERTOWER CORPORATION

Condensed Consolidated Balance Sheets

(In thousands, except par value)

See accompanying notes.

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FIBERTOWER CORPORATION

Condensed Consolidated Statements of Operations

(unaudited)

(In thousands, except per share data)

See accompanying notes.

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FIBERTOWER CORPORATION

Condensed Consolidated Statements of Cash Flows

(unaudited)

(In thousands)

See accompanying notes.

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FIBERTOWER CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1—Organization and Business

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

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

We have incurred operating and net losses and negative cash flows since our inception, and we had an accumulated deficit of $651.4 million as of June 30, 2010. Through June 30, 2010, we have relied primarily on the proceeds from equity and debt financings to fund our operating and investing activities.  Failure to generate sufficient revenue could have a material adverse effect on our results of operations, financial condition and cash flows.  The recoverability of assets is highly dependent on the ability of management to execute its business plan which is subject to a number of risks including, but not limited to, dependence on key employees, dependence on key customers and suppliers, potential competition from larger, more established companies, the ability to develop and bring new services or products to market (including expansion of our network), the ability to attract and retain additional qualified personnel and the ability to obtain adequate financing to support our planned growth.

Note 2—Basis of Presentation and Accounting Policies

Principles of consolidation and basis of presentation — The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the six-month period ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2009.

There have been no material changes in our significant accounting policies as of June 30, 2010 as compared to the significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2009. However, the following provides the valuation techniques and the related assumptions and estimates used in the calculation of stock-based compensation expense with respect to restricted stock awards with market conditions which we first granted during the second quarter of 2010.

We record stock-based compensation expense only for those restricted stock awards for which the requisite service period is expected to be rendered.  The cumulative effect of a change in the estimated number of restricted stock awards for which the requisite service is expected to be or has been rendered is recognized in the period of the change in the estimate.  To the extent that the requisite service period is rendered, stock-based compensation expense is not reversed; rather, it is recognized regardless of whether or not the market condition is achieved.

Valuation.  We estimate the fair value of restricted stock awards with market conditions granted using a Monte Carlo simulation with a three-year period which is equivalent to the contractual term of the award.  Our determination of the fair value of restricted stock awards with market conditions on the date of grant is affected by our stock price as well as inputs of subjective assumptions and variables.  Changes in assumptions could result in materially different stock-based compensation expense which could materially affect our operating expenses, net income (loss) and net income (loss) per share.

Amortization method.  We recognize stock-based compensation expense on a straight-line basis over the requisite service period of the award.

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Expected volatility.  We estimate the volatility of our common stock at the date of grant based on the historical volatilities of similar public companies consisting of competitive telecommunications providers that share a common capital intensive network build plan, are free cash flow negative, highly levered and are in an earlier life-cycle stage.

Risk-free interest rate.  We base the risk-free interest rate on the implied yield currently available on U.S. Treasury issues with an equivalent remaining term equal to the expected life of the award.

Forfeitures.  We use historical data and management’s judgment to estimate the pre-vesting award forfeitures to estimate the number of shares for which the requisite service period will not be rendered.

Dividend yield.  We have not and do not anticipate paying any cash dividends on our common stock in the foreseeable future; therefore a 0% dividend yield was assumed.

Reverse stock split — On December 18, 2009, we effected a 1-for-10 reverse stock split of our common stock.  Accordingly, the accompanying unaudited condensed consolidated financial statements for all periods presented have been retroactively restated to reflect the effect of the reverse stock split.

Recent accounting pronouncements — There have been no recent accounting pronouncements or changes in accounting pronouncements during the six months ended June 30, 2010, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the year ended December 31, 2009, that are of significance, or potential significance, to us.

Note 3—Property and Equipment

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

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

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

See discussion in Note 4, Long-term Debt and Capital Lease regarding the network equipment under capital lease.

Note 4—Long-term Debt and Capital Lease

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

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

We issued the Notes due 2016 on December 22, 2009, in connection with our exchange offer (“Exchange Offer”) whereby certain of the Notes due 2012 were exchanged for interim notes which were later redeemed for shares of our common stock, cash and the Notes due 2016.

The change in Notes due 2016 during the six months ended June 30, 2010 is summarized as follows (in thousands):

As required by the accounting guidance for troubled debt restructurings, we are recognizing interest expense on the Notes due 2016 at the effective interest rate (7.31%) necessary to equate future principal and interest payments to an initial carrying value of $124.4 million. The Notes due 2016 will mature in January 2016. Interest is payable at 9.00% per annum on the principal amount accruing from December 22, 2009, payable semi-annually on January 1 and July 1 of each year beginning July 1, 2010. On each interest payment date, one-third of the interest will be payable in cash and two-thirds of the interest will be payable in additional Notes due 2016 in a principal amount equal to such portion of the interest amount. The Notes due 2016 are carried at a premium to par.  This premium is amortized over the term of the Notes due 2016.  In addition, we are increasing the carrying value of the Notes due 2016 by accruing interest expense for the future issuance of notes through interest payments-in-kind.  The net impact of these adjustments was a $2.8 million increase of the carrying value of the Notes due 2016 in the six months ended June 30, 2010.  When we issued the Notes due 2016, we placed into escrow approximately $11.0 million, classified as restricted cash and investments in our Condensed Consolidated Balance Sheets, which, together with the earnings thereon, was an amount sufficient to pay the cash portion of the first six interest payments.

The Notes due 2016 are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis by each of our existing and future domestic restricted subsidiaries. All of our current subsidiaries are restricted subsidiaries governed by the terms of our indentures. The Notes due 2016 and the related guarantees are our senior secured obligations and rank pari passu in right of payment with all of our and the guarantors’ existing and future senior indebtedness, including our Notes due 2012. Because the liens on the collateral securing the Notes due 2016 rank ahead of the liens securing the Notes due 2012, the Notes due 2016 rank effectively senior in right of payment to the Notes due 2012 to the extent of the value of the collateral securing the Notes due 2016. The Notes due 2016 and the related guarantees are secured, to the extent permitted by law, by a first priority pledge (subject to permitted liens) of substantially all of our and our existing and future restricted subsidiaries’ assets (it being understood that the Communications Act of 1934 currently prohibits the grant of a security interest in an FCC license), other than certain excluded assets, and by a first priority pledge (subject to permitted liens) of the equity interests of each of our existing and future domestic restricted subsidiaries and the equity interests of any unrestricted subsidiaries or foreign subsidiaries owned by any such domestic restricted subsidiaries, in each case subject to certain limitations and exceptions. The maximum potential amount of future undiscounted payments the guarantors could be required to make under the guarantees of the Notes due 2016 is $186.4 million. This amount represents total anticipated cash payments, including expected interest payments that are not recorded on the Condensed Consolidated Balance Sheets.

The indenture governing the Notes due 2016 contains covenants that restrict our ability to i) incur or guarantee additional indebtedness or issue certain preferred stock, ii) pay dividends or make other distributions, iii) issue capital stock of our restricted subsidiaries, iv) transfer or sell assets, including the capital stock of our restricted subsidiaries, v) make certain investments or acquisitions, vi) grant liens on our assets, vii) incur dividend or other payment restrictions affecting our restricted subsidiaries, viii) enter into certain transactions with affiliates, and ix) merge, consolidate or transfer all or substantially all of our assets. As of June 30, 2010, we are in compliance with all of the covenants.

We may redeem the Notes due 2016 prior to January 2012 at 100% of the aggregate principal amount of the notes to be redeemed plus a make-whole premium and accrued and unpaid interest to the date of redemption. We may redeem the Notes due 2016 beginning in January 2012 at 104.5% of the aggregate principal amount of the notes to be redeemed plus accrued and unpaid interest to the date of redemption. The redemption price decreases to 102.25% in January 2014 and to 100% in January 2015. If a fundamental change, which generally includes events relating to certain changes in control of FiberTower, occurs prior to maturity, holders may

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require us to repurchase all or part of the Notes due 2016 for cash at a repurchase price equal to 101% of their aggregate principal amount, plus accrued and unpaid interest, up to the repurchase date. We evaluated these provisions and determined they do not represent derivatives that are required to be bifurcated from the Notes due 2016.

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

See Note 5, Fair Value Disclosures for disclosure of the fair value of our Notes due 2016.

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

The change in Notes due 2012 during the six months ended June 30, 2010 is summarized as follows (in thousands):

On November 9, 2006, we completed the sale of $402.5 million of the Notes due 2012 that mature on November 15, 2012. The notes are fully guaranteed, jointly and severally, by each of our subsidiaries and bear interest at a rate of 9.00% per annum, payable semi-annually in arrears on May 15 and November 15 of each year.

We elected to pay the May 15, 2009, November 15, 2009 and May 15, 2010 interest payments entirely by the issuance of additional Notes due 2012, as permitted under the related indenture. This resulted in the issuance of an additional $33.5 million in principal amount of Notes due 2012 in 2009 and $1.5 million in the second quarter of 2010. These additional notes are identical to the Notes due 2012, except that interest on such additional notes began to accrue from the date they were issued. Subject to certain conditions, we also have the option of making the next semi-annual interest payment due in November 2010 with additional Notes due 2012 in lieu of cash. The interest rate applicable to any such interest payments made in additional Notes due 2012 is 11%. Thereafter, the interest is payable only in cash. We currently expect the payment of the November 2010 interest payment to be made in additional Notes due 2012.

In the second quarter of 2009, we repurchased $70.9 million par value of our Notes due 2012 in the open market.  These repurchases, at a weighted average price of approximately $43 per $100 of par value, were for a total of $30.8 million in cash plus accrued but unpaid interest of $0.1 million.  In the first quarter of 2009, we repurchased $71.3 million par value of our Notes due 2012 in the open market. These repurchases, at a weighted average price of approximately $30 per $100 of par value, were for a total of $21.4 million in cash plus accrued but unpaid interest of $1.9 million. The repurchases resulted in the recognition of a gain on early extinguishment of debt in the second quarter of 2009 of $44.6 million and in the first quarter of 2009 of $53.7 million.

The gain on early extinguishment of debt recorded during the three and six months ended June 30, 2009 was comprised of the following (in thousands):

We will be required to repay any Notes due 2012 that are not redeemed or converted prior to maturity for 125.411% of their principal amount, or $35.7 million. We are accreting the principal premium ratably over the six-year period from inception until the Notes due 2012 mature and are recognizing such accretion as additional interest expense. The effect of this accretion is to increase the effective yield to the holders to 12% per annum based on the par value of the Notes due 2012. The effect of the accretion related to the interest payments made by the issuance of additional notes, is to increase the effective yield to the holders from 12% to approximately 12.5% per annum.

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The Notes due 2012 and related guarantees are secured, to the extent permitted by law, by a second priority pledge of substantially all of our assets (other than certain excluded assets) and by a second priority pledge of the stock of all of our subsidiaries. The Notes due 2012 rank pari passu in right of payment to all of our existing and future senior indebtedness and senior to all of our existing and future subordinated indebtedness. Because the liens on the collateral securing the Notes due 2016 rank ahead of the liens securing the Notes due 2012, the Notes due 2016 rank effectively senior in right of payment to the Notes due 2012 to the extent of the value of the collateral securing the Notes due 2016. The maximum potential amount of future undiscounted payments the guarantors could be required to make under the guarantees of the Notes due 2012 is $43.3 million. This amount represents total anticipated cash payments, including expected interest payments that are not recorded on the Condensed Consolidated Balance Sheets.

The Notes due 2012 are not redeemable by us before November 15, 2010. If our common stock has traded at or above 150% of the $62.20 per share conversion price discussed below for 20 of any 30 consecutive trading days and the daily trading volume for each such trading day, when multiplied by the closing sale price for such trading day, equals at least $8.0 million, we may redeem any of the Notes due 2012, in whole or in part at any time on or after November 15, 2010, at 100% of the aggregate accreted principal amount, together with accrued and unpaid interest.

The Notes due 2012 may be converted into shares of our common stock. The conversion price was originally $82.90 per share subject to adjustment under certain circumstances. The conversion price was reduced on November 9, 2008 as described below. Holders who convert their Notes due 2012 in connection with certain designated events related to consolidations and mergers that occur on or prior to November 15, 2010 will receive a make-whole premium on the notes such holders convert.

The Notes due 2012 contain certain anti-dilution provisions that caused the conversion price to be reduced because we had not issued or sold common stock for aggregate proceeds of at least $50.0 million by November 9, 2008. The number of common shares that could be issued upon conversion of the Notes due 2012 was increased as a result of the anti-dilution provisions being triggered on November 9, 2008, which increase was capped at a 33% increase in the total number of shares. Therefore, the triggering of the anti-dilution provisions resulted in a reduction to the conversion price to $62.20 per share. This resulted in 2.0 million additional shares which could be potentially issuable upon conversion of all Notes due 2012 outstanding at December 31, 2008 and any additional notes that could be issued as payment for interest on the Notes due 2012. In 2009, the amount of shares which could be potentially issuable if all outstanding Notes due 2012 at December 31, 2009 (and any additional notes that could be issued as payment for interest on the notes) were converted was reduced by i) 2.8 million resulting from the repurchases of Notes due 2012 and ii) 4.8 million resulting from the Exchange Offer.

In connection with the Exchange Offer, the indenture governing the Notes due 2012 was amended to eliminate or amend substantially all of the restrictive covenants contained in such indenture. In addition, the holder put option upon the occurrence of certain designated events was eliminated.

We concluded that the embedded feature of the Notes due 2012 related to the make-whole premium, designated event make-whole premium and holder put option, qualified as derivatives and should be bundled as a compound embedded derivative (“Derivative”). The carrying value of the Derivative at June 30, 2010 and December 31, 2009 was zero.

See Note 5, Fair Value Disclosures for disclosure of the fair value of our Notes due 2012 and the Derivative.

Debt issuance costs incurred in connection with the sale of the Notes due 2012 totaled $14.3 million. Accumulated amortization totaled $13.9 million at June 30, 2010. This included a reduction of $3.2 million in unamortized debt issuance costs associated with the repurchases of Notes due 2012 in 2009 and $4.6 million in debt issuance costs written off in connection with the Exchange Offer. Accumulated amortization totaled $13.8 million at December 31, 2009.

Obligation under Capital Lease

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

Note 5—Fair Value Disclosures

The following table presents information about our assets measured at fair value on a recurring basis as of June 30, 2010 and December 31, 2009, and indicates the fair value hierarchy of the valuation techniques we utilized to determine such fair value (in thousands):

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(1)           Includes $36.0 million of money market mutual funds which invest in U.S. Government securities.

(2)           Includes $42.5 million of money market mutual funds which invest in U.S. Government securities.

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

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

At June 30, 2010, the estimate of fair value for the Notes due 2016 and Notes due 2012 was determined based on bids from market makers.  At December 31, 2009, there was not sufficient liquidity to establish an active market in the Notes due 2016 and Notes due 2012.  Therefore, the estimate of fair value at December 31, 2009 was determined using a discounted cash flow approach as well as based on bids from market makers.

The fair value of the Derivative at June 30, 2010 and December 31, 2009 was zero based on our internal models. We monitor the fair value of the Derivative each reporting period and record changes in fair value through charges or credits to miscellaneous income, net with an offsetting adjustment to the carrying value of the Notes due 2012 on the balance sheet. The value of the Derivative can fluctuate based on changes in several factors including the trading price of our common stock, passage of time and other events affecting the Notes due 2012.

Note 6—Stockholders’ Equity and Stock-Based Compensation

Stock Compensation Plans

On June 3, 2010 our stockholders approved the adoption of the FiberTower Corporation 2010 Stock Incentive Plan (the “2010 Stock Incentive Plan”).  The 2010 Stock Incentive Plan provides for the grant of incentive stock options and non-qualified stock options, restricted stock, restricted stock units, stock appreciation rights, phantom stock, and other stock or performance-based awards to all employees, non-employee directors and service providers of FiberTower.  The selection of eligible individuals to whom awards will be granted is within the discretion of the Compensation Committee of the Board of Directors.  The maximum number of shares of common stock that may be issued under the 2010 Stock Incentive Plan is 6,500,000 shares.

Following is a description of the restricted stock and stock option awards and the activity under the 2010 Stock Incentive Plan and the FiberTower Corporation Stock Incentive Plan adopted in 2001 (the “2001 Stock Incentive Plan”) during the three and six months ended June 30, 2010 and 2009.

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Restricted Stock Awards

Under the 2010 Stock Incentive Plan and the 2001 Stock Incentive Plan, holders of restricted stock awards have voting rights.  Because holders of restricted stock have voting rights, such shares are considered outstanding for financial reporting purposes, but are included in net income (loss) per share computations only to the extent vested.  In addition, certain of our restricted stock awards convey dividend rights to the holder prior to vesting.  These are considered participating securities for purposes of computing net income (loss) per share.  See Note 8, Net Income (Loss) Per Share.

A summary of restricted stock activity for the three and six months ended June 30, 2010 and 2009 is as follows:

(1)           The grant date fair value of the time-vested restricted stock awards granted during the three months ended June 30, 2010 was $3.56 per share based on our common stock price at the date of the award.  These awards vest annually over a three-year period from the grant date and were granted out of the 2010 Stock Incentive Plan (1.4 million shares) and the 2001 Stock Incentive Plan (0.7 million shares).

(2)           The grant date fair value of the awards with a market condition price target of $7.00 per share was $2.50 per share and the grant date fair value of the awards with a market condition price target of $10.00 per share was $1.99 per share.  We refer to awards granted with a market condition as the “2010 performance awards”.  The 2010 performance awards become eligible for end-of-performance-period cliff vesting 50% upon the price of our common stock remaining at or above $7 per share for 20 continuous trading days at any time during the performance period and 50% upon the price of our common stock remaining at or above $10 per share for 20 continuous trading days at any time during the performance period.  While the 2010 performance awards will become eligible for vesting upon attaining the applicable threshold, no eligible portion of the award will vest until the end of the three-year vesting period.  The 2010 performance awards were granted out of the 2010 Stock Incentive Plan.

In the first six months of 2010 we granted 116,000 restricted shares to certain non-employee directors which vested on the day following the date of grant.  In the first six months of 2009, we granted 105,000 of such restricted share awards.

As of June 30, 2010, restricted shares outstanding under the 2010 Stock Incentive Plan were 3,421,000 and under the 2001 Stock Incentive Plan were 837,000.

See Note 2, Basis of Presentation and Accounting Policies for a description of the valuation techniques and related assumptions and estimates used in the calculation of stock-based compensation expense with respect to restricted stock awards with market conditions.  The fair value estimate for the 2010 performance awards used the following assumptions: i) expected stock price volatility of 75%; ii) risk-free interest rate of 1.31%  and iii) expected dividend yield of 0%.  Stock-based compensation expense for the 2010 performance awards is recognized over the three-year requisite service period.

We determine the grant date fair value of each time-based vesting restricted stock award based on our common stock price at the date of the award.

At June 30, 2010, there was approximately $11.4 million of unrecognized compensation cost related to restricted stock awards. This compensation cost is expected to be recognized over a weighted-average period of approximately 2.8 years.

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Stock Option Awards

A summary of stock option activity for the three and six months ended June 30, 2010 and 2009 is as follows:

The weighted-average grant-date fair value per share of stock options granted was $1.23 during the first six months of 2009.

At June 30, 2010, the number of shares issuable under outstanding stock options was 636,000, of which 528,000 were exercisable.

At June 30, 2010, there was approximately $0.6 million of unrecognized compensation cost related to stock options. This compensation cost is expected to be recognized over a weighted-average period of approximately 1.5 years.

Employee and non-employee stock-based compensation expense was recorded in the Condensed Consolidated Statements of Operations as follows (in thousands):

Warrants — At June 30, 2010, there were 257,400 warrants outstanding at an exercise price of $72.50 per share.  Such warrants expire in December 2014.  During the first quarter of 2009, 31,000 warrants at an exercise price of $18.40 per share expired unexercised.

Common Stock Reserved for Future Issuance

Shares of common stock reserved for future issuance at June 30, 2010 were as follows (in thousands):

(1)            Shares of common stock reserved for future issuance pursuant to the Notes due 2012 were reduced by i) 2.8 million during 2009 as a result of the repurchases of Notes due 2012 described in Note 4, Long-term Debt and Capital Lease and ii) 4.8 million as a result of the Exchange Offer and redemption of debt in December 2009.

Note 7—Income Taxes

There is no income tax benefit from our net loss during the six months ended June 30, 2010 as we have recorded a full valuation allowance against our net deferred tax assets.

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As a result of the gain on early extinguishment of debt realized on the repurchases of our Notes due 2012 during the first six months of 2009 as described in Note 4, Long-term Debt and Capital Lease, combined with the suspension of the use of net operating losses in California, we recorded a state income tax provision of $0.4 million during the second quarter of 2009. However, for federal tax purposes, the American Recovery and Reinvestment Tax Act of 2009, Section 108(i), allows a taxpayer to elect to defer the recognition of cancellation of indebtedness income (“CODI”) from debt reacquisitions in 2009 and 2010 until 2014, and include the deferred CODI in income ratably over five years beginning in 2014. We intend to make this election for federal tax purposes for 2009 for some, if not all of our CODI, and accordingly, we did not record a current tax provision for the federal taxes incurred on CODI realized for the six months ended June 30, 2009.  We established a deferred tax liability for this election, which resulted in a corresponding and equal reduction in the valuation allowance recorded against our net deferred tax assets.

In the first quarter of 2009 and in connection with the preparation of the 2008 tax filings, management reviewed its current multi-state operations as they relate to the state apportionment percentages.  As a result of this review, we updated our overall blended state tax rate computation.  The impact of such update was a reduction in the overall state blended tax rate and, in turn, the carrying value of our deferred tax liability.  Accordingly, we recorded a discrete, non-cash state income tax benefit of $1.5 million in the first quarter of 2009, with a corresponding decrease to the deferred tax liability.

Note 8—Net Income (Loss) Per Share

As mentioned in Note 2, Basis of Presentation and Accounting Policies, on December 18, 2009, we effected a 1-for-10 reverse split of our common stock.  Accordingly, all share, option, warrant and per share information for all periods presented have been retroactively restated to reflect the effect of the reverse stock split.  Also, in 2009, we adopted guidance which resulted in the retrospective adjustment to prior period net income (loss) per share.  The guidance states that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are considered participating securities and shall be included in the computation of net income (loss) per share pursuant to the two-class method described in ASC 260-10, Earnings Per Share.  The effect of the adoption of this guidance was not material to our net income (loss) per share.

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

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

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For each of the three and six months ended June 30, 2010, 0.3 million stock options were excluded from the calculation of diluted net income (loss) per share because their inclusion would have been anti-dilutive.  For each of the three and six months ended June 30, 2009, 0.4 million stock options were excluded from the calculation of diluted net income (loss) per share because their inclusion would have been anti-dilutive.

At June 30, 2010, 0.5 million shares were potentially issuable if all currently outstanding Notes due 2012 (and any additional notes that could be issued as payment for interest on these notes) were converted.   See Note 4, Long-term Debt and Capital Lease for additional information.

There were also warrants outstanding at June 30, 2010, to acquire 0.3 million common shares.

Note 9—Related Party Transactions

During the three and six months ended June 30, 2010 and 2009, we leased co-location space from a stockholder that (i) owns approximately 5% of our outstanding common stock at June 30, 2010 and (ii) has an executive officer who serves on our Board of Directors. The aggregate operating expenses included in the Condensed Consolidated Statements of Operations pertaining to these lease and service arrangements, were approximately $0.9 million for the three months ended June 30, 2010 and $1.9 million for the six months ended June 30, 2010.  Such amounts were approximately $0.9 million for the three months ended June 30, 2009 and $1.7 million for the six months ended June 30, 2009.

Note 10—Guarantees and Other Contingencies

Regulatory Matters—We are subject to significant Federal Communications Commission, or FCC, regulation, some of which is in a state of flux due to challenges to existing rules and proposals to create new rules, including the nation’s first National Broadband Plan (NBP), which the FCC released on March 16, 2010. The NBP contains 198 specific recommendations for the FCC, Congress, or other federal, state or local entities to consider implementing in the next 2-to-24 months, including some directly or indirectly related to backhaul.  However, it is not clear whether or not any or all of the recommendations will be implemented.  Such FCC regulations are subject to different interpretations and inconsistent application and have historically given rise to disputes with

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other carriers and municipalities regarding the classification of traffic, rates, rights-of-way, wireless siting rights and zoning matters. Management believes that resolution of any such disputes will not have a material adverse impact on our consolidated financial position.

License Renewal—Like most other FCC licenses, the 24 GHz and 38.6-40.0 GHz (39 GHz) wide-area licenses which we hold were granted for an initial ten-year term. All those licenses now possess renewal dates ranging from 2010 to 2020. We hold two types of 39 GHz licenses which cover either rectangular service areas (“RSAs”), or economic areas (“EAs”). On October 1, 2008, the FCC released an Order governing FiberTower-held 39 GHz licenses. Our RSA 39 GHz licenses with 2007 expiration dates received either i) ten-year renewals for licenses deemed constructed or ii) ten-year renewals contingent upon meeting construction requirements which the FCC extended until June 1, 2012. All of our RSA licenses previously scheduled to expire in 2007 that are located in our top 50 markets met the FCC’s construction standard and, consequently, were renewed for ten years along with some licenses in smaller markets that were protected due to spectrum lease or other construction activity. Our remaining 183 RSA licenses, which were scheduled to expire at various times through 2009 - 2010 and all of our 352 EA licenses which expire October 18, 2010, are subject to this precedent and subject to renewal and extension filings, and likely must follow the precedent in the Order to receive an extension until June 1, 2012 to demonstrate “substantial service” as defined by the FCC. Recent applications to renew or extend construction deadlines for 39 GHz licenses expiring in 2009 and 2010 have been granted by the FCC. The licenses subject to the renewals or extensions or both, represent over 1.15 billion spectrum Points of Presence, or PoPs, in total.

To obtain renewal of a license, the licensee must demonstrate that, at the time of renewal, it either met a “safe harbor” build-out requirement or that it has provided “substantial service” as determined by the FCC. What level of service is considered “substantial” will vary depending upon the type of product offering by the licensee. The FCC has provided specific safe harbor guidance only for point-to-point offerings, where it has indicated the licensee should have constructed four links per channel per million persons in the license area. Licensees may show that they have met the substantial service test in other ways, such as providing niche services or offering service to underserved consumers.  On May 25, 2010, the FCC released a Notice of Proposed Rulemaking and Order seeking to establish new uniform license renewal (“Uniform License Renewal” proceeding) rules for many mobile and fixed wireless spectrum bands, including at 24 GHz and 39 GHz.  The proposed rules include refinements or changes to the rules governing 24 GHz and 39 GHz spectrum renewal to largely mirror the renewal rules that govern the 700 MHz Commercial Services Band (located at 698-746, 747-762 and 777-792 MHz). These 700 MHz rules requirements include a suggested requirement for geographic-area licensees to file a “renewal showing” in which they demonstrate that they have and are continuing to provide service.  The existing 24 GHz and 39 GHz renewal and substantial service requirements will govern until the Uniform License Renewal proceeding produces a final Order.  Comments are due in the Uniform License Renewal proceeding on August 6, 2010.  Reply comments are due August 23, 2010.  FiberTower plans to file comments and reply comments, and to actively monitor this proceeding.  It is not clear if the Uniform License Renewal proceeding will take months, 1-to-2 years, or longer to fully conclude.

Currently, licensees are required, prior to the expiration date of their licenses, to file renewal applications with an exhibit demonstrating compliance with the substantial service criteria. If an entity is deemed not to have provided substantial service through meeting the safe harbor build-out requirement or through other means with respect to a license for which renewal is sought, the renewal will not be granted and the license will expire. We are required, or expect to be required, to demonstrate substantial service by June 1, 2012 for the majority of our 39 GHz licenses. We are required to demonstrate substantial service for all of our 24 GHz licenses by February 1, 2011, except for one, which requires such a showing in 2014. We do not currently meet the substantial service safe harbor guidance provided by the FCC for the substantial majority of our 24 GHz and 39 GHz licenses, which require, or we expect to require, renewal applications or showings mostly in the 2011 - 2012 time period. We believe that our licenses will be renewed based on our significant network investment, spectrum offerings and expanding geographic coverage. However, since we are required to demonstrate substantial service at the time licenses are renewed, the FCC has little and possibly changing precedent in the 24 GHz and 39 GHz bands, and determination of substantial service is subject to FCC discretion, the FCC could choose to not renew licenses that do not meet the substantial service safe harbor.

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

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

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

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

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

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

FORWARD LOOKING STATEMENTS

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

There are many risks, uncertainties and other factors that can prevent the achievement of goals or cause results to differ materially from those expressed or implied by these forward-looking statements.  These include, among other things, negative cash flows and operating and net losses, additional liquidity requirements, potential loss of significant customers, downturns in the wireless communication industry, regulatory costs and restrictions, potential loss of FCC licenses, equipment supply disruptions and cost increases, competition from alternative backhaul service providers and technologies, along with those risk factors described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2009 (“Risk Factors”).

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

Overview

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

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

As of June 30, 2010, we had 148 employees, of whom 100 were in Engineering, Market/Field Operations, and Network Operations, the payroll- related costs of which are classified as Cost of Service Revenues; 15 were in Sales and Marketing; and 33 were in General and Administrative.

As of June 30, 2010:

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·                  We provide services to 6,244 billing customer locations at 2,789 billing sites in 13 markets throughout the U.S;

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

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

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

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

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

·                  expand within existing markets or add new markets based on identified demand;

·                  leverage our existing network and customer relationships by increasing utilization of existing assets;

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

·                  allocate capital efficiently by balancing new site and market growth.

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

·                  market demand for wireless services;

·                  availability of alternative services at better prices;

·                  predictability of our deployment schedules; and

·                  quality of our services.

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

During the second quarter of 2010, we achieved the following significant financial and operational milestones:

·                  Service revenues grew 18% to $18.4 million from $15.6 million in the second quarter of 2009;

·                  Average monthly revenue per deployed site grew 16% to $1,925 from $1,666 in the second quarter of 2009; and

·                  Adjusted EBITDA improved to a loss of $0.7 million from $3.2 million in the second quarter of 2009. See Results of Operations—Non-GAAP Financial Measures below for a reconciliation of Adjusted EBITDA to net income (loss).

As of June 30, 2010, we had deployed 3,136 sites, of which 2,789 had billing customers. A deployed site may not yet be billing for reasons including that we have not yet sold any service at that site.

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Our business plan depends on our expectation that most, if not all, sites will generate revenue within the useful life of the site sufficient to fully recover our investment in property and equipment. If we are unable to generate sufficient revenues from these sites in the future, our business, financial condition and results of operations would be adversely affected. Since our inception, our operating expenses have exceeded our revenues. We have incurred operating and net losses and negative cash flows since our inception and we expect that we will continue to incur operating and net losses and negative cash flows for the next few years as we continue to expand our network. See “Liquidity and Capital Resources” below for additional information.

Service Revenues

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

Traffic grows as we construct new sites for customers, sell to new customers at existing sites, or sell incremental bandwidth to existing customers. The average monthly revenue generated per deployed site increased to $1,925 in the second quarter of 2010 from $1,842 in the first quarter of 2010.  The average monthly revenue per deployed site excludes $0.3 million in the second quarter and $0.6 million in the first quarter of 2010 recognized from customers’ early termination of certain circuits.  We intend to continue our focus on site-level margins, project return on investment, and cost reductions.

For the three and six months ended June 30, 2010 and 2009, the following customers accounted for a significant portion of our revenues:

Accounts receivable from these customers comprised the following percentages of our total accounts receivable balances at June 30, 2010 and December 31, 2009:

Costs and Expenses

The major components of our cost of service revenues are:

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

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

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

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

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

Construction of our network is a complex process involving the interaction and assembly of multiple components that result in internal labor, third party and equipment costs. We regularly assess the recoverability of costs accumulated in construction-in-progress as we execute our network build-out plans.

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

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

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

Interest income and interest expense are primarily the result of interest earned on investment of cash and interest cost incurred on the outstanding balance of our indebtedness. See Note 4, Long-term Debt and Capital Lease for additional information.

As a result of the gain on early extinguishment of debt realized on the repurchases of our Notes due 2012 during the first six months of 2009 as described in Note 4, Long-term Debt and Capital Lease, we recorded a state income tax provision of $0.4 million during the second quarter of 2009.  In the first quarter of 2009, we recorded a $1.5 million income tax benefit and a corresponding decrease to the deferred tax liability. See Note 7, Income Taxes for additional information.

Challenges Facing Our Business

In addition to the Risk Factors, there are various challenges facing our business. These include acquiring new customers on new and existing sites, retaining existing customers, deploying new sites in a predictable manner, scaling our business and managing growth, the concentrated nature of our customers, the emerging nature of our market, the weakened state of the U.S. economy and variability in our stock price.

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

Deploying new sites in a predictable manner can be challenging given the difficulties in dealing with numerous landlords in order to lease space on sites, complying with the various zoning and permitting laws of different cities or districts, negotiating fiber arrangements, and managing the contractors involved with construction, program and project management. We have taken steps to reduce deployment unpredictability on larger deployments by engaging with large, well-established, turnkey vendors that are experienced in these activities. Additionally, we concentrate on selecting sites owned by major tower operators with whom we already have agreements, which we believe will help minimize the risk of failing to negotiate a definitive lease for a site.

We are a growing company, and hiring qualified personnel and developing processes and systems rapidly are necessary in order to grow successfully. If we cannot hire qualified employees, manage our growth and develop these systems and processes successfully, our business could be adversely affected.

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

We operate in an emerging market. Our future success depends on an increased demand for wireless services for voice and other mobile broadband services such as transmissions of photos or videos and internet communication.

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We have built flexibility into our spending by reducing recurring general and administrative expenses and in prior periods, by reducing capital expenditures and sales and marketing expenses. However, our ability to pay our expenses and make payments due on our Notes due 2016 and Notes due 2012 depends on our future performance, which will be affected by financial, business, economic, legislative and other factors, many of which are beyond our control. Continued uncertainty about the overall weakness in the U.S. economy may inhibit our ability to grow at the level needed to fully service our Notes due 2016 and Notes due 2012 as scheduled.

Results of Operations

Presented below are selected statements of operations data for the three and six months ended June 30, 2010 and 2009 that have been derived from our unaudited condensed consolidated financial statements. You should read this information together with the unaudited condensed consolidated financial statements and related notes that are included elsewhere in this report. Our historical results are not necessarily indicative of the results that are expected in future periods.