<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB
(Mark One)

|X|   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934.

                   For the fiscal year ended December 31, 1999

                                       OR

|_|   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934.

                 For the transition period from      to

                         Commission file number 33-7841

                          FiberNet Telecom Group, Inc.
                 (Name of Small Business Issuer in Its Charter)

               Delaware                                  13-3859938
    (State or Other Jurisdiction of                   (I.R.S. Employer
    Incorporation or Organization)                   Identification No.)

   570 Lexington Avenue, New York, NY                       10022
(Address of Principal Executive Offices)                  (Zip Code)

                                 (212) 405-6200
                (Issuer's Telephone Number, Including Area Code)

       Securities registered under Section 12(b) of the Exchange Act: None

         Securities registered under Section 12(g) of the Exchange Act:

                     Common Stock, par value $.001 per share
                                (Title of Class)

      Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 past 90 days.

      Yes |X| No |_|

      Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definite proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |_|

      Registrant's revenues for its most recent fiscal year: $ 0.00

      The aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, was $392,228,518 as of December 31, 1999.

      The number of shares outstanding of each of issuer's classes of common
equity, as of December 31, 1999, was 25,932,464 shares of Common Stock, $.001
par value.

                    Documents Incorporated by Reference: None

           Transitional Small Business Disclosure Format (check one):

                                 Yes |_| No |X|


                                       1
<PAGE>

                                     PART I

      THIS ANNUAL REPORT ON FORM 10-KSB (THE "ANNUAL REPORT") CONTAINS CERTAIN
FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED, (THE "EXCHANGE ACT"), INCLUDING STATEMENTS
THAT INDICATE WHAT THE COMPANY "BELIEVES", "EXPECTS" AND "ANTICIPATES" OR
SIMILAR EXPRESSIONS. THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE ACTUAL RESULTS, PERFORMANCE OR
ACHIEVEMENTS OF THE COMPANY TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED
BY SUCH FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON THESE FORWARD LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE OF
THIS ANNUAL REPORT. THERE CAN BE NO ASSURANCE THAT THE FORWARD LOOKING
INFORMATION CONTAINED HEREIN WILL IN FACT TRANSPIRE. THE COMPANY UNDERTAKES NO
OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY FORWARD LOOKING STATEMENTS, WHETHER
AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.

ITEM 1. DESCRIPTION OF BUSINESS.

Overview

      FiberNet Telecom Group, Inc. ("FiberNet" or the "Company") is an
all-optical facilities-based communications provider focused on providing
wholesale broadband connectivity for data, voice and video transmission on its
state-of-the-art fiber optic networks in major metropolitan areas. The Company
offers an advanced high bandwidth fiber optic solution to support the growing
demand for network capacity in the intra-city market, or local loop. The Company
believes that its end-to-end connectivity, quality of service and rapid
provisioning time will make it the preferred carrier's carrier for transport
capacity and services.

      The Company has established operations in the New York metropolitan area
and is expanding into other major metropolitan areas, including Chicago. The
Company integrates three core assets to provide its optical local loop solution:

      On-net buildings. The Company typically has entered into exclusive license
agreements with building owners to design, deploy and operate fully redundant,
self-healing, Synchronous Optical Network, or SONET, rings in multi-tenant
commercial office buildings in Manhattan. These FiberNet In-building Networks,
or FINs, can extend from the basement of on-net buildings to telecommunications
closets on every floor to provide a central distribution system for broadband
communications services in the building.

      Metropolitan transport network. The Company has entered into a twenty-year
license agreement with Metromedia Fiber Network Services, Inc., or MFN, pursuant
to which the Company has leased the right to use a substantial amount of dark
fiber in multiple metropolitan markets. The Company lights the dark fiber in
ring configurations with optical networking gear, establishing connectivity
between carrier point facilities and on-net buildings. The Company has lit
multiple OC-48 SONET rings in the New York metropolitan area and will utilize
dense wave division multiplexing, or DWDM, technology to increase capacity in
its metropolitan transport network.

      Carrier point facilities. The Company has developed carrier point
facilities to enable the interconnection of its network with other carriers'
networks. In addition, the Company offers colocation and cross-connection
services to its carrier customers at these facilities. The Company's primary
carrier point facility, located at 60 Hudson Street in New York City, is also
the site of its network operations center, which provides network monitoring,
management and maintenance.

      This connectivity between carrier interconnection points and floors of the
Company's on-net buildings delivers the seamless transmission of communications
traffic in the local loop. By extending a carrier-class backbone directly to the
access edge of the network, FiberNet believes it is enabling the convergence of
core telecommunications networks with diverse customer premise technologies.

Industry and Market Opportunities

      The Company believes that there is and will continue to be a significant
demand for broadband transmission capacity to accommodate bandwidth-intensive
data applications, such as Internet access, virtual private networks,
e-commerce, video conferencing and multimedia applications. As a result of the
liberalization of the communications industry, these broadband applications are
being provided by a growing number of competitive service providers. In an
effort to meet the increasing network capacity demands of these service
providers, there has been a build-out of inter-city, long-haul fiber optic
networks transmitting traffic between metropolitan cities. These fiber optic
networks generally offer large circuit capacity, reliability and scalability.
The Company believes, however, that an intra-city bottleneck has developed as
the build-out of metropolitan fiber optic networks has not kept pace with the
long-haul build-outs and the increasing demand for local loop communications
transport.

      Moreover, the vast majority of existing communications transport networks
in metropolitan areas, including in-building infrastructure, consist of original
copper wiring installed by incumbent local exchange carriers, or ILECs, and
regional Bell operating companies, or RBOCs. The Company believes that this
legacy infrastructure, built for low speed voice and data services, does not
support new technologies or meet the scalable bandwidth requirements of
broadband data communications.


                                       2
<PAGE>

      Accordingly, communications providers are lacking a cost-effective, high
performance network that will enable the delivery of high speed data, Internet
and next generation multimedia services. The Company believes that it provides a
solution to these providers' needs, by offering wholesale fiber optic capacity
on its state-of-the-art network for end-to-end local loop connectivity.

Our Solution

      The Company is focused on replicating and expanding the geographic and
physical penetration of the ILEC in major metropolitan areas, but in the context
of a fully integrated all-fiber optic solution. The Company designs, installs
and operates its local loop networks to provide end-to-end, broadband
connectivity that is scalable, reliable and secure.

      End-to-end connectivity. The integration of the Company's carrier point
facilities, metropolitan transport network and FINs offers other communications
service providers access to a complete all-optical local loop network that
includes:

            o     Inter-building connectivity - transport connecting carrier
                  points and floors of on-net buildings on the metropolitan
                  transport network and FINs.

            o     Intra-building connectivity - transport connecting floors
                  within an on-net building on the FIN.

            o     Inter-carrier point connectivity - transport connecting two or
                  more carrier points on the metropolitan transport network.

            o     Intra-carrier point connectivity - transport connecting the
                  Company's carrier point facilities to other carriers'
                  facilities in a carrier point.

      High-bandwidth. The Company's fiber optic communications network is
capable of using the highest commercially available transmission capacity at
10.0 gigabits per second, or Gbps, (OC-192) and can currently transmit data at
2.5 Gbps (OC-48), which is equivalent to more than 37,000 simultaneous voice
conversations. The Company's network can handle advanced, capacity-intensive
data applications such as voice over Internet Protocol, video teleconferencing,
multimedia and Internet-related applications, utilizing multiple transmission
protocols, including SONET, Ethernet, Frame Relay, ATM and Internet Protocol.

      In addition, the Company's network architecture supports multiplexing
technology that is capable of increasing the transmission capacities of each
fiber optic strand in its network. For example, the network supports DWDM. Fiber
optic systems use laser-generated light to transmit voice, data and video in
digital formats through ultra thin strands of glass. DWDM significantly
increases the capacity of fiber optic cable by splitting the laser-generated
light into different colors, opening more channels for transport on a single
strand of fiber. The Company believes that continuing developments in
multiplexing technology and equipment will increase the capacity of each fiber
strand and provide more bandwidth carrying capacity in a cost effective manner.

      Scalability. Through the use of high-level optical gear and DWDM
technology the Company's local loop network is scalable to the highest bandwidth
capacity currently available (OC-192). The Company is capable of remotely
provisioning new circuits within three to five business days through its
centralized network operations center. As a result, the Company is rapidly able
to allocate network capacity to meet its customers' growing bandwidth
requirements.

      Reliability. As communications networks are increasingly used for mission
critical applications, including electronic commerce, data storage and disaster
recovery, there is an increasing need for reliable connectivity. The Company
designs its networks using a diversely routed, self-healing SONET architecture,
which is deployed in a ring topology, with multiple fibers providing full
redundancy. The self-healing ring architecture has the ability to route digital
traffic in either direction around the network ring, ensuring that there is no
single point of failure on the network. If a fiber is cut or broken, traffic
will be rapidly rerouted around the ring, restoring transmission nearly
instantaneously, preventing a network outage and making the interruption mostly
undetectable to the user. This network architecture, used in both the Company's
metropolitan transport network and in its FINs, extends core backbone
reliability to the edge of the network.

      In addition, the Company's network is monitored to maintain quality
control 24 hours, 7 days a week. Network monitoring is primarily performed by
experienced Company personnel, with off-hours monitoring currently being
outsourced to Nortel Networks, Inc., or Nortel. The system alerts the Company to
any degradation or loss of connectivity and automatically reroutes traffic in
the event of a network outage.

      Flexibility. The Company is focused on providing a network that can meet
its customers changing needs. The Company's open architecture supports new
broadband technologies and multiple transmission protocols. Although SONET is
the primary transmission protocol, the network is compatible with IP, ATM, Frame
Relay and Ethernet overlays and other evolving transport standards. In addition,
the open architecture enables the interconnection of the Company's network with
any other carriers' network, broadening the Company's potential customer base.


                                       3
<PAGE>

Strategy

      The Company's objective is to become the preferred facilities-based
provider of fiber optic network capacity in the local loop. The following are
key elements of the Company's strategy in achieving its objective:

      o     Establish the Company's position as a leading carriers' carrier in
            the local loop;

      o     Maintain standing as a leading optical networking service provider;

      o     Expand its portfolio of on-net buildings with exclusive license
            agreements;

      o     Replicate its fiber optic network solution in additional gateway
            cities;

      o     Provide responsive customer service with rapid provisioning time;

      o     Enhance its product offerings by providing ancillary services; and

      o     Pursue strategic alliances with leading-edge network technology
            companies.

Products and Services

Local Network

      Through its subsidiary, Local Fiber, LLC, the Company is building local
fiber optic networks to provide carriers with wholesale transport in major
metropolitan areas. The Company leases dark fiber rights, installs its own
optical transmission equipment to light the fiber and then provides lit circuits
to carriers for the transport of digital traffic in the out-of-building local
loop. In addition, the Company provides colocation and cross connection services
at its carrier point facilities.

      The Company has an existing New York metropolitan transport network, which
consists of multiple rings deployed in three geographic locations, midtown
Manhattan, downtown Manhattan and a New York/New Jersey connection. The Company
intends to expand this existing network and to establish a metropolitan
transport network in Chicago by the end of 2000.

      Customers.  The Company's targeted customers include communications
service providers that are seeking cost-effective, flexible, reliable, broadband
network connectivity. This customer base also includes carriers that have their
own local networks, but do not have sufficient bandwidth to meet their customers
needs or are seeking shorter installation intervals and will benefit from the
Company's faster provisioning times.

      The Company's believes that its potential carrier customers include a
broad range of companies, including:

      o     ILECs and RBOCs;

      o     competitive local exchange carriers, or CLECs;

      o     interexchange carriers, or IXCs;

      o     Internet service providers, or ISPs;

      o     application service providers, or ASPs; and

      o     integrated communications providers, or ICPs.

      Network design and architecture. The Company's local out-of-building
network consists of:

      o     Carrier point facilities. Carrier point facilities are
            environmentally controlled, secure sites designed to house the
            Company's transmission and networking equipment. At these facilities
            the Company establishes the interconnection of its local network
            with other carriers' networks. This interconnection of networks
            enables the Company to transfer other carriers' traffic onto its
            local network and provide transport services to them. In addition,
            the Company utilizes its carrier point facilities to provide
            colocation and cross connection services to other carriers.

            The Company's primary carrier point facility in New York is located
            at 60 Hudson Street in downtown Manhattan. The Company has leased
            approximately 15,200 square feet through 2008. The Company also has
            a lease at 111 Eighth Avenue in Manhattan for approximately 5,600
            square feet, expiring in 2015. The Company currently offers
            colocation services at 60 Hudson Street and plans to offer these
            services at 111 Eighth Avenue.

            The Company intends to continue to expand its network to include
            multiple carrier point facilities in each of its markets. Each
            additional point of presence will increase the


                                       4
<PAGE>

            Company's ability to interconnect with other communications service
            providers, increasing its potential customer base and revenue
            opportunities with existing customers.

      o     Colocation services. The Company offers colocation services at
            certain of its carrier point facilities by providing carriers with
            access and space to install their own communications and networking
            equipment in a safe and secure technical operating environment. The
            demand for colocation services has increased as carriers expand into
            geographic areas in which they do not have appropriate space or
            technical personnel to support their equipment and operations. By
            locating their equipment at the Company's carrier point facilities
            in close proximity to the equipment of the Company and other
            carriers, communications service providers can facilitate network
            interconnections. The Company also offers ancillary services,
            including AC/DC power, HVAC, fire protection and security. The
            Company currently has colocation facilities at 60 Hudson Street and
            will offer colocation at 111 Eighth Avenue and in the central
            equipment rooms in the basements of certain of its on-net buildings.

      o     Metropolitan network transport. The Company has entered into a
            twenty-year license agreement with MFN pursuant to which the Company
            has leased the right to use a substantial amount of dark fiber in
            multiple metropolitan markets. The Company lights the dark fiber in
            ring configurations with optical networking gear, establishing
            connectivity between carrier point facilities and on-net buildings.
            The Company has lit multiple OC-48 SONET rings in the New York
            metropolitan area and will utilize DWDM technology to increase
            capacity in its metropolitan transport network.

      o     Network operations center. The Company has a network operations
            center located at its carrier point facility at 60 Hudson Street.
            This network operations center enables the Company to monitor and
            manage the traffic on its network and to provide customer support
            and maintenance from a centralized location. Network monitoring and
            maintenance is available 24 hours, 7 days a week and is primarily
            performed by experienced Company personnel, with off-hours
            monitoring currently being outsourced to Nortel. The Company's
            customers are also able to monitor their traffic on the network with
            full look-through capabilities.

FiberNet In-building Network

      Through its subsidiary, FiberNet Equal Access, LLC, the Company is
designing, deploying and operating fiber optic networks in multi-tenant
commercial office buildings and major carrier points to provide floor-by-floor
fiber optic connectivity to tenants. Moreover, there is dedicated connectivity
between the FiberNet In-building Networks and the Company's metropolitan
transport network. The Company's metropolitan transport network enters an on-net
building at one or two discrete points and interconnects with the FIN in the
central equipment room established by the Company in the basement of the
building. Diverse routing and interconnection in the building basement enables
the seamless transfer of traffic between the FIN and the Company's high-
bandwidth metropolitan transport network. By offering dedicated bandwidth
without over-subscription directly between the tenants' premises and the carrier
point facility, congestion or a bottleneck is avoided as traffic is transmitted
from the FIN to the out-of-building network.

      In-building network infrastructure. The Company's in-building network
fiber optic infrastructure consists of:

      o     Central equipment room. The Company usually leases approximately 100
            to 1,500 square feet in the basement of its on-net buildings to
            establish a central equipment room, where it installs and manages
            communications networking equipment. Here the Company connects the
            FIN to its metropolitan transport network thereby linking the on-net
            building to all of the Company's other points of presence. The
            equipment in this facility aggregates and disseminates traffic to
            and from the building. The central equipment rooms are built to the
            Company's specifications with power supplies and HVAC systems for
            environment control. The Company offers colocation services in
            certain of its central equipment rooms.

      o     Redundant, Vertical Riser System. The Company configures, installs,
            owns and manages a fiber optic network in the building's vertical
            shafts, also known as its riser system. The Company believes its
            FINs are designed to ensure reliability and scalability by deploying
            over one hundred strands of fiber in dual risers, allowing for
            redundant fiber paths in a ring architecture. A FIN generally
            extends from the Company's central equipment room throughout the
            building, with a termination point on each floor. Typically, the
            Company installs secure telecommunications closets on each floor of
            the building to house the network equipment and redundant power
            supplies. This footprint on every floor facilitates the rapid
            provisioning of transmission capacity to tenants, the scalability
            for growth in bandwidth and the flexibility to accommodate new
            technologies. The Company believes its FINs will be the preferred
            wholesale network for other communications service providers. The
            Company has lit OC-3 SONET rings in each of its on-net buildings.

      Advantages of the FiberNet In-building Network to carriers and building
owners.

      o     Benefit to carriers. The Company believes that carriers benefit from
            the Company's in-building network solution in the following ways:


                                       5
<PAGE>

            -     access to a high-bandwidth, cost-effective network, without
                  having to incur capital expenditures associated with building
                  their own networks;

            -     direct access to all of the tenants in each on-net building;

            -     a scalable network, enabling them to meet tenants'
                  communications needs more quickly;

            -     reliability and redundancy, allowing them to offer tenants
                  quality of service guarantees;

            -     ease of interconnection;

            -     fast provisioning, accelerating time to market;

            -     a comprehensive solution to their network capacity needs in
                  the local loop; and

            -     access to a network that will accommodate new communications
                  technologies.

      o     Benefits to building owners. The Company believes that the
            installation of its state-of the-art communications network in
            commercial buildings offers building owners:

            -     a single state-of-the-art infrastructure in their building;

            -     an increase in the value of their property, at no cost to
                  themselves;

            -     a percentage of the in-building revenues generated by the
                  Company;

            -     free choice for tenants in selection of communications service
                  providers;

            -     improvement in leasing and tenant retention, particularly
                  those businesses with bandwidth intensive communications
                  requirements; and

            -     the ability to offer equal access to multiple communications
                  service providers with minimal disruption in the building.

      Building Selection and License Agreements. The company considers a number
of factors in selecting buildings for the installation of its in-building
network. The Company typically targets buildings with more than 500,000 square
feet of rentable space and multiple tenants. Other factor include:

      o     location;

      o     size;

      o     occupancy levels;

      o     tenant mix;

      o     proximity to its points of presence and local fiber optic networks;

      o     relationship to other on-net buildings;

      o     feasibility of installation of network infrastructure;

      o     cost-effectiveness of construction; and

      o     existing broadband communications infrastructure in the building.

      The Company has and intends to continue to enter into exclusive license
agreements with building owners for the installation and operation of its in-
building network within selected buildings. These licenses provide the Company
with the exclusive right to provide wholesale transport services in the
building. However, ILECs may resell their existing infrastructure in the
building, and other communications providers may deploy their own infrastructure
solely to provide retail services, as requested by tenants. The Company's
typical license agreement has an initial term of fifteen years, with renewal
options of up to ten years.

      Design and implementation. The Company has a team of communications
professionals and engineers that design and oversee the installation of its
in-building networks. Prior to the commencement of construction of a fiber
network inside an office building, the Company's technical staff conducts a
formal, detailed building site survey. The Company's engineers then develop a
network design specific to the building based on its standard in-building
network design. Design of the network also includes the build-out of the
Company's central equipment room.

      The Company typically outsources the construction of its in-building
network to carefully selected construction managers and general contractors. The
Company's in-house technical staff works closely with these construction
managers, general contractors and their subcontractors during the construction
process.


                                       6
<PAGE>

      The Company believes that the total construction time for the completion
of the Company's in-building network and related point of presence is typically
between 90 and 120 days, and the Company typically spends $400,000 to $1,000,000
per building. These construction costs vary with building size, location,
complexity of the construction project and other factors.

      Connection to our customers and tenants. Once the Company has completed
the construction and installation of its in-building network and has received an
order from a customer, it connects the tenant's local area network or
telecommunications infrastructure to its in-building network at the
telecommunications closet on the tenant's floor. This connection transfers the
tenant's traffic from their premise network onto the Company's in-building
network and then onto its metropolitan transport network, which hauls the
traffic back to carrier points of presence. Typically this connection can be
completed within three to five days. The Company does not provide the horizontal
wiring required to connect a tenant's network or infrastructure to the Company's
FIN.

      Relationships with building owners. To date, the Company has constructed
its in-building network in five buildings in Manhattan, four of which are owned
and managed by Tishman Speyer Properties, L.P. The Company has also entered into
and is in the process of negotiating additional license agreements for
in-building networks in a significant number of buildings in multiple
metropolitan markets with national and local property owners.

Sales and Marketing

      The Company has a two-tiered sales and marketing strategy:

      Selling to carriers. Senior level management personnel and experienced
sales representatives with extensive knowledge of and key contacts within the
industry, market our wholesale services to carriers. Carrier customers are
segmented into two target groups. The first target group includes carriers with
significant bandwidth demands between carrier points for their aggregation of
network traffic. These carriers need to cross-connect high capacity circuits
with other carriers' networks. This group typically includes large long distance
providers and international carriers. The second target group includes
communications service providers needing connectivity to their retail customers
in the Company's on-net buildings. The required service levels in this group
generally are for less bandwidth intensive circuits. Carrier customers in this
category could include CLECs, ISPs, fixed wireless communications companies and
other in-building retail service providers.

      Marketing to tenants. Although the Company only sells its services to
other communications carriers, it works with carriers and the owners of its on-
net buildings to generate tenant awareness of the availability of the Company's
fiber optic communications infrastructure. The Company believes that if tenants
are aware of the capacity, reliability and security of its network, they will be
encouraged to select carriers using its FINs to provide their communications
services. This in turn will increase the amount of capacity carriers lease from
the Company.

Competition

      The market for broadband network capacity and related services is very
competitive. The Company faces significant competition from many communications
providers with significantly greater financial resources, well-established brand
names, larger customer bases and diverse strategic plans and technologies. The
Company expects significant competition from traditional and new communications
companies, including the following:

      Local telephone companies. In New York City and other major metropolitan
areas where the Company plans to do business, it faces significant competition
from ILECs, which currently dominate local communications markets, and CLECs,
which are increasing their market penetration for local telecommunications
services. As a result of the Telecommunications Act of 1996, ILECS are required
to provide other carriers with access to end users via their existing networks.
This type of access is in direct competition to the Company's services. Various
other competitive communications providers also own telecommunications
infrastructure in the local loop. Each of these carriers could, and some do,
compete with FiberNet in the market for providing broadband transmission
capacity in the local loop.

      Other in-building communications providers. Certain integrated
communications providers are deploying their own network infrastructure in
commercial office properties in FiberNet's target markets to provide
telecommunications services to tenants. These companies include, but are not
limited to, Advanced Radio Telecom, Allied Riser Communications, Broadband
Office, Cypress Communications, Intermedia, NEXTLINK, OnSite Access, RCN Telecom
Services, SiteLine, Teligent, and Winstar. In particular, these companies build
their networks only to offer their own retail services. Consequently, they could
indirectly compete against FiberNet by not utilizing the Company's FIN to gain
connectivity to tenants. Additionally, many of these companies are seeking to
establish license agreements with building owners to provide them with access to
the buildings. FiberNet has and will continue to compete with certain of these
companies for license agreements with owners of target buildings.

      Metropolitan network providers. Many of the leading telecommunications
companies, including AT&T, MCI WorldCom, Sprint, Level 3 and Qwest, have
constructed or are constructing fiber optic networks nationwide. These companies
utilize their networks for their own transmission requirements and in certain
circumstances provide excess network capacity to other carriers. Other
communications companies, such as MFN and Telergy, build metropolitan dark fiber
networks that are leased or sold to other carriers and large corporate users.
The Company competes directly and indirectly with these companies in its current
market and intends to compete with them in target markets.


                                       7
<PAGE>

History

      FiberNet Telecom, Inc. ("FiberNet Telecom") was organized under the laws
of the State of Delaware on August 10, 1994. On November 24, 1997, Desert Native
Designs Inc. ("DND"), an existing public company incorporated in the State of
Nevada, acquired FiberNet Telecom pursuant to an agreement and plan of merger
dated as of the same date. Upon consummation of the merger, FiberNet Telecom
became a wholly-owned subsidiary of DND, which subsequently changed its name to
FiberNet Telecom Group, Inc. ("FiberNet Nevada"). On February 4, 2000, FiberNet
Nevada changed its state of incorporation from Nevada to Delaware by merging
with and into FiberNet Telecom Group, Inc., a Delaware corporation ("FiberNet"
or the "Company").

      The Company is a holding company that owns all of the outstanding common
stock of FiberNet Telecom, Inc., a Delaware corporation and an intermediate
level holding company. FiberNet Telecom, Inc. owns all of the outstanding
membership interests in Local Fiber, LLC ("Local Fiber"), a New York limited
liability company, and FiberNet Equal Access, LLC ("Equal Access"), also a New
York limited liability company, subject to a warrant owned by Tishman Speyer
Properties, L.P. to purchase up to 10% of Equal Access. The Company conducts its
primary business operations through its operating subsidiaries, Local Fiber and
Equal Access.

Employees

      As of December 31, 1999, the Company had a total of 34 full-time
employees. The Company considers its employee relations to be good. None of the
employees of the Company is covered by a collective bargaining agreement.

Recent Transactions

      The following is a description of selected major events and contracts that
occurred in the fiscal year ended December 31, 1999:

      Bechtel. In February 2000, the Company entered into a two year Services
Agreement with Bechtel Corporation and Bechtel Associates Professional
Corporation (collectively "Bechtel")pursuant to which Bechtel will provide
engineering services, labor, materials and equipment in connection with the
design and installation of the Company's fiber optic networks.

      Metromedia Fiber Network Services, Inc. In December 1999, the Company
entered into a 20 year license agreement with MFN. Pursuant to the agreement, in
exchange for 5 million shares of the Company's common stock, MFN granted the
Company the exclusive right to use a significant number of fiber miles of
intra-city dark fiber in multiple major metropolitan areas, nationwide. The
Company entered into this transaction with the intent of strengthening the
Company's New York City network and accelerating its expansion into other
national markets. The transaction dramatically increases the total amount of
dark fiber that the Company can access for its metropolitan transport networks.
As part of the transaction, the Company also acquired MFN's ten percent
membership interest in Local Fiber.

      Nortel Networks, Inc. In December 1999, the Company entered into a Master
Purchase Agreement with Nortel, pursuant to which the Company may purchase
products and services from Nortel over a three year term at predetermined
volume-based pricing.

Regulation

General Regulatory Environment

      The Company is subject to federal, state and local regulations that affect
its product offerings, competition, demand, costs and other aspects of its
operations. The regulation of the telecommunications industry is changing
rapidly, and varies from state to state. The Company's operations are also
subject to a variety of environmental, safety, health and other governmental
regulations. The Company cannot guarantee that future regulatory, judicial or
legislative activities will not have a material adverse effect on it, or that
domestic or international regulators or third parties will not raise material
issues with regard to its compliance or noncompliance with applicable
regulations.

The Telecommunications Act of 1996

      Federal regulation has the greatest impact on the telecommunications
industry and has undergone major changes in the last four years as the result of
the adoption by Congress of the Telecommunications Act of 1996 (the "1996 Act"
or "Act") on February 8, 1996. The 1996 Act is the most comprehensive reform of
the nation's telecommunications laws since the Communications Act was enacted in
1934. The 1996 Act imposes a number of access and interconnection requirements
on telecommunications carriers and on all local exchange providers, including
CLECs, with additional requirements imposed on incumbent local exchange
carriers. The 1996 Act provides a detailed list of items which are subject to
these interconnection requirements, as well as a detailed set of duties for all
affected carriers. All telecommunications carriers must interconnect with the
facilities of other carriers and not install features that will interfere with
the interoperability of networks. All LECs, including CLECs, have a duty to (i)
not unreasonably limit the resale of their services; (ii) provide number
portability if technically feasible; (iii) provide dialing parity to competing
providers and nondiscriminatory access to telephone numbers, directory
assistance, operator services and directory listings; (iv) provide access to
poles, ducts, conduits and rights-of-way; and (v) establish reciprocal
compensation arrangements for the transport and termination of
telecommunications. In addition to those general duties of all LECs, ILECs have
additional duties to (a) interconnect at any technically feasible point and
provide service equal in quality to that provided to their

                                       8
<PAGE>

customers or the ILEC itself; (b) provide unbundled access to network elements
at any technically feasible point at just, reasonable and nondiscriminatory
rates, terms and conditions; (c) offer retail services at wholesale prices for
the use of telecommunication carriers; (d) provide reasonable public notice of
changes in the network or the information necessary to use the network or which
affect interoperability; and (e) provide for physical collocation. "Physical
collocation" is an offering by an ILEC that enables another telecommunications
carrier to enter the ILEC's premises to install, maintain and repair its own
equipment that is necessary for interconnection or access to the ILEC's network
elements. An ILEC must allocate reasonable amounts of space to
telecommunications carriers on a first-come first-served basis. If space
limitations or practical or technical reasons prohibit physical collocation, an
ILEC must offer "virtual collocation," by which the other telecommunications
carrier may specify ILEC equipment to be dedicated to its use and electronically
monitor and control communications terminating in such equipment.

      After lengthy legal proceedings, the FCC adopted revised guidelines
implementing the interconnection and local competition provisions of the 1996
Act. In order to foster competition in the local exchange market, the FCC
required ILECs to offer access to their telecommunications networks to CLECs at
cost-based rates. These regulations affect the growth opportunities for some of
the Company's customers and thus demand for the Company's services.

      The 1996 Act also established criteria for RBOCs to satisfy in order to
provide long distance service in their local service areas. Before the passage
of the 1996 Act, an RBOC was prohibited from offering long distance service in
an area where it was an incumbent local exchange carrier. With the passage of
the Act, however, an RBOC can now gain entry into the long distance market if it
satisfies certain market-opening criteria to the FCC's satisfaction. On December
21, 1999, Bell Atlantic, in the state of New York, became the first RBOC to gain
such approval from the FCC. Other applications are pending. As more RBOCs gain
entry into the long distance market, they will become more effective
competitors. This change in the telecommunications landscape may exert
competitive pressures on the Company.

      On December 9, 1999, the FCC ordered incumbent local telephone companies
to offer line sharing arrangements that will permit competing carriers to offer
digital subscriber line services over the same copper loop facilities used by
the incumbent local telephone company to provide voice telephone service. The
prices for these arrangements will be determined by state utility commissions.
If these prices are set at low levels, it could allow our competitors to offer
low-cost alternatives to the Company's service and put downward pressure on the
Company's prices for transport services.

Liability for Internet Content

      There have been various statutes, regulations and court cases relating to
liability of Internet service providers and other on-line service providers for
information carried on or through their services or equipment, including in the
areas of copyright, indecency, obscenity, defamation and fraud. The laws in this
area are unsettled and there may be new legislation and court decisions that may
affect the Company's services and expose the Company to liability.

Regulatory Status

      The Company's subsidiary, Local Fiber, is regulated as a "common carrier"
by virtue of its provision of telecommunications services directly to the public
for a fee. A "telecommunications service," as defined by the Act, means the
transmission of information between points specified by the user. Common
carrier's are subject to extensive federal, state and local telecommunications
regulation.

      The Company's subsidiary, Equal Access, is not subject to common carrier
regulation. Unlike a common carrier, Equal Access does not hold its offerings
out to the public, nor does it provide transmission services. Equal Access
generally enters into exclusive agreements with building owners to provide
intra-building fiber capacity to telecommunications carriers on a private
contractual basis. As such, Equal Access merely provides the capacity over which
certain carriers may provide telecommunications services. However, certain
proposals have been made before Congress and the FCC that could have an adverse
impact on Equal Access' exclusive contractual rights, in certain buildings, to
provide such capacity.

Local Fiber, LLC

Federal Regulation

      As a competitive provider of telecommunications services, Local Fiber is
subject to federal common carrier regulation. Common carriers are subject to
contributions to the FCC's Universal Service Fund, a fund that was established
to ensure the availability of affordable basic telecommunications services. The
anticipated rate of assessment is approximately 5.8% of gross interstate
end-user revenues for the year 2000, and may be higher in subsequent years.
Local Fiber is also required to comply with a number of other federal regulatory
requirements, including, but not limited to rate regulation, reporting
requirements, special assessments, and access charges. Although compliance with
these regulatory requirements imposes certain administrative burdens, similarly
situated competitors are subject to comparable regulatory obligations.

State Regulation


                                       9
<PAGE>

      The Telecommunications Act generally prohibits state and local governments
from enforcing any law, rule or legal requirement that prohibits or has the
effect of prohibiting any person from providing any interstate or intrastate
telecommunications service. However, states retain jurisdiction to adopt
regulations necessary to preserve universal service, protect public safety and
welfare, ensure the continued quality of communications services and safeguard
the rights of consumers.

      Local Fiber must obtain and maintain certificates of authority from
regulatory bodies in states where it offers intrastate telecommunications
services. In most states, telecommunications providers must also file and obtain
prior regulatory approval of tariffs for its regulated intrastate services.
Certificates of authority can generally be conditioned, modified or revoked by
state regulatory authorities for failure to comply with state law or
regulations. Fines and other penalties also may be imposed for such violations.
Local Fiber is currently authorized to provide intrastate services in New York
and may seek additional authority in other states.

      State regulatory commissions generally regulate the rates local Bell
operating companies charge for intrastate services, including intrastate access
services paid by providers of intrastate long distance services. Intrastate
access rates affect the costs of carriers providing intrastate long distance
services and demand for the services the Company and other carriers provide.
Under the Telecommunications Act, state commissions have jurisdiction to
arbitrate and review negotiations between local telephone companies and CLECs
regarding the prices local telephone companies charge CLECs for interconnection
and resale. In setting these prices, state commissions must use the forward-
looking cost methodology prescribed by the FCC, and later upheld by the Supreme
Court. A state may also impose telecommunications taxes and fees for state-level
universal service and other programs on providers of services within that state.

Local Regulation

      In addition to federal and state laws, local governments exercise legal
authority that may impact Local Fiber's operations. For example, local
governments retain the authority to license public rights-of-way, subject to the
limitation that local governments may not prohibit the provision of
telecommunications services. Local authorities affect the timing and costs
associated with the use of public rights-of-way. These regulations may have an
adverse effect on the Company's business to the extent Local Fiber requires
access to such public rights-of-way.

Equal Access

      Equal Access is subject to numerous local regulations such as building and
electrical codes, licensing requirements and construction requirements. These
regulations vary on a city-by-city and county-by-county basis.

      Equal Access generally secures multi-year license agreements with real
estate owners for the exclusive right to lease intra-building fiber capacity to
third parties. Under current FCC regulations, commercial real estate owners have
the right to control wiring within their premises, beyond the demarcation point
at which telecommunications carriers terminate their facilities. The demarcation
point is typically at a minimum point of entry to the building such as the
basement. These rules allow the real estate owners or managers to install and
maintain their own inside wiring, or to contract with companies, such as Equal
Access, to maintain wiring on their behalf. If laws or regulations are enacted
that effectively require building owners to give inside wiring access to all
requesting telecommunications providers on nondiscriminatory terms, Equal
Access' ability to secure and maintain exclusive inside wiring contracts may be
inhibited.

      Currently, there is no federal legal requirement that owners or managers
of commercial office buildings give access to competitive providers of
telecommunications services. However, such laws have been adopted in certain
states. For example, laws in Connecticut and Texas generally require commercial
real estate owners to provide nondiscriminatory access to requesting
telecommunications providers that have customers within a building, and limit
what the real estate owner may charge for such access. Although these laws
require that telecommunications carriers be permitted to install their own
inside wiring, there is no requirement that real estate owners allow such
carriers to use existing inside wiring. Thus, in certain states,
telecommunications carriers are permitted to construct inside wiring within
buildings even if a provider such as Equal Access already has existing
facilities.

      Federal laws and regulations concerning building access have been
considered in the past and may be adopted in the future. On June 10, 1999, the
FCC initiated an inquiry into riser access in multiple tenant environments and
requested comment on the following issues:

            - the FCC's tentative conclusion that utilities must allow
      telecommunications and cable service providers access to rooftop and other
      rights-of-way and utility shaft conduit in multiple tenant environments on
      just, reasonable and nondiscriminatory rates, terms and conditions;

            - whether incumbent local telephone companies should make available
      unbundled access to riser cable and wiring within multiple tenant
      environments; and

            - whether building owners offering access to any telecommunications
      provider should be required to make comparable access available to all
      such providers on a nondiscriminatory basis, and whether the FCC has the
      authority to impose such a requirement.


                                       10
<PAGE>

      In addition, legislation has recently been introduced in the U.S. House of
Representatives that covers similar issues concerning access to building risers
and rights-of-way. Legislation has also been introduced in both the Senate and
the House that addresses issues relating to telecommunications access to
buildings owned or used by the federal government. The Company cannot predict
the outcome of the FCC's proceeding or of any legislation, nor what effect, if
any, it may have on its business.

Other

      The Company's operations are subject to various federal, state, local and
foreign environmental, safety and health laws and governmental regulations.
These laws and regulations govern matters such as the generation, storage,
handling, use and transportation of hazardous materials, the emission and
discharge of hazardous materials into the atmosphere, the emission of
electromagnetic radiation, the protection of wetlands, historic sites and
endangered species and the health and safety of its employees.

      Although the Company monitors compliance with environmental, safety and
health laws and regulations, the Company cannot ensure that it has been or will
be in complete compliance with these laws and regulations. The Company may be
subject to fines or other sanctions imposed by governmental authorities if the
Company fails to obtain certain permits or violate the laws and regulations. The
Company does not expect any capital or other expenditures for compliance with
laws, regulations or permits relating to the environment, safety and health to
be material in 1999 or 2000.

      In addition, the Company may be subject to environmental laws requiring
the investigation and cleanup of contamination at sites it owns or operates or
at third party waste disposal sites. These laws often impose liability even if
the owner or operator did not know of, or was not responsible for, the
contamination. Although the Company operates numerous sites in connection with
its operations, it is not aware of any liability relating to contamination at
these sites or third party waste disposal sites that could have a material
adverse effect on the company.

ITEM 2. DESCRIPTION OF PROPERTIES

      The principal offices of FiberNet are located at 570 Lexington Avenue, New
York, New York, consisting of approximately 5,106 square feet of space. FiberNet
leases this space under agreements which expire in 2008, at a current annual
base rental of approximately $275,000. The Company also has leased two
facilities at major carrier hotels in New York, New York. These facilities are
located at 60 Hudson Street and at 111 Eighth Avenue. The lease for the 15,239
square feet facility at 60 Hudson Street extends through 2008 and has an annual
base rental of approximately $310,000. The lease for the 5,672 square feet
facility at 111 Eighth Avenue extends through 2015 and has an annual base rental
of approximately $190,000. The Company also leases space in the basements of its
on-net buildings for its central equipment rooms.

ITEM 3. LEGAL PROCEEDINGS

      To the knowledge of management, there is no material litigation pending or
threatened against the Company which would have a material adverse effect on the
Company.

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

      On December 10, 1999, by unanimous written consent, the Board of Directors
of FiberNet Nevada, the Company's predecessor entity, and the Board of Directors
of FiberNet, approved the terms of a merger as described in an Agreement and
Plan of Merger (the "Plan of Merger") by FiberNet Nevada merged with and into
FiberNet in order to change the Company's state of incorporation. The Plan of
Merger was approved by FiberNet Nevada, which was the sole stockholder of
FiberNet prior to the Merger, and by the stockholders holding a majority of the
voting shares of stock in FiberNet Nevada. Stockholder approval of the Merger
was obtained by written consent in lieu of a stockholders meeting on December
10, 1999. 25,391,904 shares voted in favor of the Plan of Merger out of a total
of 36,536,425 shares entitled to vote, constituting a majority of the voting
shares of stock in FiberNet Nevada.

      The Merger was effective on February 4, 2000 upon the filing of a
Certificate of Merger with the Secretary of State of the State of Delaware and
the Articles of Merger with the Secretary of State of the State of Nevada.

      In addition, the Board of Directors of the Company approved the 1999 Stock
Option Plan to provide for the issuance of options to employees, directors and
consultants to purchase an aggregate of 2,500,000 shares of Common Stock of the
Company thereunder. The 1999 Stock Option Plan was also approved by stockholders
of the Company holding a majority of voting shares of stock in the Company.
Stockholder approval was obtained by written consent in lieu of a stockholders
meeting on December 10, 1999. 25,391,904 shares voted in favor of the 1999 Stock
Option Plan out of a total of 36,536,425 shares entitled to vote, constituting a
majority of the voting shares of stock in the Company. An amendment to the 1999
Stock Option Plan was approved by the Board of Directors to increase the number
of shares of Common Stock of the Company reserved for issuance under the 1999
Stock Option Plan by 2,000,000 shares, to an aggregate of 4,500,000

                                       11
<PAGE>

shares. Stockholder approval was obtained by written consent in lieu of a
stockholders meeting on December 16, 1999. 25,391,904 shares voted in favor of
the Amendment out of a total of 36,536,425 shares entitled to vote, constituting
a majority of the voting shares of stock in the Company.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK HOLDER MATTERS

      The Company's Common Stock is currently eligible for quotation on the NASD
Electronic Bulletin Board under the symbol "FTGX". As of February 22, 1999, the
Company currently had a minimum of 1,402 shareholders of record.

      The following table sets forth the high and low sales prices for each
quarter for the Company's Common Stock as reported on the NASD Electronic
Bulletin Board during the fiscal year 1999:

      ---------------------------------------------------------------------
                                     Fiscal 1998            Fiscal 1999
      ---------------------------------------------------------------------
                                    High      Low         High         Low
      ---------------------------------------------------------------------
      Quarter ending March 31      $8.375    $4.500      $3.250      $1.250
      ---------------------------------------------------------------------
      Quarter ending June 30       $6.000    $4.000      $5.313      $2.938
      ---------------------------------------------------------------------
      Quarter ending September 30  $4.688    $1.875      $7.500      $4.250
      ---------------------------------------------------------------------
      Quarter ending December 31   $2.375    $1.000      $17.438     $4.875
      ---------------------------------------------------------------------

      All of the above quotations were obtained from Bloomberg, L.P.

      The Company has not paid any dividends with respect to its Common Stock
and does not expect to pay dividends on its Common Stock in the foreseeable
future. Any future dividends will be declared at the discretion of the Board of
Directors and will depend, among other things, upon the financial condition,
capital requirements, earnings and liquidity of the Company.

      RECENT SALES OF UNREGISTERED SECURITIES

      Bridge Warrants. On March 23, 1999 the Company issued a warrant to
purchase 400,000 shares of Common Stock to Trident Technology Partners LLC at a
purchase price of $0.50 per share in connection with a bridge loan (the "Bridge
Warrant"). The Bridge Warrant may be exercised, in whole or in part, at any
time from March 23, 1999 through March 23, 2004, upon payment of the exercise
price. The Bridge Warrant may also be exercised without paying the exercise
price by surrendering the warrant in exchange for a number of shares calculated
pursuant to a formula set forth in the Bridge Warrant. The transaction was a
private placement and exempt from registration pursuant to Regulation D of the
Securities Act of 1933, as amended.

      Option grant to Richard D. Sayers. On May 7, 1999, the Company granted an
option to purchase 250,000 shares of Common Stock to Richard D. Sayers at an
exercise price of $1.875 per share pursuant to an Employment Agreement (the
"Employment Agreement"). The option to purchase 125,000 shares vested upon the
effective date of the Employment Agreement and 125,000 shares vest in equal
monthly installments during the one year term of the Agreement. The option grant
was exempt from registration pursuant to Section 4(2) of the Securities Act of
1933, as amended.

      Conversion Warrants. On June 30, 1999 the Company entered into an
agreement (the "Chiaino Warrant") with Frank Chiaino ("Chiaino") pursuant to
which it issued to Chiaino 41,664 shares of Common Stock and 27,498 warrants to
purchase Common Stock at a purchase price of $0.67 per share.

      On June 30, 1999 the Company also entered into an agreement (the
"Petrocelli Warrant" and together with the Chiaino Warrant, the "Conversion
Warrants") with Petrocelli Electric Company Inc., LPS Consultants, Inc. and LTJ
Group pursuant to which the Company issued (i) 309,865 shares of Common Stock of
the Company; (ii) 204,511 warrants to purchase Common Stock at a purchase price
of $0.67 per share; and (iii) 390,000 warrants to purchase Common Stock at a
purchase price of $1.50 per share.

      The Conversion Warrants may be exercised, in whole or in part, at any time
from June 30, 1999 through June 30, 2004, upon payment of the applicable
exercise price. The Conversion Warrants may also be exercised without paying the
exercise price by surrendering the warrant in exchange for a number of shares
calculated pursuant to a formula set forth in the Conversion Warrants. The
exercise prices may be adjusted from time to time, as provided in the Conversion
Warrants, in order to prevent dilution of the rights granted under the
Conversion Warrants.

      4% and 8% Senior Secured Convertible Notes due May 7, 2004. On May 7,
1999, the Company entered into a Securities Purchase Agreement (the "May
Purchase Agreement") with certain purchasers (the "May Purchasers"), pursuant to
which the Company issued (i) 4% and 8% Senior Secured Convertible Notes of the
Company, due May 7,

                                       12
<PAGE>

2004 (the "May Notes") in the principal aggregate amount of $13.9 million,
convertible into shares of Common Stock of the Company at a price of $1.50 per
share; (ii) 133,333 shares of Series C Preferred Stock, $.001 par value of the
Company for a purchase price of $1.50 per share, convertible into Common Stock
of the Company; (iii) 6,204,000 warrants to purchase Common Stock at a purchase
price of $0.67 per share (the "Class A Warrants"); and (iv) 1,700,000 warrants
to purchase share of Common Stock of the Company at a purchase price of $1.50
per share (the "Class B Warrants").

      Under the terms of the May Notes, each holder had the right, up until the
time of repayment, to convert the unpaid principal and interest into shares of
Common Stock of the Company at a price of $1.50 per share. The May Notes also
provided that upon written notice of the conversion of the Notes held by the
Majority in Interest, as that term is defined in the May Purchase Agreement, the
remaining holders of the May Notes would be deemed to have automatically
converted their Notes into shares of Common Stock. On November 30, 1999, Signal
Equity Partners, L.P., the Majority in Interest, converted its May Notes, which
automatically converted all of the May Notes into Common Stock. Pursuant to a
Conversion and Exchange Agreement, by and among the Company and certain
Noteholders (as defined therein)(the "Conversion and Exchange Agreement") the
holders of the 4% May Notes were given the option of exchanging their Common
Stock for Series D Preferred Stock, and the holders of the 8% May Notes were
given the option of exchanging their Common Stock for Series E Preferred Stock.

      The Class A Warrants and Class B Warrants may be exercised, in whole or in
part, at any time from May 7, 1999 through May 7, 2004, upon payment of the
exercise price. The Class A Warrants may also be exercised without paying the
exercise price by surrendering the warrant in exchange for a number of shares
calculated pursuant to a formula set forth in the May Purchase Agreement. The
exercise price may be adjusted from time to time, as provided in the Class A
Warrants, in order to prevent dilution of the rights granted under the Class A
Warrants.

      The Series C Preferred may be converted into Common Stock at any time at
the option of the holder. Additionally, the Series C Preferred shall
automatically convert into Common Stock upon the consummation of a qualified
public offering, as defined in the Stockholders Agreement, dated May 7, 1999,
between the Company and certain stockholders (the "Stockholders Agreement").
Additionally, any shares of Series C Preferred held by holders of Common Stock
received upon the conversion of the May Notes automatically convert upon (i) the
conversion of Series C Preferred owned or held by the Majority in Interest; (ii)
the conversion or repayment of the May Notes owned or held by the Majority in
Interest, in accordance with the terms of the May Notes. The conversion ratio
for the Series C Preferred is one share of Common Stock for every one share of
Series C Preferred Stock, subject to certain customary anti-dilution adjustments
made from time to time pursuant to the Certificate of Designation of the Series
C Preferred.

      The transaction was a private placement and exempt from registration
pursuant to Regulation D of the Securities Act of 1933, as amended.

      8% Senior Secured Convertible Notes due September 28, 2004. On September
28, 1999, the Company entered into a Securities Purchase Agreement (the
"September Purchase Agreement") with certain purchasers (the "September
Purchasers"), pursuant to which the Company issued 8% Senior Secured Convertible
Notes due September 28, 2004 ("September Notes") in the aggregate principal
amount of $12.5 million, convertible into shares of Common Stock of the Company
at a price of $3.00 per share.

      Under the terms of the September Notes, each holder had the right, up
until the time of repayment, to convert the unpaid principal and interest into
shares of Common Stock of the Company at a price of $3.00 per share. The
September Notes also provided that upon written notice of the conversion of the
September Notes held by the Majority in Interest, as that term is defined in the
May Purchase Agreement (described above), the remaining holders of the September
Notes would be deemed to have automatically converted their respective
September Notes into shares of Common Stock. On November 30, 1999, Signal Equity
Partners, L.P., the Majority in Interest, converted its September Notes, which
automatically converted all of the September Notes into Common Stock. Pursuant
to the Conversion and Exchange Agreement, the holders the September Notes were
given the option of exchanging their Common Stock for Series F Preferred Stock.

      The transaction was a private placement and exempt from registration
pursuant to Regulation D of the Securities Act of 1933, as amended.

      Tishman Speyer Properties, L.P. On June 30, 1999 the Company granted
Tishman Speyer Properties, L.P. ("TSP") an option, pursuant to an Option
Agreement dated June 30, 1999, as amended, to purchase 1,000,000 shares of
Common Stock of the Company for a purchase price of $1.50 per share. On February
1, 2000, TSP exercised its option to purchase all 1,000,000 shares.

      Metromedia Fiber Network Services, Inc. Pursuant to a Private Network
Agreement dated as of December 17, 1999 by and between MFN and the Company, and
a related Exchange and Registration dated as of the same date between MFN and
the Company, the Company issued 5,000,000 shares of the Company's Common Stock
to MFN. The transaction assumed a per share price of $8.69. As a result of the
transaction, MFN held approximately ten percent of the Company's Common Stock as
of the date of the agreement. The transaction was a private placement and exempt
from registration pursuant to Regulation D of the Securities Act of 1933, as
amended.

      Pacer International, Inc. Pursuant to an Option Agreement dated as of
October 1, 1999 between Pacer International, Inc. ("Pacer") and the Company, the
Company issued to Pacer an option to purchase 600,000 shares of its Common Stock
at $3.00 per share. On February 29, 2000, Pacer exercised its option with
respect to all 600,000 shares. The transaction was a private placement and
exempt from registration pursuant to Regulation D of the Securities Act of 1933,
as amended.

      Options granted pursuant to 1999 Stock Option Plan. The Company granted
approximately 3.4 million options to purchase shares of Common Stock to 40
employees, directors and consultants pursuant to its 1999 Stock Option Plan. The
options typically vest annually over three years from the date of grant. The
exercise price for the options ranges from $3.00 to $11.06 per share. The option
grants were exempt from registration pursuant to Section 4(2) of the Securities
Act of 1933, as amended.


                                       13
<PAGE>

      Settlement Agreement. On February 28, 2000 the Company agreed to issue to
Trident Telecom Partners, LLC ("Trident") and certain members of Trident
("Trident Members") in settlement of certain litigation (i) 23,442 warrants to
purchase Common Stock at a purchase price of $0.67 per share to Trident Telecom
Management, LLC, (ii) 66,667 shares of Common Stock and 44,000 warrants to
purchase Common Stock at a purchase price of $0.67 per share to Trident Telecom
Management, LLC, for consideration of $100,000, (iii) 35,764 shares of Common
Stock and 1,997 warrants to purchase Common Stock at a purchase price of $0.67
per share to Bruno Guazzoni, for consideration of approximately $290,000, (iv)
47,074 shares of Common Stock and 3,994 warrants to purchase Common Stock at a
purchase price of $0.67 per share to Pacific Alliance, LLC, and (v) 35,305
shares of Common Stock and 2,995 warrants to purchase Common Stock at a purchase
price of $0.67 per share to Emral Holdings, Ltd. The warrants are exercisable in
whole or in part, at any time from May 7, 1999 through May 7, 2004, upon payment
of the exercise price. The warrants may also be exercised without paying the
exercise price by surrendering the warrant in exchange for a number of shares
calculated pursuant to a formula set forth in the May Purchase Agreement. The
exercise price may be adjusted from time to time, as provided in the warrants,
in order to prevent dilution of the rights granted under the warrants. The
shares and warrants to be issued pursuant to this transaction will be a private
placement, exempt from registration pursuant to Section 4(2) of the Securities
Act of 1933, as amended.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

General

      As of December 31, 1999, the Company has had no commercial operations to
date and had not generated any revenues. Since it inception, the Company has
engaged principally in organizational and developmental activities, including
formulating its business plan, developing strategic relationships with vendors
and property owners, gaining access to capital for future growth, hiring
personnel and purchasing equipment.

      The Company has initially focused its developmental activities in New York
City. FiberNet has deployed its in-building networks in five commercial office
properties and has established two carrier point facilities. The Company will
continue to expand its portfolio of on-net buildings in the New York
metropolitan area and add additional carrier point facilities to its network. In
the first quarter of fiscal 2000, FiberNet began providing services in the New
York market. As a result, the Company will no longer be a development stage
enterprise for financial reporting purposes.

      Recently, the Company also began its expansion into the Chicago market and
expects to be operational in that market during fiscal 2000. In addition to
Chicago, FiberNet intends to expand into other gateway cities, as well. The
Company will pursue the same business strategy in its expansion markets, as it
has in New York.

      FiberNet's strategy is to provide wholesale broadband connectivity for
data, voice and video transmission on its state-of-the-art fiber optic networks
in major metropolitan areas. The Company offers an advanced high bandwidth fiber
optic solution to support the growing demand for network capacity in the
intra-city market, or local loop. The Company believes that its end-to-end
connectivity, quality of service and rapid provisioning time will make it the
preferred carrier's carrier for transport capacity and services.

      The Company integrates three core assets to provide its optical local loop
solution:

      On-net buildings. The Company typically has entered into exclusive license
agreements with building owners to design, deploy and operate fully redundant,
self-healing, SONET rings in multi-tenant commercial office buildings in
Manhattan. These FiberNet In-building Networks can extend from the basement of
on-net buildings to telecommunications closets on every floor to provide a
central distribution system for broadband communications services in the
building.

      Metropolitan transport network. The Company has entered into a twenty-year
license agreement with MFN pursuant to which the Company has leased the right to
use a substantial amount of dark fiber in multiple metropolitan markets. The
Company lights the dark fiber in ring configurations with optical networking
gear, establishing connectivity between carrier point facilities and on-net
buildings. The Company has lit multiple OC-48 SONET rings in the New York
metropolitan area and will utilize dense wave division multiplexing technology
to increase capacity in its metropolitan transport network.

      Carrier point facilities. The Company has developed carrier point
facilities to enable the interconnection of its network with other carriers'
networks. In addition, the Company offers colocation and cross-connection
services to its carrier customers at these facilities. The Company's primary
carrier point facility, located at 60 Hudson Street in New York City, is also
the site of its network operations center, which provides network monitoring,
management and maintenance.

      For the fiscal year ended December 31, 1999 the Company reported an
operating loss of $13.1 million and a net loss of $72.2 million, compared to
losses of $3.1 million and $2.8 million, respectively, in fiscal 1998. The
Company's general and administrative expenses increased from $3.1 million in
1998 to $8.3 million in 1999, primarily as a result of an increase in payroll
expense and related overhead as the Company's organizational and developmental
activities accelerated. The Company expects such increase to continue for the
next fiscal year.

      FiberNet recorded non-recurring expenses of $4.3 million in fiscal 1999.
Of these expenses, $3.7 million was a non-cash charge, relating to the
prospective settlement of certain litigation. Net interest expense was $1.3
million in fiscal 1999 compared to $0.2 million of net interest income in fiscal
1998. This change resulted primarily from the issuance of Senior Secured
Convertible Notes during the year (see "Liquidity and Capital Resources" below).
Nearly all of the interest expense on the Senior Secured Convertible Notes
accrued in fiscal 1999 was converted into or exchanged for shares of common
stock or preferred stock on November 30, 1999.

      The Company recorded two non-cash charges for beneficial conversion
features in fiscal 1999, relating to the issuance of convertible securities, in
accordance with the Emerging Issues Task Force, or EITF, Issue 98-5. The total
amount of these charges was $57.2 million, and the Company concurrently recorded
an increase to stockholders' equity in an equal amount. The Company also
recorded preferred stock dividends of $0.8 million in fiscal 1999, relating to
its Series D, E and F Preferred Stock. Such dividends were paid in additional
shares of Series D, E and F Preferred Stock, as of December 31, 1999.


                                       14
<PAGE>

      As a result of the Company's developmental activities and the deployment
of its networks and facilities, FiberNet has incurred significant losses from
inception to date. The Company expects such losses to continue, as it further
executes its business plan and expands its operations. Consequently, FiberNet
has been dependent upon external sources of capital to fund its operations.
Prospectively, the Company will continue to incur losses and will not be able to
fund its operations with internally generated funds, thereby requiring
additional, external capital. Additionally, the Company has no relevant
operating history upon which an evaluation of its performance and prospects can
be made. The Company is subject to unforeseen capital requirements, failure of
market acceptance, failure to establish business relationships, and competitive
disadvantages against larger and more established companies.

Liquidity and Capital Resources

      The Company has to date financed its development efforts through direct
equity investments from its shareholders and the issuance of additional debt and
equity securities in private transactions. The Company has sustained losses for
the fiscal year ended December 31 1999 of $72.2 million and from August 10, 1994
(date of inception) to December 31, 1999 of $75.8 million. These operating
losses are due to the development of the Company's telecommunications
operations, and the Company anticipates that such losses will continue as it
executes its business plan. During the fiscal year ended December 31, 1999 cash
used to fund operating activities was $5.3 million, and cash purchases of
property, plant and equipment were $10.8 million.

      The Company's planned operations will require significant capital to fund
equipment purchases, engineering and construction costs, marketing costs,
administrative expenses and other operating activities. The Company anticipates
spending over $100 million through the fiscal year 2000 for the deployment of
its FINs, expansion of its metropolitan transport networks, the development of
additional carrier points facilities and other network programs and management
systems.

      On November 24, 1997, the Company raised $5.1 million from the private
placement of Series A Preferred Stock. On May 7, 1999, the Company issued $14.1
million of 4% and 8% Senior Secured Convertible Notes due 2004, Series C
Preferred Stock and warrants to purchase Common Stock. On September 28, 1999,
the Company issued $7.8 million of 8% Senior Secured Convertible Notes due
2004, and on October 19, 1999 FiberNet issued an additional $4.7 million of 8%
Senior Secured Convertible Notes due 2004, for a total of $12.5 million. On
November 30, 1999 the Company converted or exchanged all of the outstanding 4%
and 8% Senior Secured Convertible Notes due 2004 plus accrued interest into
either Common stock or new series of preferred stock.

      On December 17, 1999 FiberNet issued five million shares of Common Stock
to Metromedia Fiber Network Services, Inc. as consideration for a twenty year
lease for a significant number of route miles of dark fiber in multiple markets
and the repurchase of a 10% minority interest in the Company's Local Fiber, LLC
operating subsidiary held by MFN. The Company has also secured a commitment for
an equipment lease line of credit totaling $5.1 million. The $1.2 million of
equipment leases outstanding as of December 31, 1999 was the only long-term
indebtedness of the Company as of that date.

      FiberNet has had on-going discussions with sources of additional
financing. As a result, the Company may also consider from time to time private
or public sales of additional equity or debt securities, entering into credit
facilities and other financings, depending upon market conditions, in order to
finance the continued operations of its business. To date, no final commitments,
other than that discussed above, have been obtained. There can be no assurance
that the Company will be able to, other than those discussed above, successfully
consummate any such financing at all, or on acceptable terms.

      The Company has experienced significant growth in employees during fiscal
1999 and expects such growth to continue over the next twelve months as its
operations increase. The Company hired a significant number of new personnel in
the engineering and operations departments, as well as sales and marketing.

ITEM 7. FINANCIAL STATEMENTS

      Audited balance sheets as of December 31, 1999, and December 31, 1998 and
the related statements of operations, cash flows and stockholders' equity for
the period from inception (August 10, 1994) to December 31, 1999, together with
related notes and the reports of Arthur Andersen LLP, independent auditor, and
Mendelsohn Kary Bell & Natoli, P.C., independent auditor, appear on pages F-1
through F-14 of this report.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

      None.


                                       15
<PAGE>

ITEM 9. MANAGEMENT

Executive Officers and Directors

      The following tables set forth the directors and executive officers of the
Company as of December 31, 1999. Directors are elected for a period of one year
and thereafter serve until the next annual meeting at which their successors are
duly elected by the stockholders. Officers and other employees serve at the will
of the board of directors.

NAME                       AGE      POSITIONS
----                       ---      ---------

Timothy P. Bradley         38       Director
Steven G. Chrust           50       Director
Roy (Trey) D. Farmer III   29       Executive Vice President, Director
Michael S. Liss            45       President, Chief Executive Officer, Director
Charles Mahoney            62       Director
Richard Sayers             63       Director
William Vrattos            30       Director
Les Hankinson              48       Senior Vice President - Sales and Marketing
Joel Zimmermann            51       Senior Vice President - Facilities
Jon A. DeLuca              28       Vice President - Finance


TIMOTHY P. BRADLEY has served as a Director of FiberNet since May 7, 1999. Mr.
Bradley is a Managing Partner and co-founder of Signal Equity Partners, a
private equity investment fund focused on the telecommunications and information
technology industries. Mr. Bradley also co-founded Signal Partners LLC, a
financial advisory firm whose clients included Fortune 500 companies and premier
private equity funds. Previously, Mr. Bradley was a general partner at the
Exeter Group, a private equity investment fund. Prior to working in the private
equity industry, Mr. Bradley was a practicing attorney in New York City. He
received a BA from Yale University in 1983, a JD from New York University School
of Law in 1988, and an MBA from Columbia Business School in 1993. Mr. Bradley is
a member of the Company's Audit Committee and Compensation Committee.

STEVEN G. CHRUST has served as a Director of FiberNet since December 8, 1999. He
is Founder and President of SGC Advisory Services, Inc., an
advisory/money-management firm specializing in telecommunications and
technology, and has been involved with the telecommunications and financial
services industry for over 25 years. He was co-founder and served as Vice
Chairman of WinStar Communications, Inc. from 1995 through 1998. Previously, Mr.
Chrust was Director of Technology Research at Sanford C. Bernstein & Co. Mr.
Chrust was Chairman of the Association for Local Telecommunications Services
(ALTS), the national organization representing facilities-based competitive
local exchange carriers. Mr. Chrust is a member of the Company's Audit
Committee.

ROY (TREY) D. FARMER III has served as the Executive Vice President and a
Director of FiberNet since May 11, 1999. From 1998 to 1999 he was a partner of
Sterling Capital LLC. Prior to joining Sterling Capital, Mr. Farmer worked with
a group of strategic consulting firms based in New York City that repositioned
technology companies. He has an A.B. in classical philosophy from Princeton
University, an M.Ed. from Harvard University and an M.A.R. from Yale University.

MICHAEL S. LISS has served as President & CEO of FiberNet and as a Director of
the Company since May 11, 1999. From 1994 to 1999, he was a Managing Director of
Lazard Freres & Co. LLC, and prior to that he was a Senior Managing Director of
Bear, Stearns & Co. Inc. Mr. Liss is a graduate of the Yale Law School and the
Yale School of Management and has a B.A. from Columbia University. Mr. Liss is a
member of the Company's Compensation Committee.

CHARLES MAHONEY has served as a Director of the Company since May 7, 1999. He is
presently President and Chief Executive Officer of Arcade Building Services, a
wholly owned subsidiary of Tishman Speyer Properties, L.P. From 1990 to 2000 he
was a Senior Managing Director and Managing Director with TSP. Prior to his
employment at TSP, Mr. Mahoney held positions at the Helmsley Organization and
at Con Edison. He holds a B.S. from C.W. Post College. Mr. Mahoney is a member
of the Company's Compensation Committee.

RICHARD D. SAYERS has served as a Director of the Company since May 7, 1999.
Since 1996, he has served as the President of Taurus Telecommunications, Inc., a
private consulting company in the telecommunications industry. From 1994 to
1996, Mr. Sayers was the Vice Chairman of ACC Corp. and President of its
international group, serving as Chairman of ACC Telenterprises (ACC-Canada) and
Chairman of ACC Long Distance, United Kingdom. Mr. Sayers has nearly 40 years of
executive level experience in the telecommunications industry. He received a
B.S. in electrical engineering from Union College.

WILLIAM VRATTOS has served as a Director of the Company since September 29,
1999. Since 1997, he has been a Vice President of Georgica Advisors LLC,
focusing on the firm's public and private investments in the media,
communications and entertainment industries. Prior to that Mr. Vrattos worked in
the investment banking division of Morgan Stanley & Co. Incorporated from 1991
until 1995. He also currently serves as a Director and Chairman of the Finance
Committee of Listing Services Solutions, Inc., a privately held
telecommunications service company. Mr. Vrattos is a member of the Company's
Audit Committee.

LES HANKINSON has served as the Senior Vice President of Sales and Marketing
since October 4, 1999. Mr. Hankinson has more than 27 years of executive level
experience in the telecommunications industry. From 1991 to


                                       16
<PAGE>

1999, he was with British Telecommunications plc ("BT"), where he was
responsible for Worldwide Wholesale Sales and Marketing for Carrier Services as
well as Internet and Multimedia. As Vice President and General Manager-Internet
Sales and Marketing, he was responsible for launching BT's line of products
aimed at the wholesale and retail Internet market. Mr. Hankinson has also held
executive positions at Sprint, MCI WorldCom, SBS, and Cable & Wireless. He
attended George Mason University where he majored in Computer Science. He also
completed a Telecommunications Master's Program at the Telecommunications
Engineering Staff College in London, England.

JOEL ZIMMERMANN has served as the Senior Vice President of Facilities of
FiberNet since July 21, 1999. Mr. Zimmermann has more than 15 years of executive
level experience in the telecommunications industry. His previous employers
include Pacer International, Concert, MCI and Amtrak. His responsibilities in
metropolitan, long-distance and international networking and systems have
included business development, planning, design, program management,
implementation and operations. Mr. Zimmermann has a B.S. in civil engineering
from Rutgers University and a M.B.A. from Southern Methodist University.

JON A. DELUCA has served as the Vice President of Finance of FiberNet since June
14, 1999. From 1997 to 1999, Mr. DeLuca was a Managing Director of Lago
Industries, LLC, a private merchant banking firm. Prior to that, he was employed
in the Leveraged Finance Groups of Lazard Freres & Co. LLC and Bear, Stearns &
Co. Inc. Mr. DeLuca has a B.A. from Trinity College.

DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT.

        Section 16 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors, executive officers, and any
persons holding more than 10% of the outstanding common stock of the Company to
file reports with the Commission concerning their initial ownership of common
stock and any subsequent changes in that ownership.

        Based solely on its review of the copies of such forms received by it,
or written representations from reporting persons that no other reports were
required for those persons, the Company believes that, during fiscal year 1999
all reports required to be filed pursuant to Section 16(a) of the Exchange Act
were filed on a timely basis except (a) an Initial Statement of Beneficial
Ownership on Form 3 was filed late by Steven G. Chrust, and (b) Statements of
Changes in Beneficial Ownership on Forms 4 were filed late by Michael S. Liss,
Richard Sayers and William Vrattos for one December 1999 event, by Signal Equity
Partners, L.P. for two December 1999 events and by Trident Telecom Partners LLC
for three December 1999 events.


                                       17
<PAGE>

ITEM 10. EXECUTIVE COMPENSATION

      The following table sets forth summary information as to compensation
received by the Company's Chief Executive Officer and each of the other most
highly compensated persons who were serving as executive officers of the Company
as of December 31, 1999 and who earned in excess of $100,000 for services
rendered to the Company during fiscal year 1999 (collectively, the "named
executive officers").

<TABLE>
<CAPTION>
                                     Annual Compensation                      Long Term Compensation
                                                                          Awards                  Payouts
                                                                                Securities
                                                                 Restricted     Underlying
     Name and                                                   Stock Awards    Options/SARs     LTIP Payouts       All other
Principal Position       Year     Salary ($)       Bonus ($)        ($)              (#)              ($)        Compensation ($)
<S>                      <C>       <C>              <C>             <C>           <C>                  <C>           <C>
Michael S. Liss
President, CEO &
Director                 1999      158,653            --             --          1,005,000             --             --
Roy (Trey) D.
Farmer III
Executive Vice
President&
Director                 1999      107,757          15,000           --           340,000              --             --
</TABLE>

         The following table provides information regarding the grant of stock
options during fiscal year 1999 to the named executive officers.

<TABLE>
<CAPTION>
                                                    Individual Grants
                                                    -----------------


                            Number of       % of Total
                         Shares Covered   Options Granted
                            by Option      to Employees    Exercise Price   Expiration
         Name                Grant(1)     in Fiscal Year     ($/share)         Date
         ----                --------     --------------     ---------         ----
<S>                          <C>          <C>                <C>            <C>
Michael S. Liss                125,000         4.4             4.000        5/11/2009
                               440,000        15.4             3.750        12/3/2009
                               440,000        15.4             6.000        12/3/2009

Roy (Trey) D. Farmer III       125,000         4.4             4.000        5/11/2009
                               215,000         7.5             5.000        12/3/2009
</TABLE>

THE STOCK PLAN

      In December 1999, the Company adopted an employee equity participation
program covering 4,500,000 shares of Common Stock of the Company to advance the
growth and success of FiberNet by enabling employees, directors and consultants
to acquire a proprietary interest in the Company. The Board of Directors
administers the 1999 Stock Option Plan. All employees are eligible to receive
awards under the 1999 Stock Option Plan, at the Board's discretion.

      Options granted pursuant to the 1999 Stock Option Plan may be either
nonqualified options and/or incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended.


                                       18
<PAGE>

      During the fiscal year ended as of December 31, 1999, the Company granted
approximately 3.4 million options under the 1999 Stock Option Plan and
approximately 1.9 million options not under the 1999 Stock Option Plan, covering
a total of approximately 5.3 million shares, at an average exercise price of
approximately $3.78 per share.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The following table sets forth certain information as of December 31,
1999, concerning the ownership of voting securities (i) each member of the Board
of Directors of the Company, (ii) each executive officer of the Company named in
the Annual Compensation Table appearing under "Executive Compensation," above,
(iii) all current Directors and executive officers of the Company as a group and
(iv) each beneficial owner of more than 5% of the outstanding shares of any
class of voting securites.


                                       19
<PAGE>

<TABLE>
<CAPTION>
                                           Name and Address of               Number of Shares
  Title of Class                           Beneficial Owner                  Beneficially Owned                 Percent of Class
<S>                                 <C>                                          <C>                                 <C>
Common Stock                        SMFS, Inc.(1)
                                    12-12 43rd Avenue
                                    Long Island City, New York 11101             6,900,000                           26.6

Common Stock                        Metromedia Fiber Network
                                    Services, Inc.
                                    1 North Lexington Avenue
                                    White Plains, NY 10601                       5,000,000                           19.3

Common Stock                        LTJ Group, Inc.(1)
                                    61 Old Well Road
                                    Rochester, New York 1462                     4,161,556                           16.0

Common Stock                        Trident Telecom Partners, LLC
                                    445 Park Avenue,  6th Floor
                                    New York, NY 10022                           3,017,443                           11.6

Common Stock                        Michael S. Liss (2)
                                    c/o 570 Lexington Ave, 3rd Floor
                                    New York, NY 10022                            336,025                            1.3

Common Stock                        Executive officers and
                                    directors as a group                          336,025                            1.3

Series C Preferred Stock            Alexander Enterprise Holdings
                                    Corp.
                                    499 Park Avenue, 24th Floor
                                    New York, NY 10022                             8,511                             6.4

Series C Preferred Stock            Burden Direct Investment Fund
                                    III
                                    10 East 53rd Street, 32nd Floor
                                    New York, NY 10022                             9,456                             7.1

Series C Preferred Stock            Penny Lane Partners L.P.
                                    767 5th Avenue
                                    New York, NY 10153                             7,092                             5.3

Series C Preferred Stock            Pequot Scout Fund, L.P.
                                    500 Nyala Farm Road
                                    Westport, CT 06880                             9,456                             7.1

Series C Preferred Stock            Signal Equity Partners, L.P.
                                    10 East 53rd Street, 32nd Floor
                                    New York, NY 10022                            43,499                             32.6

Series C Preferred Stock            Trident Telecom Partners, LLC
                                    445 Park Avenue, 6th Floor
                                    New York, NY 10022                            40,189                             30.1

Series C Preferred Stock            Michael S. Liss (2)
                                    c/o 570 Lexington Ave, 3rd Floor
                                    New York, NY 10022                             4,728                             3.5

Series C Preferred Stock            Richard D. Sayers (3)
                                    3625 Ridge Run
                                    Canandaigua, NY 14424                           946                              0.7

Series C Preferred Stock            Executive officers and
                                    directors as a group                           5,674                             4.2
</TABLE>

(1) Pursuant to the Stockholders Agreement dated May 7, 1999 between the Company
and certain stockholders (as defined therein), SMFS, Inc., LTJ Group, Inc. and
LPS Consultants, Inc. granted irrevocable proxies to Signal Equity Partners,
L.P., Trident Telecom Partners, LLC and Concordia Telecom Management, L.L.C. to
vote all of their shares at all meetings of stockholders. The proxy terminates
upon the earliest to occur of (i) a transfer of all shares owned by the
stockholder that granted the proxy; (ii) a qualified public offering, as defined
in the Stockholders Agreement; or (iii) three years from the date of the
Stockholders Agreement.

(2) Michael S. Liss, the Company's President and Chief Executive Officer,
beneficially owns these shares through Concordia Telecom Management, L.L.C.

(3) Richard D. Sayers, a director of the Company, beneficially owns these shares
through Taurus Telecommunications, Inc.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     During 1999, the Company made payments to Petrocelli Electric Co., a
related party, of approximately $1.3 million for consulting and contracting
services rendered. Mr. Santo Petrocelli, former Chairman of the Company, is the
President and Chief Executive Officer of Petrocelli Electric Co. and Petrocelli
Electrical Services and the principal of SMFS, Inc., a shareholder in the
Company. Other consulting fees paid to related parties included approximately:
(i) $96,000 to Richard D. Sayers, a current Director of the Company, (ii)
$85,000 to Frank Chiaino, the former President and Chief Executive Officer of
the Company, and (iii) $83,000 to Landtel Telecommunications. Mr. Joseph
Tortoretti is the majority shareholder of Landtel Telecommunications and a
principal of LTJ Group, Inc., a shareholder of the Company. The Company also
issued approximately 973,000 warrants and shares of Common Stock as
consideration for accounts payable of $527,000 due to related parties, including
Petrocelli Electric Co., LPS Consultants, Inc., Landtel Telecommunications and
Frank Chiaino. Mr. Lawrence Polan, a former Director of the Company, is also
Vice President and Chief Financial Officer for Petrocelli Electric Co. In
addition, he controls LPS Consultants, Inc.

     The Company capitalized services from Petrocelli Electrical Services of
approximately $2.5 million and $12,000 during 1998 and 1997, respectively.
Additionally, the Company expensed approximately $140,000 and $20,000 of
consultant fees from this related party during 1998 and 1997, respectively. The
Company capitalized services of approximately $57,000 and $6,000 of consulting
services from Landtel Communications during 1998 and 1997, respectively.
Additionally, the Company expensed approximately $57,000 and $100,000 of
consultant fees from this related party during 1998 and 1997, respectively. The
Company purchased approximately $75,000 of consulting fees from LPS Consultants,
Inc. during 1998.







                                       20
<PAGE>

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

      (a) The following documents are filed herewith as part of this Form
10-KSB:

      EXHIBIT NO.                EXHIBIT NAME
      -----------                ------------

      2.1                        Agreement and Plan of Merger between the
                                 Company and FiberNet Telecom Group, Inc., a
                                 Nevada corporation, dated December 10, 1999
                                 (incorporated by reference to Exhibit A to the
                                 Company's Information Statement Pursuant to
                                 Section 14(c) of the Securities Exchange Act of
                                 1934, as amended, filed on January 13, 2000)

      3.1                        Certificate of Incorporation of Company
                                 (incorporated by reference to Exhibit B to the
                                 Company's Information Statement Pursuant to
                                 Section 14(c) of the Securities Exchange Act of
                                 1934, as amended, filed on January 13, 2000)

      3.2                        Bylaws of the Company (incorporated by
                                 reference to Exhibit C to the Company's
                                 Information Statement Pursuant to Section 14(c)
                                 of the Securities Exchange Act of 1934, as
                                 amended, filed on January 13, 2000)

      4.1                        Form of certificate for the Company's Common
                                 Stock

      4.2                        Form of 8% Senior Secured Convertible Note
                                 (incorporated by reference to Exhibit B of the
                                 Company's Schedule 13D filed on May 17, 1999).

      4.3                        Form of 4% Senior Secured Convertible Note
                                 (incorporated by reference to Exhibit D of the
                                 Company's Schedule 13D, filed on May 17, 1999).

      4.4                        Form of Warrant (incorporated by reference to
                                 Exhibit E of the Company's Schedule 13D filed
                                 May 17, 1999).

      4.5                        Form of Warrant (incorporated by reference to
                                 Exhibit F of the Schedule 13D filed on May 17,
                                 1999).

      4.6                        Stockholders Agreement dated as of May 7, 1999
                                 by and among the Company and the stockholders
                                 listed therein (incorporated by reference to
                                 Exhibit H of the Company's Schedule 13D, filed
                                 on May 17, 1999).

      4.7                        Registration Rights Agreement dated as of May
                                 7, 1999 by and among the Company the
                                 stockholders listed therein(incorporated by
                                 reference to Exhibit I of the Company's
                                 Schedule 13D filed on May 17, 1999).

      4.8                        Proxy for LPS Consultants, Inc., dated May 7,
                                 1999 (incorporated by reference to Exhibit J of
                                 the Company's Schedule 13D filed on May 17,
                                 1999).

      4.9                        Proxy for SMFS, Inc. dated May 7, 1999
                                 (incorporated by reference to Exhibit K of the
                                 Company's Schedule 13D, dated May 17, 1999).

      4.10                       Proxy for LTJ Group, Inc. dated May 7, 1999
                                 (incorporated by reference to Exhibit L of the
                                 Company's Schedule 13D filed on May 17, 1999

      4.11                       Joinder dated as of September 28, 1999 to the
                                 Stockholders Agreement dated as of May 7, 1999
                                 by and among the Company and the stockholders
                                 listed therein (incorporated by reference to
                                 Exhibit 4.3 of the Company's Form 8-K).

      4.12                       Joinder dated as of September 28, 1999 to the
                                 Registration Rights Agreement dated as of May
                                 7, 1999 by and among the Company and the
                                 parties listed therein (incorporated by
                                 reference to Exhibit 4.4 of the Company's Form
                                 8-K).

      10.1                       Office Lease Agreement between Hudson Telegraph
                                 Associates and FiberNet Telecom Group, Inc.
                                 dated as of February 17, 1998 (incorporated by
                                 reference to Exhibit 10.1 to the Company's Form
                                 10-QSB filed on November 16, 1998).

      10.2                       Master Lease Agreement between Comdisco, Inc.
                                 and the Company dated as of July 27, 1998
                                 (incorporated by reference to Exhibit 10.1 to
                                 the Company's From 10-KSB filed on March 31,
                                 1999)

      10.3                       Agreement of Lease between 570 Lexington
                                 Company, L.P. and FiberNet Telecom Group, Inc.
                                 dated as of August 3, 1998 (incorporated by
                                 reference to Exhibit 10.5 to the Company's Form
                                 10-QSB filed on May 15, 1998).

      10.4                       Employment Agreement dated as of May 7, 1999
                                 between the Company and Michael S. Liss.


                                       21
<PAGE>

      10.5                       Employment Agreement dated as of May 7, 1999
                                 between the Company and Roy (Trey) D. Farmer.

      10.6                       Employment Agreement dated as of July 21, 1999
                                 between the Company and Joel Zimmermann.

      10.7                       Employment Agreement dated as of October 4,
                                 1999 between the Company and Les Hankinson.

      10.8                       Option Agreement between the Company and Pacer
                                 International, Inc. dated as of October 1,
                                 1999.

     *10.9                       Private Network Agreement dated December 17,
                                 1999 between the Company and Metromedia Fiber
                                 Network Services, Inc.

      10.10                      1999 Stock Option Plan of FiberNet Telecom
                                 Group, Inc. (incorporated by reference to
                                 Exhibit F to the Company's Information
                                 Statement Pursuant to Section 14(c) of the
                                 Securities Exchange Act of 1934, as amended,
                                 File No. 000-24661 filed on January 13, 2000)

      10.11                      Lease Agreement dated February 29, 2000 between
                                 111 Eighth Avenue LLC and FiberNet Telecom
                                 Group, Inc.

      21.1                       Subsidiaries of the Company

      23.1                       Consent of Arthur Andersen LLP

      23.2                       Consent of Mendelsohn Kary Bell & Natoli, P.C.,
                                 Certified Independent Auditors

      27.1                       Financial Data Schedule

      99.1                       Purchase Agreement dated as of May 7, 1999 by
                                 and the Company and the purchasers listed
                                 therein (incorporated by reference to Exhibit A
                                 of the Company's Schedule 13D filed on May 17,
                                 1999).

      99.2                       Securities Purchase Agreement, dated as of
                                 September 28, 1999 by and among the Company and
                                 the purchasers listed therein (incorporated by
                                 reference to Exhibit N to the Company's
                                 Schedule 13D/A filed on October 14, 1999).

      99.3                       First Amendment dated as of September 28, 1999
                                 to the Security Agreement dated as of May 7,
                                 1999 from the Company and its subsidiaries to
                                 the Collateral Agent listed therein
                                 (incorporated by reference to Exhibit 4.5 of
                                 the Company's Form 8-K).

      99.4                       First Amendment dated as of September 28, 1999
                                 to the Guaranty Agreement dated as of May 7,
                                 1999 made by FiberNet Telecom, Inc., FiberNet
                                 Equal Access, L.L.C. and Local Fiber, L.L.C.
                                 (incorporated by reference to Exhibit 4.6 of
                                 the Company's Form 8-K).

      99.5                       First Amendment dated as of September 28, 1999
                                 to the Pledge Agreement dated as of May 7, 1999
                                 between FiberNet Telecom, Inc. and the
                                 Collateral Agent listed therein (incorporated
                                 by reference to Exhibit 4.7 of the Company's
                                 Form 8-K).

      99.6                       First Amendment dated as of September 28, 1999
                                 to the Parent Pledge Agreement dated as of May
                                 7, 1999 between the Company and the Collateral
                                 Agent listed therein (incorporated by reference
                                 to Exhibit 4.8 of the Company's Form 8-K).

      99.7                       Conversion and Exchange Agreement dated as of
                                 November 30, 1999 (incorporated by reference to
                                 Exhibit S to the Company's Schedule 13D filed
                                 on December 2, 1999
-----------------
* Confidential treatment has been requested for portions of this exhibit. These
  portions have been omitted and filed separately with the Commission.

      (b) The following reports on Form 8-K were filed during the quarter ended
December 31, 1999

      Item Number                  Description               Filing Date
      -----------                  -----------               -----------

      5,7             A report dated November 30, 1999       December 2, 1999
                      regarding the conversion of the
                      4% and 8% Senior Secured Convertible
                      Notes due May 7, 2004 and the 8%
                      Senior Secured Convertible Notes
                      due September 28, 2004 and
                      filing the certificates of
                      designation for the Series D, E
                      and F Preferred Stock and the
                      Conversion and Exchange
                      Agreement dated as of November
                      30, 1999 by and among the
                      Company and certain noteholders
                      listed therein.


                                       22
<PAGE>

      5,7             A report dated September 28,            October 5, 1999
                      1999 regarding the Issuance of
                      the 8% Senior Secured
                      Convertible Notes due September
                      28, 1999 and filing the
                      Securities Purchase Agreement
                      dated as of September 29, 1999
                      by and among the Company and the
                      purchasers listed therein and
                      related documents.


                                       23
<PAGE>

                                   SIGNATURES

      In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereto duly
authorized.

                                    FIBERNET TELECOM GROUP, INC.


Date: March 30, 2000            By: /s/ Michael S. Liss
                                    --------------------------------------------
                                    Name: Michael S. Liss
                                    Title: President and Chief Executive Officer

      In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

           Name                              Title                     Date


/s/ Michael S. Liss              Director, President and Chief    March 30, 2000
----------------------------     Executive Officer
Michael S. Liss


/s/ Jon A. DeLuca                Vice President of Finance and    March 30, 2000
----------------------------     Principal Accounting Officer
Jon A. DeLuca


/s/ Timothy P. Bradley           Director                         March 30, 2000
----------------------------
Timothy P. Bradley


/s/ Steven G. Chrust             Director                         March 30, 2000
----------------------------
Steven G. Chrust


/s/ Roy (Trey) D. Farmer III     Director and Executive           March 30, 2000
----------------------------     Vice President
Roy (Trey) D. Farmer III


/s/ Charles J. Mahoney           Director                         March 30, 2000
----------------------------
Charles J. Mahoney


/s/ Richard D. Sayers            Director                         March 30, 2000
----------------------------
Richard Sayers


/s/ William Vrattos              Director                         March 30, 2000
----------------------------
William Vrattos


                                       24
<PAGE>

                          FIBERNET TELECOM GROUP, INC.
                        CONSOLIDATED FINANCIAL STATEMENTS


                                TABLE OF CONTENTS

Reports of Independent Public Accountants........................   F-1

Consolidated Balance Sheets.....................................    F-2

Consolidated Statements of Operations...........................    F-4

Consolidated Statements of Stockholders' Equity ................    F-5

Consolidated Statements of Cash Flows...........................    F-6

Notes to Consolidated Financial Statements......................    F-7 - F-14

<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To FiberNet Telecom Group, Inc.:

We have audited the accompanying consolidated balance sheets of FiberNet Telecom
Group, Inc. (a corporation in the development stage - Note 1) and subsidiaries
as of December 31, 1999 and December 31, 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1999 and 1998 and for the six month period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of FiberNet Telecom
Group, Inc. and subsidiaries as of December 31, 1999 and December 31, 1998, and
the results of their operations and their cash flows for the years ended
December 31, 1999 and 1998 and for the six month period ended December 31, 1997,
in conformity with accounting principles generally accepted in the United
States.

/s/ Arthur Andersen LLP
Arthur Andersen LLP

New York, New York
March 7, 2000



[MENDELSOHN KARY BELL & NATOLI LETTERHEAD]
        INDEPENDENT AUDITOR'S REPORT

To the Board of Directors
FiberNet Telecom, Inc. and Affiliated Entities
(A Development Stage Company)

We have audited the accompanying combined statements of operations,
stockholder's equity and cash flows of FiberNet Telecom, Inc. and affiliated
entities (a development stage company) for the year ended June 30, 1997 and for
the period from August 10, 1994 (inception) to June 30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurances 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 audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above, present fairly, in
all material respects, the results of operations, shareholder's equity and cash
flows of FiberNet Telecom, Inc. and Affiliated Entities for the year ended June
30, 1997, and from August 10, 1994, (inception), to June 30, 1997 in conformity
with generally accepted accounting principles.



                                        /s/ Mendelsohn Kary Bell & Natoli, P.C.



New York, New York
November 29, 1997


                                      F-1

<PAGE>

                          FIBERNET TELECOM GROUP, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                                            December 31,                  December 31,
                                                                                1999                          1998
                                                                            -----------                   ------------
<S>                                                                         <C>                           <C>
ASSETS
Current Assets:
      Cash and cash equivalents                                             $  9,512,480                  $    257,384
      Prepaid expenses and other                                                 159,907                       309,365
                                                                            ------------                  ------------
         Total current assets                                                  9,672,387                       566,749

Property, plant and equipment, net                                            55,176,713                     5,397,109

Other Assets:
      Goodwill, net                                                            8,667,471                             -
      Deferred charges, net                                                    3,697,501                             -
      Other assets                                                               373,620                       363,839
                                                                            ------------                  ------------
         Total other assets                                                   12,738,592                       363,839
                                                                            ------------                  ------------
TOTAL ASSETS                                                                $ 77,587,692                  $  6,327,697
                                                                            ============                  ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
      Accounts payable including related party of $1.4 million in 1998      $  3,732,216                  $  3,974,350
      Accrued expenses                                                         4,447,016                       337,384
      Capital lease - current portion                                            203,031                             -
                                                                             -----------                  ------------
         Total current liabilities                                             8,382,263                     4,311,734

Long-Term Liabilities:
      Capital lease obligation                                                   956,360                             -
                                                                             -----------                  ------------
Total Liabilities                                                              9,338,623                     4,311,734

Minority Interest                                                                      -                       104,429
</TABLE>



(continued)


                                      F-2
<PAGE>

<TABLE>
<CAPTION>
<S>                                                                         <C>                        <C>
   Stockholders' Equity:
      Common Stock, $.001 par value, 50,000,000
      shares authorized and   25,932,464 and   16,000,000
      shares issued and outstanding at
      December 31, 1999 and December 31, 1998, respectively                       25,933                         16,000

      Series B Voting Preferred Stock $.001 par value, 80,000 shares issued
      and outstanding at December 31, 1998 (Preference in involuntary
      liquidation value, $1.00 per share)                                              -                             80

      Series C Voting Preferred Stock $.001 par value, 133,333 shares issued
      and outstanding at December 31, 1999 (Preference in involuntary
      liquidation value, $1.50 per share)                                        200,000                             -

      Series D Preferred Stock $.001 par value, 310,173 shares issued and
      outstanding at December 31, 1999 (Preference in involuntary
      liquidation value, $15.00 per share)                                    22,553,205                             -

      Series E Preferred Stock $.001 par value, 293,872 shares issued and
      outstanding at December 31, 1999 (Preference in involuntary
      liquidation value, $15.00 per share)                                    21,429,777                             -

      Series F Preferred Stock $.001 par value, 347,819 shares issued and
      outstanding at December 31, 1999 (Preference in involuntary
      liquidation value, $30.00 per share)                                    25,329,198                             -

      Additional paid in capital and other                                    74,506,595                     5,465,564
      Deficit accumulated during the development stage                       (75,795,639)                   (3,570,110)
                                                                            ------------                  ------------

   Total Stockholders' Equity                                                 68,249,069                     1,911,534
                                                                            ------------                  ------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                  $ 77,587,692                  $  6,327,697
                                                                            ============                  ============
</TABLE>


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


                                      F-3
<PAGE>

                          FIBERNET TELECOM GROUP, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                          YEAR ENDED         YEAR ENDED          YEAR ENDED
                                                         December 31,       December 31,        December 31,
                                                             1999               1998                1997
                                                        -------------       ------------      ---------------
                                                                                                 Unaudited
<S>                                                     <C>                 <C>                <C>
Revenues                                                $           -       $          -       $            -

Operating expenses:
General and administrative                                  8,263,981          3,111,157              712,506
Non-recurring expenses                                      4,303,587                  -                    -
Depreciation and amortization                                 519,880             27,951                1,842
                                                        -------------       ------------      ---------------
Total operating expenses                                   13,087,448          3,139,108              714,348
                                                        -------------       ------------      ---------------
Loss from operations                                      (13,087,448)        (3,139,108)            (714,348)

Interest (expense)/income, net                             (1,283,563)           156,392               26,180
Interest expense on beneficial conversion                  (7,932,188)                 -                    -
                                                        -------------       ------------      ---------------
Loss before minority interest                             (22,303,199)        (2,982,716)            (688,168)

Minority interest                                             104,429            166,229               23,240
                                                        -------------       ------------      ---------------
Net loss                                                  (22,198,770)        (2,816,487)            (664,928)

Preferred stock dividends                                    (756,807)                 -                    -
Preferred stock on beneficial conversion                  (49,245,855)                 -                    -
                                                        -------------       ------------      ---------------
Net loss applicable to common stockholders              $ (72,201,432)      $ (2,816,487)     $      (664,928)
                                                        =============       ============      ===============
Net loss applicable to common stockholders
    per share--basic and diluted                               $(4.30)            $(0.18)              $(0.04)
                                                        -------------       ------------      ---------------
Weighted average shares outstanding                        16,798,254         15,847,222           15,000,000
                                                        -------------       ------------      ---------------

<CAPTION>
                                                                                                  PERIOD FROM
                                                                                                   INCEPTION
                                                       SIX MONTHS ENDED       YEAR ENDED       August 10,1994 TO
                                                         December 31,          June 30,          December 31,
                                                             1997                1997                1999
                                                          -----------        -----------        -------------
<S>                                                       <C>                <C>                <C>
Revenues                                                  $         -        $         -        $           -

Operating expenses:
General and administrative                                    418,140            373,674           12,176,339
Non-recurring expenses                                              -                  -            4,303,587
Depreciation and amortization                                   1,842                  -              549,673
                                                          -----------        -----------        -------------
Total operating expenses                                      419,982            373,674           17,029,599
                                                          -----------        -----------        -------------
Loss from operations                                         (419,982)          (373,674)         (17,029,599)

Interest (expense)/income, net                                 26,180                  -           (1,100,991)
Interest expense on beneficial conversion                           -                  -           (7,932,188)
                                                          -----------        -----------        -------------
Loss before minority interest                                (393,802)          (373,674)         (26,062,778)

Minority interest                                              23,240                  -              293,898
                                                          -----------        -----------        -------------
Net loss                                                     (370,562)          (373,674)         (25,768,880)

Preferred stock dividends                                           -                  -             (756,807)
Preferred stock on beneficial conversion                            -                  -          (49,245,855)
                                                          -----------        -----------        -------------
Net loss applicable to common stockholders                $  (370,562)       $  (373,674)       $ (75,771,542)
                                                          ===========        ===========        =============
Net loss applicable to common stockholders
    per share--basic and diluted                              $(0.027)           $(0.025)              $(4.51)
                                                          -----------        -----------        -------------
Weighted average shares outstanding                        15,000,000         15,000,000           16,798,254
                                                          -----------        -----------        -------------

</TABLE>


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


                                      F-4
<PAGE>

                          FIBERNET TELECOM GROUP, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                                                    Capital in
                                                                   Preferred Stock             Common Stock          Excess of
                                                                 Shares        Amount        Shares      Amount      Par Value
                                                              -----------   -----------   -----------   --------   ------------
<S>                                                           <C>           <C>           <C>           <C>        <C>
Balance at August 10, 1994                                             --    $       --            --    $    --    $        --

Issuance of 240 shares of common stock for cash, out of
 1,000 shares authorized, August 10, 1994, at $.001 par
 value                                                                 --            --           240         --         61,000
Net loss for the period from inception to June 30, 1996                --            --            --         --             --
                                                               ----------    ----------    ----------    -------    -----------
Balance at June 30, 1996                                               --            --           240         --         61,000
Capital contribution                                                   --            --            --         --         80,796
Net loss for the year ended June 30, 1997                              --            --            --         --             --
                                                               ----------    ----------    ----------    -------    -----------
Balance at June 30, 1997                                               --            --           240         --        141,796
Capital contribution                                                   --            --            --         --        212,348
Effect of reverse acquisition of DND; issuance of
 15,000,000 share common stock, $.001 par value, November
 24, 1997                                                              --            --    15,000,000     15,000        (15,000)
Other                                                                  --            --          (240)        --             --
Issuance of 1,000,000 shares Series A Preferred
 Stock, $.001 par value, November 24, 1997                      1,000,000         1,000            --         --      5,074,000
Issuance of 80,000 shares Series B Preferred Stock, $.001
 par value, November 24, 1997                                      80,000            80            --         --            (80)
Preferred Stock dividends accrued in 1997                              --            --            --         --        (30,163)
Net loss for the six months ended December 31, 1997                    --            --            --         --             --
                                                               ----------    ----------    ----------    -------    -----------
Balance at December 31, 1997                                    1,080,000         1,080    15,000,000     15,000      5,382,901
Conversion of 1,000,000 shares Series A Preferred
 Stock, $.001 par value, into common stock,
 February 24, 1998                                             (1,000,000)       (1,000)    1,000,000      1,000             --
Dividends paid                                                        --             --            --         --        (44,837)
Earned compensation, executive stock options                          --             --            --         --        127,500
Net loss for the year ended December 31, 1998                         --             --            --         --             --
                                                              ----------     ----------    ----------    -------    -----------
Balance at December 31, 1998                                      80,000     $       80    16,000,000    $16,000   $  5,465,564
</TABLE>

<TABLE>
<CAPTION>
                                                          Accumulated
                                                            Deficit
                                                           During the
                                                          Development
                                                             Stage         Total
                                                         ------------   ------------
<S>                                                       <C>             <C>
Balance at August 10, 1994                                $        --     $       --
Issuance of 240 shares of common stock for cash, out of
 1,000 shares authorized, August 10, 1994, at $.001 par
 value                                                             --         61,000
Net loss for the period from inception to June 30, 1996        (9,387)        (9,387)
                                                          -----------    -----------
Balance at June 30, 1996                                       (9,387)        51,613
Capital contribution                                               --         80,796
Net loss for the year ended June 30, 1997                    (373,674)      (373,674)
                                                          -----------    -----------
Balance at June 30, 1997                                     (383,061)      (241,265)
Capital contribution                                               --        212,348
Effect of reverse acquisition of DND; issuance of
 15,000,000 share common stock, $.001 par value, November
 24, 1997                                                          --             --
Other                                                              --             --
Issuance of 1,000,000 shares Series A Preferred
 Stock, $.001 par value, November 24, 1997                         --      5,075,000
Issuance of 80,000 shares Series B Preferred Stock, $.001
 par value, November 24, 1997                                      --             --
Preferred Stock dividends accrued in 1997                          --        (30,163)
Net loss for the six months ended December 31, 1997          (370,562)      (370,562)
                                                          -----------    -----------
Balance at December 31, 1997                                 (753,623)     4,645,358
Conversion of 1,000,000 shares Series A Preferred
 Stock, $.001 par value, into common stock,
 February 24, 1998                                                 --             --
Dividends paid                                                     --        (44,837)
Earned compensation, executive stock options                       --        127,500
Net loss for the year ended December 31, 1998              (2,816,487)    (2,816,487)
                                                          -----------    -----------
Balance at December 31, 1998                             $ (3,570,110)  $  1,911,534

</TABLE>

(continued)













<TABLE>
<CAPTION>

                                                                                                                     Capital in
                                                                   Preferred Stock             Common Stock          Excess of
                                                                Shares        Amount        Shares       Amount      Par Value
                                                               ----------    ----------    ----------    -------    -----------
<S>                                                            <C>            <C>          <C>           <C>        <C>
Balance at December 31, 1998                                       80,000    $       80    16,000,000    $16,000   $ 5,465,564
Redemption of Series B Preferred Stock                            (80,000)          (80)           --         --            --
Issuance of Series C Preferred Stock                              133,333       200,000            --         --            --
Conversion of Senior Secured Convertible Notes to common
 stock, net                                                            --            --    13,826,868     13,826    34,528,040
Exchange of common stock for preferred stock and
 beneficial conversion feature:
   Issuance of Series D Preferred Stock                           309,143    22,412,867    (3,091,430)    (3,091)   (4,634,067)
   Issuance of Series E Preferred Stock                           291,926    21,164,635    (2,919,260)    (2,919)   (4,376,133)
   Issuance of Series F Preferred Stock                           345,515    25,049,838    (3,455,243)    (3,455)  (10,362,447)
Series D Preferred Stock dividends                                  1,030       140,338            --         --            --
Series E Preferred Stock dividends                                  1,946       265,142            --         --            --
Series F Preferred Stock dividends                                  2,304       279,360            --         --            --
Beneficial conversion feature on preferred stock dividends             --            --            --         --        71,967
Exercise of warrants to common stock                                   --            --       220,000        220       147,180
Issuance of common stock for purchase of MFN dark
 fiber, minority interest and other                                    --            --     5,351,529      5,352    43,971,939
Deferred compensation                                                  --            --            --         --   (4,289,919)
Stock compensation to consultants and employees                        --            --            --         --    13,764,039
Other                                                                  --            --            --         --       220,432
Net loss for the year ended December 31, 1999                          --            --            --         --            --
                                                               ----------    ----------    ----------    -------   -----------
Balance at December 31, 1999                                    1,085,197   $69,512,180    25,932,464    $25,933  $ 74,506,595
                                                               ==========    ==========    ==========    =======   ===========
</TABLE>

<TABLE>
<CAPTION>
                                                        Accumulated
                                                          Deficit
                                                         During the
                                                         Development
                                                            Stage          Total
                                                       -------------    -----------
<S>                                                    <C>              <C>
Balance at December 31, 1998                           $ (3,570,110)    $ 1,911,534
Redemption of Series B Preferred Stock                            --            (80)
Issuance of Series C Preferred Stock                              --        200,000
Conversion of Senior Secured Convertible Notes to common
 stock, net                                                       --     34,541,866
Exchange of common stock for preferred stock and
 beneficial conversion feature:
   Issuance of Series D Preferred Stock                           --     17,775,709
   Issuance of Series E Preferred Stock                           --     16,785,583
   Issuance of Series F Preferred Stock                           --     14,683,936
Series D Preferred Stock dividends                                --        140,338
Series E Preferred Stock dividends                                --        265,142
Series F Preferred Stock dividends                                --        279,360
Beneficial conversion feature on preferred stock dividends        --         71,967
Exercise of warrants to common stock                              --        147,400
Issuance of common stock for purchase of MFN dark
 fiber, minority interest and other                               --     43,977,291
Deferred compensation                                             --     (4,289,919)
Stock compensation to consultants and employees                   --     13,764,039
Other                                                       (24,097)        196,335
Net loss for the year ended December 31, 1999           (72,201,432)   (72,201,432)
                                                        -------------  ------------
Balance at December 31, 1999                            $(75,795,639)  $ 68,249,069
                                                        =============  ============
</TABLE>

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

                                      F-5
<PAGE>



                          FIBERNET TELECOM GROUP, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>


                                                                       YEAR ENDED       YEAR ENDED       YEAR ENDED
                                                                      December 31,     December 31,     December 31,
                                                                          1999             1998             1997
                                                                     -------------    -------------    -------------
                                                                                                        (Unaudited)
<S>                                                                   <C>               <C>              <C>
Cash flows from operating activities:
   Net loss applicable to common stockholders                       $(72,201,432)      $(2,816,487)     $ (664,928)
   Adjustments to reconcile net loss to
     net cash used in operating activities:
        Depreciation and amortization                                    551,296            27,951           1,842
        Amortization of deferred financing costs                         500,574           227,324          56,200
        Preferred stock dividend and other non-cash interest           1,093,290                 -               -
        Stock option compensation expense                              3,175,269           127,500               -
        Beneficial conversion charges                                 57,771,291                 -               -
        Litigation settlement                                          3,710,339                 -               -
        Minority interest                                               (104,429)         (166,229)         (6,446)
   Change in assets and liabilities:
        (Increase) decrease in prepaid expenses and other assets         139,677         (669,250)       (153,160)
        Increase (decrease) in accounts payable and
           accrued expenses                                              157,159         1,532,740         645,596
        Other                                                            (97,702)                -               -
                                                                   -------------      ------------     -----------
Cash used in operating activities                                     (5,304,668)       (1,736,451)       (120,896)

Cash flows from investing activities:
   Capital expenditures                                              (10,827,171)       (3,077,492)        (94,865)
                                                                    -------------     -------------    ------------
Cash used in investing activities                                    (10,827,171)       (3,077,492)        (94,865)

Cash flows from financing activities:
   Net proceeds from issuance of debt securities                      25,331,145                 -               -
   Net proceeds from issuance of equity securities                       200,000                 -       5,075,000
   Repayment of capital lease obligation                                (144,210)                -               -
   Payment of dividends                                                        -           (75,000)              -
   Capital contributed                                                         -                 -         286,248
                                                                   -------------      ------------     -----------
Cash provided from financing activities                               25,386,935           (75,000)      5,361,248
                                                                   -------------      ------------     -----------
Net increase (decrease) in cash                                        9,255,096        (4,888,943)      5,145,487

Cash at beginning of period                                              257,384         5,146,327             840
                                                                   -------------      ------------     -----------

Cash at end of period                                               $  9,512,480       $   257,384      $5,146,327
                                                                   =============      ============     ===========

Supplemental disclosures of cash flow information:

Interest paid                                                       $    109,707                 -               -
Income taxes paid                                                              -                 -               -

Non-Cash Financing Activities
   Issuance of common stock to acquire MFN
      dark fiber and minority interest                              $ 43,450,000                 -               -
   Issuance of capitalized stock options                               7,115,100                 -               -
   Capital expenditures financed through capital leases                1,303,601                 -               -

<CAPTION>
                                                               FOR SIX                           PERIOD FROM
                                                             MONTHS ENDED       YEAR ENDED     INCEPTION August
                                                             December 31,         June 30,        10, 1994 TO
                                                                1997               1997        December 31,1999
                                                            -------------      ------------    ----------------

<S>                                                        <C>                <C>               <C>
Cash flows from operating activities:
   Net loss applicable to common stockholders                 $  (370,562)       $ (373,674)   $(75,771,542)

   Adjustments to reconcile net loss to
      net cash used in operating activities:
        Depreciation and amortization                               1,842                 -         581,089
        Amortization of deferred financing costs                        -            56,200         784,098
        Preferred stock dividend and other non-cash interest            -                 -       1,093,290
        Stock option compensation expense                               -                 -       3,302,769
        Beneficial conversion features charges                          -                 -      57,771,291
        Litigation settlement                                           -                 -       3,710,339
        Minority interest                                          (6,446)                -        (277,104)
   Change in assets and liabilities:
        (Increase) decrease in prepaid expenses and other assets  (34,924)           (1,067)       (621,764)
        Increase (decrease) in accounts payable and
           accrued expenses                                       361,482           239,072       2,290,861
        Other                                                           -                 -         (97,702)
                                                            -------------      ------------     -----------
Cash used in operating activities                                 (48,608)          (79,469)     (7,234,375)

Cash flows from investing activities:
   Capital expenditures                                           (94,065)             (800)    (13,999,528)
                                                            -------------      ------------     -----------
Cash used in investing activities                                 (94,065)             (800)    (13,999,528)

Cash flows from financing activities:
   Net proceeds from issuance of debt securities                        -                 -      25,331,145
   Net proceeds from issuance of equity securities              5,075,000                 -       5,275,000
   Repayment of capital lease obligation                                -                 -        (144,210)
   Payment of dividends                                                 -                 -         (75,000)
   Capital contributed                                            212,348            81,000         359,448
                                                            -------------      ------------     -----------
Cash provided from financing activities                         5,287,348            81,000      30,746,383
                                                            -------------      ------------     -----------
Net increase (decrease) in cash                                 5,144,675               731       9,512,480

Cash at beginning of period                                         1,652               921               -
                                                            -------------      ------------     -----------
Cash at end of period                                      $    5,146,327        $    1,652    $  9,512,480
                                                            =============      ============     ===========
Supplemental disclosures of cash flow information:

Interest paid                                                           -                 -    $    109,707
Income taxes paid                                                       -                 -               -

Non-Cash Financing Activities
   Issuance of common stock to acquire MFN
     dark fiber and minority interest                                   -                 -    $ 43,450,000
   Issuance of capitalized stock options                                -                 -       7,115,100
   Capital expenditures financed through capital leases                 -                 -       1,303,601
</TABLE>


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


                                      F-6
<PAGE>

                          FIBERNET TELECOM GROUP, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.       ORGANIZATION AND OPERATIONS

         FiberNet Telecom, Inc. ("Original FiberNet") was organized under the
laws of the State of Delaware on August 10, 1994. On November 24, 1997, an
existing public company, Desert Native Design, Inc. ("DND"), acquired Original
FiberNet, pursuant to an agreement and plan of merger dated that date (the
"Original Merger"). To effect the Original Merger, DND effectuated a 3.5 for 1
forward stock split, which entitled DND shareholders to 3.5 shares of DND stock
for every one share held by them and issued 11,500,000 shares of common stock
and 80,000 Series B Preferred Stock in exchange for all of the outstanding
shares of Original FiberNet. Upon consummation of the Original Merger, Original
FiberNet became a wholly-owned subsidiary of DND, which subsequently changed its
name to FiberNet Telecom Group, Inc., a Nevada corporation ("FiberNet Nevada").
For accounting purposes, the acquisition was treated as a recapitalization of
DND with Original FiberNet as the acquirer (reverse acquisition). On December 9,
1999, FiberNet Nevada changed its state of incorporation to Delaware
(hereinafter referred to as "FiberNet" or the "Company").

         FiberNet is an all-optical facilities-based communications provider
focused on providing wholesale broadband connectivity for data, voice and video
transmission on its state-of-the-art fiber optic networks in major metropolitan
areas. The Company offers an advanced high bandwidth, fiber optic solution to
support the growing demand for network capacity in the intra-city market, or
local loop. The Company has established operations in the New York metropolitan
area and expects to expand operations into other markets, including Chicago.

         FiberNet is holding a company that owns all of the outstanding common
stock of FiberNet Telecom, Inc., a Delaware corporation and an intermediate
level holding company. FiberNet Telecom, Inc. owns all of the outstanding
membership interests of Local Fiber, LLC ("Local Fiber"), a New York limited
liability company, and all of the outstanding membership interests of FiberNet
Equal Access, LLC ("Equal Access"), also a New York limited liability company,
subject to a warrant owned by Tishman Speyer Properties, L.P. to purchase up to
10% of Equal Access. The Company conducts its primary business operations
through its operating subsidiaries, Local Fiber and Equal Access.

         The Company is a development stage company and has not realized any
revenues. To date, the Company has incurred operating losses and operating cash
flow deficits. The developmental nature of the Company's activities is such that
inherent risks exist in its operations. Prior to being able to offer its
services to its customers, the Company will incur significant expenditures. Such
expenditures have been and will continue to be primarily for the design,
development and deployment of the Company's telecommunications networks and
related infrastructure and for administrative, marketing and payroll costs.
After FiberNet offers services in its markets and buildings, there can be no
assurance that sufficient revenues will be realized to fund the ongoing
operations of the Company. As a result, the Company may require additional funds
that may not be available.

         The Company has in force and is materially dependant on certain
agreements with other entities, including telecommunications license agreements
with on-net building landlords, interconnection agreements with other
telecommunications service providers and leases with carrier hotel property
owners. FiberNet also has entered into material contracts with suppliers for the
components of its telecommunications networks. These contracts and agreements
are critical to the Company's ability to execute its business strategy and
operating plan.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements include the accounts of the Company and
its subsidiaries, FiberNet Telecom, Inc., FiberNet Equal Access, LLC and Local
Fiber, LLC. All significant intercompany balances and transactions have been
eliminated.

                                      F-7
<PAGE>

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of expenses during the reporting period. Actual results
could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include highly liquid investments with an original
maturity of three months or less. The carrying amount approximates fair value
because of the short maturity of the instruments.

Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation.
Depreciation and amortization are provided using the straight-line method over
the estimated useful lives of the assets, once placed in service. The estimated
lives are as follows:

                  Computer software                  3 -- 5   Years
                  Computer hardware                  3 -- 5   Years
                  Furniture and fixtures             5 -- 10  Years
                  Leasehold improvements             9 -- 15  Years
                  Network equipment                  5 -- 10  Years
                  Network infrastructure             5 -- 20  Years

Maintenance and repairs are charged to expense as incurred. Long-term
improvements are capitalized as additions to property, plant and equipment.

Fair Value of Financial Instruments

Due to short maturities, the Company estimates that the carrying value of its
financial instruments approximates fair value.

Goodwill and Intangibles

Cost in excess of net assets of acquired business is amortized on the
straight-line method over 15 years. The company reviews long-lived assets
including goodwill, other intangible assets, and property, plant and equipment
for impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Determination of any impairment would
include a comparison of estimated future cash flows to be generated during the
remaining life of the asset versus the net carrying value of the asset.

Earnings Per Share

Basic earnings per share have been computed using the weighted average number of
shares during the period. Diluted earnings per shares is computed by including
the dilutive effect on common stock that would be issued assuming conversion of
stock options, warrants and other dilutive securities.

Stock Option Plan

The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB 25), and, accordingly, recognizes compensation expense for stock option
grants to the extent that the estimated fair value of the stock exceeds the
exercise price of the option at the measurement date. The compensation expense
is charged against operations ratably over the vesting period of the options.

Accounting for Income Taxes

The Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109), which requires the use of the
liability method of accounting for deferred income taxes. Under this method,
deferred income taxes represent the net tax effect of temporary differences
between tax carrying amount of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. Additionally, if it is
more likely than not that some portion or all of a deferred tax asset will not
be realized, a valuation allowance is required to be recognized.

Reclassification

Certain prior year amounts have been reclassified in the consolidated financial
statements to conform to current year presentation.


Recent Accounting Pronouncements

In 1998, Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," (SFAS 133) and Statement of
Position 98-5, "Reporting on the Costs of Start up Activities" (SOP 98-5) were
issued. As amended by SFAS 137, SFAS 133 establishes accounting and reporting
standards requiring that every derivative instrument be recorded in the balance
sheet as either an asset or liability measured at its fair value. The Company
will adopt SFAS 133 in fiscal 2001 but since it does not have derivatives
currently, there would be no impact on the financial statements or disclosures.
SOP 98-5 provides guidance on accounting for the costs of start-up activities,
which include pre-opening costs, organization costs and start-up costs.
The Company has expensed all start-up costs as incurred, as a result, adoption
of SOP 98-5 has no material impact on the Company's financial statements.

                                      F-8
<PAGE>

3.       PROPERTY, PLANT AND EQUIPMENT

         Property, plant and equipment consist of the following:

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,              DECEMBER 31,
                                                                     1999                      1998
                                                                 ------------               -----------
<S>                                                              <C>                         <C>
         Computer software                                       $    307,323               $     2,661
         Leasehold improvements                                     6,844,364                    69,852
         Computer equipment                                           235,347                    61,746
         Office equipment and furniture                               381,443                   360,639
         Construction in progress                                  46,173,480                 4,695,968
         Power equipment                                              190,887                   190,902
         Transmission equipment                                     1,480,242                    45,134
                                                                 ------------               -----------
         Total                                                     55,613,086                 5,426,902
         Accumulated depreciation                                    (436,373)                  (29,793)
                                                                 ------------               -----------
         Property, plant and equipment, net                      $ 55,176,713               $ 5,397,109
                                                                 ============               ===========
</TABLE>


4.       LEASE COMMITMENTS AND CONTINGENCIES

         The Company has entered into an equipment leasing agreement requiring
the payment of $1.0 million over a five year period that commenced August 1999.
The present value of this amount has been included as capital lease obligation
on the consolidated balance sheet as of December 31, 1999.

         The Company also entered into various operating lease agreements for
office space in New York, New York and for other space relating to the Company's
operations. Rent expense for the years ended December 31, 1999, 1998 and 1997
were approximately $0.8 million, $0.3 million and $8,000, respectively.

         Estimated future minimum operating and capital lease payments are as
follows:

                                                 Operating             Capital
                                                -----------           ----------

         2000                                    $ 1,073,396         $  203,031
         2001                                      1,086,199            232,617
         2002                                      1,092,049            249,997
         2003                                      1,119,705            261,770
         2004 and thereafter                       8,026,088             97,526
                                                 -----------         ----------
         Total                                   $12,397,437         $1,044,941
                                                 ===========         ==========


5.       STOCK OPTIONS

         In December 1999, the Company adopted an employee equity participation
program (the "1999 Stock Option Plan") covering 4,500,000 shares of Common Stock
of the Company to advance the growth and success of FiberNet by enabling
employees, directors and consultants to acquire a proprietary interest in the
Company. The Board of Directors administers the 1999 Stock Option Plan. All
employees are eligible to receive awards under the 1999 Stock Option Plan, at
the Board's discretion. Options granted pursuant to the 1999 Stock Option Plan
(i) may be either nonqualified options and/or incentive stock options within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended, (ii)
have a term of ten years and (iii) typically vest on an annual basis over three
years.

         During the fiscal year ended December 31, 1999, the Company granted
approximately 3.4 million options under the 1999 Stock Option Plan and 1.9
million options not under the 1999 Stock Option Plan, covering a total of 5.3
million shares, at an average exercise price of approximately $3.78 per share,
with a vesting period of up to three years. The Company's previous Employee
Equity Participation Program was terminated during 1999.

         The Company accounts for stock options under APB Opinion No. 25. During
the years ended December 31, 1999, 1998 and 1997, the Company granted stock
options to employees with exercise prices below the market price on the date of
the
                                      F-9
<PAGE>

grant. As such the Company recorded compensation expense to employees of
approximately $0.8 million, $0.1 million and $0 for those years, respectively.

         If the Company had calculated stock option compensation expense as
prescribed by SFAS No. 123, the Company's net loss and net loss per share would
have been the following pro forma amounts:


<TABLE>
<CAPTION>

                                                             1999                      1998                       1997
                                                         ------------               -----------               -----------
<S>                                     <C>             <C>                         <C>                       <C>
         Net loss                       As reported      $ 72,201,432               $ 2,816,487               $   370,562
                                        Pro forma        $ 74,081,018               $ 3,111,104               $   387,225

         Net loss per share -           As reported      $      (4.30)              $     (0.18)              $     (0.04)
         basic and diluted              Pro forma        $      (4.41)              $     (0.20)              $     (0.03)
</TABLE>

Transactions during the years ended December 31, 1999, 1998 and 1997,
respectively, involving stock options are summarized as follows:
<TABLE>
<CAPTION>
                                                    1999                           1998                            1997
                                          ---------------------------    --------------------------      --------------------------
                                                             OPTION                        OPTION                          OPTION
                                             NUMBER          PRICE         NUMBER          PRICE           NUMBER          PRICE
                                           OF SHARES       PER SHARE      OF SHARES       PER SHARE       OF SHARES      PER SHARE
                                          -----------     -----------    -----------     -----------     -----------    -----------
<S>                                       <C>             <C>            <C>             <C>             <C>            <C>
Options outstanding at the beginning
  of the period                             1,273,000     $      2.98        600,000     $      1.95              --    $        --
Granted                                     5,332,833            3.78        673,000            4.64         600,000           1.95
Terminated                                  (434,832)            4.37             --              --              --             --
                                          -----------     -----------    -----------     -----------     -----------    -----------

Options outstanding at the end of year
                                            6,171,001            3.59      1,273,000            2.98         600,000           1.95
                                          -----------     -----------    -----------     -----------     -----------    -----------

Exercisable at end of year                  3,336,126            2.52        120,000            1.95              --             --
                                          -----------     -----------    -----------     -----------     -----------    -----------

Weighted average fair value of
options granted                                           $      4.32                    $      2.63                    $      1.37
</TABLE>

         The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions used
for grants in December 31, 1999, 1998 and 1997: risk-free interest rates of
5.50%, 5.62% and 5.92%, respectively, expected dividend yields of 0%, expected
lives of 4 years and expected volatility of 88.0%.

6.       STOCK OPTION GRANTS TO NON-EMPLOYEES

         During 1999, the Company granted stock options to certain consultants
 for services rendered in connection with the design, development and
 construction of the Company's telecommunications network infrastructure. As a
 result, the Company recognized costs of approximately $3.3 million that were
 capitalized and included in property, plant and equipment. The Company also
 granted stock options to Tishman Speyer Properties, L.P. As a result, the
 Company recognized costs of approximately $3.8 million that were capitalized
 and included in deferred charges. In addition, the Company granted stock
 options with a one-year vesting period to outside consultants for pre-
 acquisition due diligence services. As a result, FiberNet recognized
 approximately $658,000 of compensation expense.

7.       STOCK RESERVED FOR FUTURE ISSUANCE

         In addition to shares of Common Stock underlying outstanding stock
options, the Company has reserved for future issuance additional shares of
Common Stock, relating to outstanding warrants and convertible securities. As of
December 31, 1999, the Company had outstanding (i) warrants exercisable into
approximately 8.7 million shares of Common Stock at exercise prices ranging from
$0.50 to $1.50 per share and (ii) convertible preferred stock convertible into
approximately 9.7 million shares of Common Stock with conversion prices of $1.50
and $3.00 per share.

                                      F-10
<PAGE>

8.       SUBSIDIARY'S WARRANTS

         The Company's subsidiary, FiberNet Equal Access, LLC has issued a
warrant for the purchase of up to 10% of its membership interest. Tishman Speyer
Properties, L.P. is entitled to acquire a limited liability membership interest,
at the exercise price of $25 per unit, subject to certain terms and conditions,
and with an exercise period of three years from August 7, 1997.

9.       PREFERRED STOCK

Series A Convertible Cumulative Preferred Stock

         As of November 24, 1997 the Company issued 1.0 million shares of Series
A Convertible Cumulative Preferred Stock at $5.125 per share for gross proceeds
of approximately $5.1 million, net of issuance costs. The Company or the holders
of the outstanding shares had the right to convert them into common stock, at
any time up to November 24, 2000. Each share of preferred stock could be
converted into one share of common stock. The holders were entitled to receive
annual cumulative dividends at the rate of 6% per annum based on a liquidation
value of $5.125 per share. As of February 24, 1998, the Company paid the
dividend to the Series A convertible preferred cumulative stock for $75,000 and
converted all of the Series A Convertible Cumulative Preferred Stock into common
stock.

Series B Voting Preferred Stock

         On November 24, 1997 the Company issued 80,000 shares of Series B
Voting Preferred Stock. Each share was entitled to 100 votes to be voted at any
meeting of shareholders. In the event of any voluntary or involuntary
liquidation, dissolution, or winding up of the corporation, the holders of
shares of the Series B Voting Preferred Stock then outstanding, were entitled to
be paid, out of the assets of the Company available for distribution to its
stockholders, whether from capital, surplus or earning, before any payment shall
be made in respect of the Company's Common Stock, but after payment to holders
of Series A Preferred Stock, an amount equal to $1.00 per share. As of May 7,
1999, all of the issued and outstanding shares of the Series B Voting Preferred
Stock were redeemed by the Company for $.001 per share.

Series C Voting Preferred Stock

         On May 7, 1999 the Company issued approximately 133,000 shares of
Series C Voting Preferred Stock. Each share shall be entitled to 117.03
votes to be voted at any meeting of shareholders. In the event of any voluntary
or involuntary liquidation, dissolution, or winding up of the corporation, the
holders of shares of the Series C Voting Preferred Stock then outstanding,
shall be entitled to be paid, out of the assets of the Company available for
distribution to its stockholders, whether from capital, surplus or earning,
before any payment shall be made in respect of the Company 's Common Stock an
amount equal to $1.50 per share. Each holder of each share of Series C
Voting Preferred Stock shall have the right to convert such share for one
share of Common Stock at a conversion price of $1.50 per share, subject to
adjustment. The holders of the Series C Voting Preferred Stock shall be
entitled to share in any dividends declared and paid by the Company to the
Common Stock on a ratable basis.

Series D, E and F Preferred Stock

         As of November 30, 1999 the Company issued approximately (i) 309,000
shares of Series D Preferred Stock, (ii) 292,000 shares of Series E Preferred
Stock and (iii) 346,000 shares of Series F Preferred Stock. The shares of Series
D, E and F Preferred Stock shall not be entitled to any votes to be voted at any
meeting of shareholders. In the event of any voluntary or involuntary
liquidation, dissolution, or winding up of the corporation, the holders of
shares of the Series D, E and F Preferred Stock then outstanding, shall be
entitled to be paid, out of the assets of the Company available for distribution
to its stockholders, whether from capital, surplus or earning, before any
payment shall be made in respect of the Company 's Common Stock an amount equal
to $15.00, $15.00 and $30.00 per share, respectively. Each holder of each share
of Series D, E and F Preferred Stock shall have the right to convert such share
for ten shares of Common Stock at conversion prices of $1.50, $1.50 and $3.00
per share, respectively, subject to adjustment. The holders of the Series D, E
and F Preferred Stock shall be entitled to receive dividends at a rate of 4%, 8%
and 8% per annum, respectively. Such dividends shall be payable semi-annually
and at the option of the Company in cash or in additional shares of the
respective series of Series D, E or F Preferred Stock.

10.      RELATED PARTY TRANSACTIONS

         During 1999, the Company made payments to Petrocelli Electric Co., a
related party, of approximately $1.3 million for consulting and contracting
services rendered. Other consulting fees to related parties included
approximately: (i) $100,000 to Santo Petrocelli, a former officer (ii) $96,000
to Richard D. Sayers, a current director, (iii) $85,000 to Frank Chiaino, a
former officer and (iv) $83,000 to Landtel Telecommunications, a current
affiliated entity. The Company also issued

                                      F-11
<PAGE>

approximately 973,000 warrants and shares of Common Stock as consideration for
accounts payable of $527,000 due to related parties, including Petrocelli
Electric Co., LPS Consultants, Inc., Landtel Telecommunications and Frank
Chiaino. The pricing of these transactions has been determined on an
arms-length basis.

         The Company capitalized services from Petrocelli Electrical Services, a
related party, of approximately $2.5 million and $12,000 during 1998 and 1997,
respectively. Additionally, the Company expensed approximately $140,000 and
$20,000 of consultant fees from this related party during 1998 and 1997,
respectively. As of December 31, 1998 and 1997, the Company had a payable of
approximately $1.2 million and $153,000, respectively.

         The Company capitalized services of approximately $57,000 and $6,000 of
consulting services from Landtel Telecommunications during 1998 and 1997,
respectively. Additionally, the Company expensed approximately $57,000 and
$100,000 of consultant fees from this related party during 1998 and 1997,
respectively. As of December 31, 1998 and 1997, the Company had a payable of
approximately $163,000 and $87,000, respectively.

         The Company recognized approximately $75,000 of consulting fees from
LPS Consultants, Inc. during 1998. As of December 31, 1998, the Company had a
payable of approximately $17,000.

11.      INCOME TAXES

         A reconciliation of the actual income tax (provision) benefit and the
tax computed by applying the U.S. federal rate (35%) to the loss from continuing
operations, before income taxes for the three years ended December 31, 1999
follows:

<TABLE>
<CAPTION>

                                                         1999                     1998                    1997
                                                     ------------             -----------           ---------------

<S>                                                  <C>                      <C>                    <C>
Computed Tax at Statutory Rate                       $(25,432,427)            $  (985,770)             $(232,725)
State and Local, net of FIT benefit                           885                      --                     --
Preferred Stock Dividends                                 264,882                      --                     --
Other                                                       7,700                      --                     --
Debt Conversion                                        17,150,000                      --                     --
Minority Interest                                         (36,550)                (83,115)                (8,134)
Valuation Allowance                                     8,045,510               1,068,885                240,859
                                                     ------------             -----------           ---------------
                                                     $         --             $        --              $      --
                                                     ============             ===========           ===============


Deferred Taxes:

                                                          1999                    1998                    1997
                                                     ------------            ------------           ---------------
Deferred Tax Asset

Deferred Expenses                                     $ 4,466,054             $ 1,293,966              $      --
Stock Options                                           1,441,607                      --                     --
Depreciation                                              (14,231)                 (3,731)                    --
Net Operating Loss                                      3,861,740                 418,541                     --
Valuation Allowance                                    (9,755,170)             (1,708,776)                    --
                                                      -----------             -----------           ---------------
Net Deferred Tax Asset                                $        --             $        --              $      --
                                                      ============            ============          ===============
</TABLE>

         As of December 31, 1999, the Company has federal income tax net
operating loss carryforwards of approximately $11.0 million. The federal tax
loss carryforwards begin expiring in 2012. Full valuation allowances have been
recorded against all temporary differences.

         During 1999 the Company did not record a current or deferred federal
tax provision.

12.      EMPLOYMENT CONTRACTS

The Company has various employment contracts with key executive employees. The
total compensation under these contracts for 2000 and future years is as
follows:

                                      F-12
<PAGE>

                              Year                 AMOUNT
                            --------             ----------
                              2000               $1,187,500
                              2001                  679,583
                              2002                   37,500
                              2003                       --
                              2004                       --
                                                 ----------
                             Total               $1,904,583
                                                 ==========


13.      MINORITY INTEREST

         The ownership of Local Fiber, LLC was divided into Class A Members (the
Company) owning 90% and Class B Members (Metromedia Fiber Network Services,
Inc.) owning 10%. The Class A Members requested that Class B Members enter into
a license agreement with the Company, and as an inducement therefore, the Class
A Members made capital contributions on behalf of Class B Members in connection
with each Class A Members' capital contribution. On December 17, 1999, the
Company purchased all of the Class B membership interests from Metromedia Fiber
Network Services, Inc.




14.      SIGNIFICANT TRANSACTIONS

         On May 7, 1999 (the "Closing Date"), the Company entered into a
securities purchase agreement with certain investors, including Signal Capital
Partners, L.P., Trident Telecom Partners LLC and Concordia Telecom Management,
L.L.C., for the sale of $14.1 million of securities, consisting of $13.9 million
aggregate amount of 4% to 8% Senior Secured Convertible Notes due 2004 (the "May
Convertible Notes") and 133,333 shares of convertible Series C Preferred Stock
with an aggregate redemption value of $0.2 million, or $1.50 per share, (the
"Series C Preferred Stock," together with the May Convertible Notes, the
"Securities"). The Securities are convertible into shares of the Company's
Common Stock at a conversion price of $1.50 per share, which represented the
approximate fair market value of the Company's common stock when the conversion
price of the Securities was determined. The May Convertible Notes are secured
by, among other things, a pledge by the Company of the shares of Common Stock of
its wholly-owned subsidiaries. Together with the sale of the May Convertible
Notes, the Company issued approximately 7.9 million warrants to purchase common
stock to the purchasers of the May Convertible Notes (the "Warrants"). The
Warrants are exercisable at $0.67 to $1.50 per share and expire five years after
the Closing Date.

         In connection with the issuance of the May Convertible Notes and the
related Warrants, the Company recorded an original issue discount on the May
Convertible Notes in the amount $5.4 million. The original issue discount was
amortized over the five-year life of the May Convertible Notes. Certain
financing costs related to the issuance of the May Convertible Notes were
capitalized as deferred charges and amortized over the five-year life of the May
Convertible Notes.

         As of June 18, 1999, the Company converted certain accounts payable to
related parties, totaling $0.5 million, into shares of Common Stock and
warrants.

                                      F-13
<PAGE>

         On September 28, 1999, the Company entered into another securities
purchase agreement with certain investors, including Signal Equity Partners,
L.P. (formerly Signal Capital Partners, L.P.) and Waterview Partners, L.P., an
affiliate of Georgica Advisors LLC, for the sale of $7.8 million of 8% Senior
Secured Convertible Notes due 2004. On October 19, 1999, the Company issued an
additional $4.7 million of 8% Senior Secured Convertible Notes due 2004 to
certain other investors, for a total of $12.5 million (the "September
Convertible Notes"). The September Convertible Notes were convertible into
shares of the Company's common stock at a conversion price of $3.00 per share,
subject to anti-dilution adjustments. The September Convertible Notes were
secured by, among other things, a pledge by the Company of the shares of Common
Stock of its wholly-owned subsidiaries. In connection with this transaction, the
Company recorded a non-recurring, non-cash charge for a beneficial conversion
feature in the amount of $7.9 million, to reflect the market price of the common
stock as of the dates of issuance thereof.

         In connection with the issuance of $7.8 million of the September
Convertible Notes on September 28, 1999, certain financing costs, totaling
approximately $135,000, were capitalized as deferred charges and amortized over
the five-year life of those September Convertible Notes.

         On November 30, 1999, holders of the Company's May Convertible Notes
and September Convertible Notes converted their principal and accrued interest
into shares of Common Stock. Subsequently, certain holders of the 4% May
Convertible Notes exchanged their Common Stock for Series D Preferred Stock;,
certain holders of the 8% May Convertible Notes exchanged their Common Stock for
Series E Preferred Stock; and certain holders of the September Convertible Notes
exchanged their Common Stock for Series F Preferred Stock.

         The Series D Preferred Stock and Series E Preferred Stock are
convertible into Common Stock at a price of $1.50 per share, and the Series F
Preferred Stock is convertible into Common Stock at a price of $3.00 per share.
In connection with the transaction, the Company recorded a non-recurring,
non-cash charge for a beneficial conversion feature in the amount of $49.2
million, to reflect the market price as of the date thereof.

15.      METROMEDIA FIBER NETWORK SERVICES, INC. PRIVATE NETWORK AGREEMENT

         Pursuant to a Private Network Agreement dated as of December 17, 1999
and other related agreements by and between Metromedia Fiber Network Services,
Inc. ("MFN") and the Company ("the Network Agreement"), the Company issued five
million shares at an assumed price of $8.69 per share. As part of the Network
Agreement, the Company issues four million shares (of the total five million) to
acquire an exclusive right of use of dark fiber in multiple markets for a total
price of approximately $34.8 million. This amount has been reflected in the
accompanying consolidated financial statements as property, plant and equipment.
As part of the remaining part of the Network Agreements, the Company issued one
million shares (of the total five million) to repurchase a 10% membership
interest in Local Fiber, LLC held by MFN. The transaction was recorded as a
purchase business combination. The Company recorded approximately $8.7 million
of goodwill in the accompanying consolidated financial statements, which will be
amortized over a period of 15 years. The Company has recorded a purchase
allocation on a preliminary basis and will complete the allocation by the fourth
quarter of 2000.

16.      NON-RECURRING EXPENSES

         During 1999, the Company recorded non-recurring expenses of $4.3
million, comprised of a $3.7 million non-cash charge, relating to a prospective
settlement of certain litigation, and $0.6 million, relating to the decommission
of the Company's Lucent 5ESS-2000 telecommunication switch located at its
facility at 60 Hudson Street in New York, New York.



                                      F-14