SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-K





(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, 2007

OR



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

Commission file number 000-24661





FiberNet Telecom Group, Inc.

(Name of Registrant in Its Charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 52-2255974                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer 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:

Common Stock, par value $.001 per share

(Title of Class)

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





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

Yes  ̈ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Exchange Act. Yes  ̈ No x

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ̈

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

Large accelerated filer  ̈ Accelerated filer  ̈ Non-accelerated filer x Small reporting company  ̈

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

The aggregate market value of the registrants
voting and non-voting common stock held by non-affiliates of the registrant (without admitting that any person whose shares are not included in such calculation is an affiliate) computed by reference to $8.61, the price at which the common stock was
last sold, or the average bid and asked price of the common stock, as of the last business day of the registrants most recently completed second fiscal quarter, was $46,828,040.

As of March 27, 2008, the registrant had 7,575,078 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The following documents (or parts thereof)
are incorporated by reference into the following parts of this Form 10-K: Certain information required in Part III of this Annual Report on Form 10-K is incorporated from the Registrants Proxy Statement for the Annual Meeting of
Stockholders to be held on June 10, 2008.









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PART I



|ITEM 1. | BUSINESS
|------- | --------

Overview

We provide complex interconnection services enabling the exchange of voice, video and data traffic between multiple, global networks. We own and operate
integrated colocation facilities and diverse transport routes in the two gateway markets of New York/New Jersey and Los Angeles. Our network infrastructure and facilities are designed to provide comprehensive broadband interconnectivity for the
worlds largest network operators, including leading domestic and international telecommunications carriers and service providers. We operate with the reliability and resiliency to deliver core network backbone services for mission critical
requirements.

In our network-neutral colocation facilities, we provide racks, cabinets and customized caged spaces for our customers to
deploy networking equipment and establish network points of presence. The facilities are located in the key carrier hotels of our gateway markets. A carrier hotel is an industrial or commercial building in which a network operator houses its
networking equipment. We also provide redundant power systems, environmental controls and security for customers colocation needs at these network aggregation points.

Within and between our facilities, we provide transport services that enable our customers to directly interconnect with each other over our networks.
Our interconnection services include optical and electrical cross-connections and peering, lit connectivity, wavelengths and dark fiber services. We provide high bandwidth services ranging from 1.5 megabits per second (Mbps) to 10.0 gigabits per
second (Gbps).

Our networks provide these services utilizing multiple domestic and international transmission protocols. These include TDM
and SONET, the North American standards, and PDH and SDH, the international standards. Our networks also provide Ethernet, Internet Protocol (IP) and VoIP services, as well as the conversion of these services between protocols.

In addition, we provide professional services to assist in our customers deployment of network infrastructure and to extend the reach of our
transport services beyond our gateway markets.

Industry Background

Due in large part to the advent of the Internet and innovations in optical technology, there have been significant advancements in communication services. Growth in bandwidth intensive applications and services has
driven additional demand for transmission capacity. The number of national and international communication networks has increased, and businesses and consumers are increasingly relying on these networks to enable new means of communications and to
conduct mission critical operations. A greater emphasis has also been placed on network resiliency, security and speed. The demand for seamless transmission of voice, video and data traffic both locally and globally has driven the need for the
efficient and reliable interconnection of these numerous independent networks.

Network operators and providers have focused on
interconnecting their networks in large metropolitan areas with high densities of communications traffic. By establishing their main network points of presence in gateway cities, they can exchange traffic with the greatest number of other
communications companies in the most efficient manner. Within these markets, network operators have centered their points of presence in carrier hotels, or other large Internet data centers, to benefit from proximity to other operators and from a
controlled, organized operating environment. Typically long-haul fiber-optic networks were built to function as transport links between these metropolitan locations worldwide. Communications traffic is aggregated at the core of metropolitan networks
and transferred onto long-haul networks for transmission to other metropolitan points.



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Networks in metropolitan areas serve to transport the traffic delivered by global networks between
carriers points of presence. There are numerous technically complex issues involved in developing and operating networks in metropolitan areas to enable the interconnection and exchange of traffic from multiple network operators. They include:



| |  |  | Diverse traffic. Communications traffic is generated by a large number of end-users served by a variety of service providers. As a result, data coming into a
gateway market is transmitted in multiple protocols using different technology platforms.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Complex architecture. The infrastructure of interconnection networks must reach a multitude of locations to access network points of presence in dense urban
areas and to interconnect the networks of service providers so that they may exchange communications traffic.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Rights of way. Installing new broadband networks requires the use of numerous rights of way, which are controlled by many different public and private
entities in each metropolitan area. Securing access to riser systems in carrier hotels and data centers to install vertical infrastructure between floors is particularly difficult.
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Needs of Telecommunications Service Providers in Gateway Metropolitan Areas

Service providers are seeking gateway network capabilities that allow them to rapidly and cost-effectively interconnect their networks with each other in a highly reliable manner. In particular, they seek:



| |  |  | End-to-End Connectivity to Multiple Locations. Service providers establish points of presence for their networking equipment in carrier hotels in
metropolitan areas. Because of the myriad of national and international telecommunications networks, the number of points of presence in major gateway markets is extensive. Network connectivity must extend directly to a significant number of these
points of presence so that service providers may efficiently exchange communications traffic.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Reliable, High-Capacity Network. Service providers desire a broadband network with the robust transmission capacity to maximize the speed of their services
and with a reliable quality of service to ensure the delivery of their traffic. Further, to offer a full range of services, providers are seeking a network that can incorporate multiple transmission protocols and new technologies.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Rapid Provisioning of Services. Service providers require a network provider that has deployed an extensive network and offers the necessary advanced network
management systems and processes to rapidly provision circuits. Speed to market is a critical factor when managing the changing requirements of communications traffic.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our Solution

We design, install and operate networks and facilities to provide complex
interconnection services that are scalable, reliable and secure to domestic and international communications service providers. In the gateway markets in which we operate, our customers rely on us for the mission-critical exchange of communications
traffic across their core metropolitan backbones.

Full Range of Services. Our transport services provide high-bandwidth
connectivity to carriers between their major points of presence. We offer these services via multiple transmission protocols, including both domestic and international standards, as well as utilizing emerging standards and technologies. We offer
services to extend the range of connectivity beyond our gateway markets, providing a single-source solution for our customers networking requirements.

We also offer colocation services at facilities in key carrier hotels and Internet data centers. Colocation refers to the ability of a carrier to locate its networking equipment in another service providers
facilities. These colocation facilities provide network operators with an interconnection point where they can terminate their traffic and transfer it onto our high-capacity networks.



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Extensive Network Reach. We have deployed significant network infrastructure in our gateway
markets to establish connectivity to an extensive number of service providers, enabling us to exchange traffic between many other carriers. We believe that the reach of our network, particularly our vertical infrastructure in carrier hotels, is a
competitive advantage in that our customers are able to interconnect with many other carriers networks through a single interconnection to our network.

Network Architecture. To provide high quality network services to our customers, we have deployed what we believe to be an advanced optical and electrical network architecture. Features of this network
architecture include:



| |  |  | the use of optical networking equipment that can transmit data at the speeds up to 10.0 Gbps or can provide multiple optical wavelengths for data transmission;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | dense wave division multiplexing equipment that is capable of increasing the transmission capacities of each fiber-optic strand in our networks;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | an open architecture that supports new broadband technologies and multiple domestic and international transmission protocols, including SONET, SDH, Ethernet, IP,
VoIP and protocol conversions between different standards, to meet our customers evolving demands; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | multiple fibers laid in interconnecting circles, or ring architectures, over which traffic can be routed in a different direction or to a different fiber if there
is a break in one of the rings, creating networks that are fully redundant and self-healing.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Rapid Provisioning of
Services. Our optical network gives us the ability to provision new circuits in as little as eight business days through our centralized Network Operations Center, or NOC. As a result, we are able to allocate network capacity rapidly to meet our
customers bandwidth requirements. Our customers can order capacity with minimal lead-time enabling them to quickly provision new services. We believe that this provisioning capability is a key factor in our customers decisions to order
our services.

Our goal is to be the preferred facilities-based provider of network interconnection services in our markets. We serve
select major carrier hotels in our markets with end-to-end connectivity that enables our customers to utilize advanced services and applications to rapidly interconnect their own networks. Our focused strategy for achieving these goals includes the
following key elements:

Establish our position as a leading provider of interconnectivity within and between carrier hotels. We
have deployed fiber optic transport infrastructure in eight major carrier hotels in New York City, two major carrier hotels in New Jersey, one major carrier hotel on Long Island, and five major carrier hotels in Los Angeles. By establishing our
presence in multiple carrier hotels, we hope to expand the geographic reach of our networks and increase the size of our customer base. In addition, this presence increases our ability to interconnect with other service providers, thereby increasing
our potential customer base and revenue opportunities with existing customers.

Strengthen and expand upon our relationships with
customers. We believe that our end-to-end connectivity is a compelling service offering to our customers. We intend to promote:



| |  |  | our open architecture that supports multiple transmission protocols;
| | - |  | --------------------------------------------------------------------



| |  |  | our ability to provide interconnectivity to multiple carriers and network operators;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | our rapid provisioning time;
| | - |  | ----------------------------



| |  |  | our ability to increase transport capacity rapidly to meet our customers needs; and
| | - |  | ------------------------------------------------------------------------------------



| |  |  | the carrier-class reliability and resiliency of our networks.
| | - |  | -------------------------------------------------------------



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We believe that our strategy provides for a broad customer base. Our potential customers are domestic
network operators, including incumbent carriers and competitive service providers, international communications companies, Internet service providers and application service providers.

Develop the platforms to offer new services to our customers. We believe that as technology continues to develop, there are potential
opportunities to provide new services to our customers. To keep pace with this anticipated demand, we intend to continue to ensure that our network architecture provides the connectivity, scalability, performance and flexibility necessary for the
rapid introduction of new services. We regularly test equipment with the intention of adopting new technologies that can be integrated into our network to improve performance and decrease the cost of operating our network.

Our Services

Our services include the following:

Transport Services

Our transport
services are delivered over an open architecture to support multiple technologies. We provide optical wavelengths and broadband circuits with capacity ranging from 1.5 Mbps to 10.0 Gbps. We offer transport services utilizing different transmission
protocols, including the SONET and TDM protocols used primarily in North America and the international protocols, SDH and PDH. We also provide Ethernet and IP connections from 10.0 Mbps to one Gbps.

On-Net Transport. We provide interconnectivity via our optical and electrical transport networks within and between carrier hotels and other
network aggregation points. We offer intra-building connectivity, as a lit service and on dark fiber, for transport between floors of these buildings, and we offer comprehensive inter-building connectivity as a lit service between these buildings
within a metropolitan area.

Off-Net Transport. We provide our customers with off-net connectivity on networks that we do not own.
Customers purchase these services from us to benefit from our network design, provisioning and management expertise. We sell this connectivity to our customers and purchase the underlying circuits from other telecommunications carriers. We offer
off-net transport in markets that we currently serve, other metropolitan markets that we do not serve with our own networks, and on a long-haul basis to connect metropolitan areas. We offer these services as part of a turnkey solution to our
customers, providing them with a single point of contact to order additional network capacity and to manage ongoing network operations.

Meet-Me-Room Cross Connections. In New York City, we operate the 60 Hudson Street Meet-Me-Room, located in one of the premier carrier hotels in the world. A centralized, carrier-class cross connection facility, the 60 Hudson Street
Meet-Me-Room enables us to offer our customers a single facility within the carrier hotel where they can cross connect, or privately peer, with one another in a secure, rapid and cost-effective manner via optical, coaxial and copper terminations.

Hubbing Services.Our hubbing services consolidate and aggregate traffic by grooming high bandwidth circuits to lower bandwidth
circuits for efficient distribution over our networks. Customers can obtain multiple, lower bandwidth end links more cost-effectively than by purchasing those circuits individually, also saving equipment and maintenance costs. We also provide
hubbing services that include protocol conversion capabilities to interconnect domestic and international traffic.

Ethernet and IP Data
Services. On our networks in New York City, we provide native metro Ethernet transport and Dedicated Internet Access services. Ethernet transport provides dedicated, committed bandwidth over point-to-point and point-to-multipoint connections for
Ethernet hubs and virtual private networks. Our Dedicated Internet Access services utilize multiple, diverse connections to Tier 1 Internet backbones. These services can be purchased in granular increments with burstable and flat rate billing plans
to scale with our customers network growth needs. All of our colocation facilities are Ethernet and IP enabled.



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Global Gateway Services. We offer global gateway services through our carrier-grade technology
platform that enables communications providers to exchange VoIP traffic. It is built on an Ethernet switching architecture, incorporating gateway functionality and switch partitioning capabilities. The platform enables the migration of legacy voice
traffic to an IP environment and also exchanges domestic and international voice traffic between legacy systems.

Colocation Services

In our network-neutral colocation facilities in key carrier hotels, we provide our customers with a secure, reliable location to house their networking
equipment and to establish network interconnections with a choice of other networks. We offer our standardized racks and cabinets or customized cages of colocation space, with redundant supplies of AC and DC power to operate their equipment. These
highly conditioned facilities have backup generators, fire protection capabilities, industrial heating, ventilation and air conditioning systems and security systems.

We also offer additional services, including remote hands services, which are provided by our professional services organization, Availius. Through our remote hands services, customers have 24-hour access to our
trained technicians to assist in network equipment deployment, routine maintenance and troubleshooting. We also assist in the design and deployment of our customers installations, as well as their ongoing maintenance.

Communications Access Management

In certain
commercial office buildings, we manage the communications access and infrastructure for the buildings. We enter into agreements with service providers so that they may provide services to tenants in the buildings.

Network Design and Architecture

We have and will
continue to design, develop and construct networks and facilities for interconnectivity in our markets. Our networks have five components: carrier hotel facilities, meet-me-rooms, metropolitan transport networks, FINs and a NOC.

Carrier Hotel Facilities

A carrier hotel facility is
an environmentally controlled, secure site within a carrier hotel that is designed to house carrier transmission and networking equipment. At these facilities we establish the interconnection of our metropolitan transport networks with other service
providers networks. This interconnection of networks enables us to transfer other carriers traffic onto our networks and provide transport services to them. In addition to utilizing our carrier hotel facilities to interconnect with
service providers, we also provide colocation and other ancillary services at certain of these facilities.

Our primary carrier hotel
facilities in the New York metropolitan area are located in 60 Hudson Street and 111 Eighth Avenue in New York City, and 165 Halsey Street in Newark, New Jersey. We have established eight other secondary carrier hotel facilities in New York City,
Long Island and New Jersey, which we have connected to 60 Hudson Street, 111 Eighth Avenue and 165 Halsey Street via our metropolitan transport networks. Our primary carrier hotel facility in Los Angeles is located at 707 Wilshire Boulevard. We have
four secondary carrier hotel facilities in Los Angeles. By establishing our presence in multiple carrier hotels we increased our ability to interconnect with other service providers, thereby increasing our potential customer base and revenue
opportunities with existing customers. We continually monitor and evaluate each of our markets to assess the viability of our existing facilities and to determine if the development of additional facilities is warranted. At our primary sites we
offer colocation facilities in addition to transport and interconnection services. In certain of our secondary carrier hotel facilities, we have colocated in other carriers facilities.



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Meet-Me-Room

Our 60 Hudson Street Meet-Me-Room offers standardized colocation cabinets and customized cages for carriers to house their telecommunications equipment in a secure, environmentally controlled environment. All of the colocation units are
connected to a central cross connection area within the 60 Hudson Street Meet-Me-Room with optical, coaxial or copper terminations, allowing our customers to connect their networks in an organized, rapid and cost-efficient manner with carrier-class
reliability.

Occupants of our 60 Hudson Street Meet-Me-Room have access to our vertical in-building network within the building and to our
metropolitan transport networks, which connect to other carrier hotels.

Metropolitan Transport Networks

We acquire dark fiber rights, install our own optical transmission equipment to light the fiber and then provide lit circuits to customers for the
transport of their traffic. We light the dark fiber in ring configurations with optical networking gear, establishing connectivity between our carrier hotel facilities and other buildings on our networks, including certain commercial office
properties. Our intersecting rings are interconnected at two hub locations for maximum survivability and disaster recovery capability.

Our
networks typically transmit data at 2.5 Gbps (OC-48) and at times up to 10.0 Gbps (OC-192). We use dense wave division multiplexing technology to increase capacity on our networks. Dense wave division multiplexing can increase the bandwidth of a
single fiber-optic strand by transmitting signals on up to 32 different wavelengths of light on a single fiber, therefore enabling the transmission of up to 32 times more information on an existing fiber-optic strand.

Our existing metropolitan transport networks consist of OC-48 SONET and protocol independent rings deployed in midtown Manhattan, downtown Manhattan, New
York/Long Island, New York/New Jersey and Los Angeles.

FiberNet In-Building Networks (FINs)

Our FINs are advanced central distribution networks that we deploy in certain carrier hotels and commercial office properties to provide communications
transport within the building. The design specifications for our FINs are tailored to each building and we are committed to building the most secure, reliable fiber-optic systems that adhere to the highest technical standards in the industry. We
strive to provide a system that is flexible, expandable, and able to meet the needs of our customers.

The FIN is often deployed in the
buildings vertical riser system to provide connectivity to multiple floors. By often deploying over one hundred strands of fiber in dual risers, our FINs allow for redundant fiber paths in a ring architecture to ensure reliability and
scalability. Horizontal lateral conduits from the riser system can then be deployed to establish direct connectivity to the network point of presence in the customers suite or premise.

By extending our networks vertically in riser systems and laterally into customers suites, we are able to provide a maximum means of end-to-end
connectivity to our customers. We have constructed our FINs in 6 carrier hotels in New York and Los Angeles and in 20 commercial office properties in New York and Chicago.

Network Operations Center

We monitor and manage traffic on our networks from our NOC located in
Newark, New Jersey at a location that is physically diverse from our core network assets. Our NOC is responsible for proactively managing all network and customer incidents, and it uses a combination of network monitoring and provisioning tools to
handle most incidents remotely.



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It enables us to provision connectivity to any point on our networks and to provide timely customer
support and maintenance from a centralized location. Our networks are monitored and maintained 24 hours a day, 365 days a year by our trained technical staff. The NOC has been constructed to ensure survivability. It has its own back-up power systems
and emergency support capabilities.

Sales and Marketing Strategy

Sales. We sell our services through our direct sales force. Our sales team is comprised of representatives that have significant expertise in and knowledge of the communications market. By using a direct sales
strategy, we provide the personal attention and high quality of service that our customers require. To a lesser degree, we also utilize an alternate sales channel of agents to sell our services to certain customers.

Marketing. Our marketing strategy is focused on building relationships with our customers. We believe that all segments of our customer base
benefit from targeted public relations efforts, promotional materials, event marketing and personal selling techniques. In addition, we have marketing activities directed specifically to each of our constituent markets. These activities include
supporting industry organizations, participating in conferences, tradeshows and seminars, preparing personalized presentations and engaging in direct marketing.

Customers

We have a broad target customer base. Our technologically advanced network infrastructure meets the needs not
just of small- and medium-sized network users but also global carriers and service providers. Our customers include domestic incumbent carriers and competitive service providers, as well as Internet service providers and Internet-related companies.
Because the flexibility of our networks allows us to interconnect with domestic subsidiaries of internationally based customers, we have made significant progress in growing the international segment of our customer base. We provide our services to
many Post Telephone and Telegraph administrations, or PTTs. These are the communication service providers that had monopolies in their respective countries, where markets are increasingly being deregulated, such as in Europe as well as other parts
of the world.

As of December 31, 2007, our customers included AT&T, Bell Canada, British Telecom, Cable & Wireless,
China Telecom, China Netcom, Deutsche Telekom, Reliance, France Telecom, KPN, Level 3, NTT America, Qwest, Sprint, TeliaSonera, Verizon and VSNL. We enter into contracts with our customers with terms ranging from one month to 15 years.

Many of our customers made sizable investments building new communication networks, multiplying the amount of available transmission capacity.
However, the expected demand for broadband connectivity was not realized in many segments of the market. Although applications for telecommunications network capacity have been developed, the actual demand to date for capacity from those
applications did not meet industry expectations. As a result, this unrealized demand for bandwidth created significant excess capacity, depressing the market for communications services. There was an industry-wide slowdown in capital spending and a
large number of industry-related bankruptcy filings and business failures in recent years, which contributed to the financial distress that many companies in the telecommunications industry experienced. While the number of bankruptcies has declined,
we believe that other customers may file for bankruptcy or experience other financial distress in the future.

Competition

The market for our services is very competitive. Our competitors include established and new communications companies.

Local Telephone Companies. In New York City and Los Angeles, we face significant competition from the incumbent carriers (ILECs) that
currently dominate local communications markets, and CLECs, or competitive local exchange carriers, which are increasing their market penetration for local communications services. ILECs,



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including Verizon, have several competitive advantages over us, including an established brand name, extensive network infrastructure and significant capital
resources. 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 our services. Moreover, ILECs also sell
wholesale connectivity, which competes with our transport services. Various other competitive communications providers also own communications infrastructure in our markets and in the long-haul market segment. Many of these carriers currently
compete with us, and such competition may increase in the future.

Other Communications Providers. Certain other integrated
communications providers have deployed their own extensive network infrastructure in our markets to provide communications services to our potential customer base. These include, but are not limited to, AT&T, Sprint, Level 3, Qwest, Time Warner
Telecom and XO Communications. These companies operate networks on which they offer retail and wholesale services. Consequently, they directly compete with us. We also compete directly with other providers of colocation services and data center
facilities. These include, but are not limited to, Equinix and Switch and Data. Many of these companies also have several competitive advantages over us, including established brand names, extensive network infrastructure and significant capital
resources.

Our History

FiberNet
Telecom, Inc. was organized under the laws of the State of Delaware on August 10, 1994. On November 24, 1997, Desert Native Designs Inc., an existing public company incorporated in the State of Nevada, acquired FiberNet Telecom, Inc.
pursuant to an agreement and plan of merger dated as of the same date. Upon consummation of the merger, FiberNet Telecom, Inc. became a wholly owned subsidiary of Desert Native Designs, Inc., which subsequently changed its name to FiberNet Telecom
Group, Inc. On February 4, 2000, we reincorporated in Delaware.

On July 31, 2000, we consummated a corporate reorganization in
order to acquire Devnet L.L.C. As a result of this reorganization, we became a holding company that directly owns all of the outstanding common stock of FiberNet Operations, Inc., a Delaware corporation and 96% of the outstanding membership
interests in Devnet L.L.C., a Delaware limited liability company. FiberNet Operations directly owns all of the outstanding common stock of FiberNet Telecom, Inc., a Delaware corporation, and the remaining 4% of Devnet. In November 2005, we created a
new subsidiary, Availius, LLC. FiberNet Telecom, Inc. owns all of the outstanding membership interests in Local Fiber, LLC, FiberNet Equal Access, LLC and Availius, LLC, all of which are New York limited liability companies. We conduct our primary
business operations through our operating subsidiaries, Local Fiber, FiberNet Equal Access, Availius and Devnet.

Regulation of FiberNet

General Regulatory Environment

We are subject to
federal, state and local regulations that affect our product offerings, competition, demand, costs and other aspects of our operations. The regulation of the communications industry varies from state to state and is changing rapidly. To the extent
that our offerings are treated as telecommunications services, federal and state regulation would apply to those offerings. Our operations are also subject to a variety of environmental, safety, health and other governmental regulations. We cannot
guarantee that current or future regulatory, judicial or legislative activities will not have a material adverse effect on our operations or financial condition, or that domestic or international regulators or third parties will not raise material
issues with regard to our compliance or noncompliance with applicable regulations.

Federal Regulation

Federal regulation has a great impact on the communications industry and has undergone major changes in the last twelve years as the result of the
enactment of the Telecommunications Act of 1996, which amended the Communications Act of 1934 (the Act).



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Our services are provided through our operating subsidiaries, Local Fiber, Equal Access, Availius, and
Devnet. The services offered by our subsidiaries fall into one of two categories:



| |  |  | telecommunications services or common carriage; and
| | - |  | ---------------------------------------------------



| |  |  | non-telecommunications services.
| | - |  | --------------------------------

Certain regulations associated with each type of offering are described below. Although the law establishing regulatory requirements is often unclear, our telecommunications services generally are subject to a lower degree of federal and
state regulation than those of dominant carriers such as the incumbent local exchange carriers (ILECs).

Telecommunications Services

One of our subsidiaries, Local Fiber, is regulated as a telecommunications carrier because it provides telecommunications services directly
to the public for a fee, or to such class of users as to be effectively available to the public. Telecommunications carriers are subject to extensive federal, state and local telecommunications regulations that may impose substantial administrative
and other burdens on our operations.

As a competitive provider of local (also known as a competitive local exchange carrier or CLEC) and
long distance telecommunications services, Local Fiber is subject to federal telecommunications regulation, including, but not limited to contribution to numerous funds to the extent we provide interstate services or obtain numbers for end user
customers. These funds include the FCCs universal service fund. This fund was established to ensure the availability of affordable basic telecommunications services to high cost, low-income users, and access to advanced telecommunications and
Internet services by schools and libraries and rural healthcare providers. The rate of assessment is approximately 11.3% of gross interstate and international end-user telecommunications revenues for the second quarter of 2008, and may be higher in
subsequent quarters and years. The FCC is reviewing its current universal service assessment, contribution, and recovery rules. Changes to the universal service rules could affect our revenues. FCC rules also require that telecommunications carriers
contribute to various other funds, which are also based on a percentage of our gross intrastate, interstate, or international end-user telecommunications revenues, depending on the particular fund. Our contribution obligations historically have been
minimal because our customer base has been predominately carriers that essentially resell our services rather than end users. Our contribution obligations could increase should we provide more services to end users.

Local Fiber is also required to comply with a number of other federal regulatory requirements. Third parties may file complaints against us at the FCC
for violations of the Act or the FCCs regulations. Certain statistical reporting requirements may also apply. Although compliance with these regulatory requirements imposes certain administrative burdens, similarly situated competitors are
subject to comparable regulatory obligations.

Local Exchange Carrier Regulation. The Act imposes a number of access and
interconnection requirements on telecommunications carriers and on all local exchange providers, including CLECs, and imposes additional requirements on ILECs. CLECs compete with the ILECs for local subscribers of telecommunications services. As
discussed under our state regulation section, Local Fiber provides local transport services and has obtained authorization as a CLEC to provide telecommunications services in the states of New York, New Jersey, and California. However, because of
the nature of Local Fibers service offerings, not all CLEC obligations will apply to us. As a CLEC, Local Fiber is subject to any requirement imposed by the FCC that is generally applicable to local exchange carriers or LECs. In addition, LEC
regulations affect us to the extent that they have a direct effect on our carrier customers. Congress routinely considers changes to the Act, which could affect Local Fibers rights and obligations.

Under the Act, all telecommunications carriers must interconnect directly or indirectly with the facilities of other telecommunications carriers, offer
certain services for resale, provide number portability and dialing parity, provide access to rights-of-way, and establish reciprocal compensation arrangements for the transport and



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termination of traffic. In addition to these general duties, ILECs have additional obligations to provide cost-based interconnection at any technically
feasible point, access to certain portions of their network at cost-based rates, and colocation to requesting carriers.

The FCC has also
adopted guidelines for implementing the interconnection and local competition provisions of the Act. In order to foster competition in the local exchange market, the FCC initially required ILECs to offer access to certain portions of their
communication networks (known as network elements) to CLECs at cost-based rates. The FCC has significantly reduced the number of network elements ILECs must make available to competitors. Although Local Fiber does not rely solely on network elements
purchased from ILECs, the FCC has limited Local Fibers ability to obtain the elements of the ILECs networks at cost-based rates that Local Fiber requires to provide service to its customers. In addition, the FCC is reviewing its pricing
regime for network elements. Any changes to the pricing scheme for network elements may affect Local Fibers revenues. To the extent our customers previously purchased unbundled network elements from the ILEC, revisions regarding access to ILEC
network elements or the pricing of those network elements, could affect the growth opportunities for some of our customers and thus demand for our services. As part of its ongoing examination of the competitive marketplace, the FCC is currently
examining several other competition-related issues, including whether to adopt a set of performance measures and standards that could improve enforcement of ILECs wholesale obligations under the Act. The outcome of these proceedings may affect
the rates, terms or conditions of our service offerings, and result in increased competition from ILECs with respect to some of our services.

The FCC has also adopted rules regarding how telecommunications carriers compensate each other for the transport and termination of telecommunications traffic. In April 2001, the FCC issued an order limiting the amount of compensation to be
paid to terminate some traffic bound for Internet Service Providers (ISP-bound traffic) and eliminating compensation for other ISP-bound traffic. On appeal, the federal court found that the FCC did not adequately support its findings
regarding reciprocal compensation for ISP-bound traffic and remanded the FCCs order back to the FCC for further consideration. The FCC has taken no action on the remand from the federal court. In addition, the FCC is exploring methods to unify
intercarrier compensation and access charges, and is considering a bill-and-keep approach (i.e., no compensation is paid between carriers) as well as several other alternative approaches to modifying the existing intercarrier compensation
regimes. Our revenues may be negatively affected by FCC and court decisions on compensation matters.

The FCC also has issued decisions
regarding the regulation of broadband services provisioned by ILECs and the appropriate regulatory treatment under the Act for a wireline carriers offering of broadband Internet access services. In September 2005, the FCC determined that
wireline broadband Internet access service provided over a providers own facilities is an information service and therefore not subject to traditional common carrier regulation, including access regulations. In March 2006, the FCC failed to
act on a petition for forbearance filed by Verizon, which asked the FCC to forbear from applying traditional common carrier regulation to certain high-capacity broadband services. The FCCs inaction now allows Verizon to offer these services
subject to very limited regulation. Other carriers have filed similar requests with the FCC and received varying levels of deregulation. Other deregulation petitions are pending for various ILEC-provided services. These decisions, and any similar
ruling issued in the future, may result in increased competition from ILECs and CLECs with respect to some of our services and may affect the rates, terms or conditions of our service offerings.

In addition to the numerous decisions to implement the Act, in August 1999, the FCC issued an Order that provided substantial pricing flexibility to
ILECs. The pricing flexibility applies primarily to special access and dedicated transport. An appeals court upheld the FCCs decision. This ruling will ultimately permit ILECs to utilize contract arrangements for the provision of dedicated
services similar to the way in which we offer these same types of services. As a result of this pricing flexibility for ILECs, we could face greater competition with respect to the services we provide. The FCC, however, is currently considering the
adoption of performance measures and standards for ILEC-provisioned special access services, and thus, the ILECs special access services may face greater regulation.



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All of these FCC regulations and pending proceedings may affect the growth opportunities for some of our
customers and thus the demand for our services. In addition, the outcome of these proceedings may affect the rates, terms or conditions of our service offerings as well as our revenues.

State Regulation

The 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 telecommunications 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 on a common carrier basis. 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 as a CLEC to provide intrastate services in New York, New Jersey, and California, and may seek additional authority in other states. Delays in
receiving required regulatory approvals in other states could also have a material adverse effect on us. We cannot assure you that regulators or third parties will not raise material issues with regard to our compliance or non-compliance with
applicable laws or regulations.

State regulatory commissions generally regulate the rates ILECs 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 our services and those that other carriers provide.
Under the 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 a forward-looking cost methodology as required 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 affect 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 our business to the extent Local Fiber requires access to such public rights-of-way. In addition, local governments may impose telecommunications taxes and surcharges on the operations of Local Fiber.

Non-Telecommunications Services

Certain our
subsidiaries, Equal Access, Availius, and Devnet, are not subject to telecommunications carrier regulation. Unlike a telecommunications carrier, Equal Access and Devnet do not hold their offerings out to the general public for a fee. Moreover, Equal
Access and Devnet do not use public rights-of-way that may trigger local regulation. Equal Access and Devnet have entered into exclusive agreements with building owners to provide or manage intra-building fiber capacity to telecommunications
carriers on a private contractual basis. As such, Equal Access and Devnet merely provide the in-building capacity over which telecommunications service providers may provide telecommunications services, including access to the public telephone
system that enables a tenant to reach any point on the public telephone system. As explained below, recent actions by the FCC could



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have an adverse impact on Equal Access and Devnets exclusive contractual rights, in certain buildings, to provide such capacity. Availius is an
intellectual capital and resource company that leverages FiberNets expertise and implementation capabilities to provide turn-key results for network, infrastructure and wide-ranging business needs. Availius offers full-service capabilities to
sophisticated network operators and data facility users, and gives clients access to strategic direction and experienced personnel for overall project execution and management services.

Regulation of Equal Access and Devnet

Equal Access and Devnet are 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 and Devnet generally secure 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 or Devnet, to maintain wiring on their behalf.

As of December 31, 2007, there was no federal legal requirement that owners or
managers of privately owned commercial office buildings or residential buildings give access to competitive providers of telecommunications services. 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 and Devnets ability to secure and maintain exclusive inside wiring contracts may be inhibited.

Under FCC regulations, however, telecommunications carriers are prohibited from entering into exclusive contracts with commercial building owners for the
provision of telecommunications services in the building. On October 25, 2000, the FCC released an Order promoting competition between telecommunications carriers by regulating access to multiple tenant buildings. The FCCs decision bars
telecommunications carriers from entering into exclusive contracts with commercial building owners in the future. Because Equal Access and Devnet are not telecommunications carriers, the FCCs decision does not apply to them or
their dealings with building owners. The FCCs decision also requires local exchange carriers and other utilities within multiple tenant buildings to provide other telecommunications carriers and cable service providers reasonable and
non-discriminatory access to conduits and rights-of-way located in customer buildings and campuses, to the extent such conduits and rights-of-way are owned or controlled by the utility. This requirement will not apply directly to Equal Access or
Devnet because they are not telecommunications carriers or utilities. However, this requirement may apply to telecommunications carriers and utilities holding separate access rights to those of Equal Access and Devnet in FiberNet buildings, and it
may also apply to Equal Access and Devnets telecommunications carrier customers. Depending on how these rules are interpreted, these requirements may facilitate our competitors entry into buildings in which we offer our services by
permitting our competitors to gain access through the separate access rights currently held by local exchange carriers or other utilities in the same buildings. We cannot predict how the FCCs rules will be interpreted regarding this
requirement or what, if any, effect such an interpretation would have on Equal Access or Devnet. The FCC also established procedures to enable building owners to request that the incumbent local exchange carrier move the demarcation point, the point
at which the telecommunications network wiring under the incumbent local exchange carriers control ends and wiring under building owner/end-user control begins, to the minimum point of entry. The minimum point of entry is defined as either the
closest practicable point to where the wiring crosses a property line or the closest practicable point to where the wiring enters a multi-tenant building or buildings. The FCCs procedures to clarify the demarcation point in multi-tenant
buildings do not place an obligation on Equal Access, Devnet or Local Fiber, because none of these entities are incumbent local exchange carriers. However, we cannot predict the



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FCCs implementation of its demarcation point procedures or the consequences resulting from a building owners decision to locate the demarcation
point at the minimum point of entry.

In March 2008, the FCC adopted additional requirements prohibiting telecommunications carriers from
entering into exclusive contracts with residential building owners, and prohibiting enforcement of existing contracts containing exclusivity provisions. Complete information regarding the new rules has not been released. It is likely these rules
will be challenged in federal court and before the FCC. We cannot predict the outcome of the FCCs proceeding or of any legislation, nor what effect, if any, it may have on our business.

These types of requirements have also been adopted in certain states. For example, regulations in California, Connecticut, Texas and Massachusetts
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. Massachusetts has
rules that also require owners or controllers of rights-of-way, including owners of commercial buildings and certain multi-tenant dwellings, to provide non-discriminatory access to a carrier upon a tenants request. The California Public
Utilities Commissions rules prohibit carriers from entering, on a prospective basis, into exclusive access agreements with property owners that would restrict the access of other carriers to the property or discriminate against the facilities
of other carriers. Other states, such as Nebraska and Ohio, have adopted similar exclusive contract prohibitions. New York also is considering the adoption of legislation that would protect telecommunications companies from discrimination when
deploying facilities in multi-tenant buildings. Although these requirements generally permit telecommunications carriers 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 or Devnet already have existing facilities. However, some of these state requirements have
been challenged, and therefore, we cannot predict how these rules will be interpreted.

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
our services and expose us to liability.

Other Regulations

Our 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 our employees.

Although we monitor compliance with environmental, safety and health laws and regulations, we cannot
ensure that our operations have been or will be in complete compliance with these laws and regulations. We may be subject to fines or other sanctions imposed by governmental authorities if we fail to obtain certain permits or violate the laws and
regulations. We do 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 2008.

In addition, our business may be subject to environmental laws requiring the investigation and cleanup of contamination at sites we own or operate 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 we operate numerous sites in connection with our operations, we are not aware
of any liability relating to



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contamination at these sites or third party waste disposal sites that could have a material adverse effect on our business or financial condition.

Employees

As of December 31,
2007, we had 68 employees, including 43 in engineering and network operations, 15 in sales and marketing and 10 in finance and administration. We have not experienced any work stoppages and consider our relations with our employees to be good.



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|Item 1A. | RISK FACTORS
|-------- | ------------

Factors Affecting our Business Condition

In addition to the other information and factors included in this report, the following factors should be considered in evaluating
our business and future prospects:

We have and may continue to experience operating losses and net losses.

We may not achieve or sustain operating income or net income in the future. Since our inception we have incurred operating losses and net losses both on
an annual and quarterly basis. We may continue to incur operating losses and net losses in 2008. In 2005, we had an operating loss of $11.6 million and a net loss of $13.9 million. In 2006, we had an operating loss of $4.6 million and a net
loss of $6.9 million. In 2007, we had an operating loss of $2.2 million and a net loss of $4.9 million.

You should also be aware that
our financial and operational performance depends upon a number of factors, many of which are beyond our control. These factors include:



| |  |  | the economic and competitive conditions in the communications and networking industries;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | increased operating costs or pricing pressures we may experience;
| | - |  | -----------------------------------------------------------------



| |  |  | the passage of legislation or other regulatory developments that may adversely affect us;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | changes in technologies creating alternatives to our services or making our services and networks obsolete;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | delays in implementing any strategic projects; and
| | - |  | --------------------------------------------------



| |  |  | our ability to operate our networks in a reliable and cost-effective manner.
| | - |  | ----------------------------------------------------------------------------

The sector in which we operate is highly competitive.

We will encounter risks and difficulties
frequently experienced by companies in rapidly evolving markets. We are at a competitive disadvantage to larger, more established competitors. We face competition from many entities with significantly greater financial resources, well-established
brand names and larger customer bases. The entities that compete with us include wireless service providers, local telephone companies, long distance companies, competitive access providers, competitive local exchange carriers and competitive
colocation providers. The numerous companies that compete in our markets expose us to severe price competition for our services. We anticipate that these competitive disadvantages may persist or even intensify for the foreseeable future. If
additional competitors focus on our market, there may be intensified price competition which could have a material adverse effect on our business. Additionally, we may experience an increased number of service disconnections.

In the communications industry, continued pricing pressure from our competitors and an excess of network capacity may continue to cause prices for our services to
decline.

Throughout the year, we continued to experience decreases in the prices of certain of our services. We anticipate that prices
for broadband network services, in general, may continue to decline due primarily to the following:



| |  |  | price competition as various service providers continue to sell services at greatly reduced prices to absorb significant excess capacity in existing networks and
continue to install additional networks that compete with our networks;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | recent technological advances that permit substantial increases in the transmission capacity and more efficient utilization of both new and existing networks; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | strategic alliances, consolidations or similar transactions that increase customers purchasing power.
| | - |  | ------------------------------------------------------------------------------------------------------



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Many of our customers and vendors have experienced financial difficulties and have filed or may file for bankruptcy
protection.

In the past few years, general economic weakness severely impacted the telecommunications industry. The expected demand for
broadband connectivity was not realized in many segments of the market. As a result, there was an industry-wide slowdown in capital spending and a large number of industry-related bankruptcy filings. Many of our customers and vendors experienced
financial distress, and some of them filed for bankruptcy protection.

We have contracts with communications providers that have filed for
relief from creditors under the Bankruptcy Code, as well as contracts with other communications providers who may still yet file for bankruptcy protection. As a result, there is concern that some of our customers or vendors will not perform their
obligations under our contracts with them because, in bankruptcy proceedings, the debtor, or trustee, as the case may be, has the right to reject certain contracts.

In the past, bankruptcy courts have determined that certain of our contracts with our customers constitute executory contracts, and the contracts were rejected. As a result, we received an unsecured claim for damages
against the debtors, and all rights and privileges under the contracts were terminated, including payment for services rendered. There can be no assurance that additional customers or vendors will not seek bankruptcy protection and that additional
contracts will not be terminated.

In the future, we may require additional capital to fund the further development of our networks and operation of our
business.

Although we have substantially completed the build-out of our networks, we may selectively expand our facilities and networks
in the future to respond to the following:



| |  |  | an increasing number of customers;
| | - |  | ----------------------------------



| |  |  | a specific customer demand;
| | - |  | ---------------------------



| |  |  | demand for greater network capacity or colocation space;
| | - |  | --------------------------------------------------------



| |  |  | the replacement of inadequate or malfunctioning network elements;
| | - |  | -----------------------------------------------------------------



| |  |  | changes in our customers service requirements; or
| | - |  | --------------------------------------------------



| |  |  | technological advances.
| | - |  | -----------------------

In order to
do so, we may need to raise additional funds through public or private equity or debt financings. If we raise funds through the issuance of equity securities, the ownership percentage of our then-current stockholders will be diluted and the holders
of new equity securities may have rights, preferences or privileges senior to those of the holders of our common stock. If additional funds are raised through another bank credit facility or the issuance of debt securities, the holders of such
indebtedness would have rights senior to the rights of the holders of our equity, and the terms of this indebtedness could impose restrictions on our ability to incur additional indebtedness, which could impede the successful execution of our
business plan.

In addition, there can be no assurance that we will be able to successfully consummate any such financing on acceptable
terms, or at all. Our inability to obtain additional financing, as needed, could have a material adverse effect on our business. We do not have any off-balance sheet financing arrangements, nor do we anticipate entering into any.

We must maintain our existing agreements for space in major carrier hotels or our business will be harmed.

Our business depends in large part upon our ability to lease space in carrier hotels to establish carrier hotel facilities where we can locate our
networking equipment and interconnect with our customers. At a minimum, to



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provide our services in a particular metropolitan area, we must obtain and maintain space in the major carrier hotels in that area. There may be significant
competition for space in major carrier hotels. Our inability to obtain additional space, or our inability to renew existing leases, would negatively impact our operations and have a material adverse effect on our business.

We may not be able to increase the number of our significant customers.

Historically, we have experienced significant disconnections of services by our customers and decreases in the prices of our services. In order to realize anticipated revenues and cash flows, we endeavor to obtain
long-term commitments from new customers, as well as expand our relationships with current customers. This need is more critical as a wholesale carrier because our potential customers are a limited number of service providers. Therefore, it is
essential for us to succeed at establishing and expanding customer relationships.

If we cannot maintain the scalability, reliability and speed of our
network, potential customers will not use our services.

Our ability to manage a substantial amount of traffic on our networks while
maintaining superior service is critical to the operations of our business. There is no assurance that our network will be able to maintain current quality of service as the number of our customers and amount of traffic grow. Our failure to maintain
such level of service would significantly reduce customer demand for our services and have a material adverse effect on our business.

Service
interruptions on our networks could expose us to liability or cause us to lose customers.

Our operations depend on our ability to
prevent or mitigate any damages from power losses, network failures, transmission cable cuts or natural disasters. The failure of any equipment or facility on our networks could result in the interruption of service until we make the necessary
repairs or install replacement equipment. If service is not restored in a timely manner, agreements with our customers may obligate us to provide credits or other remedies to them, which would reduce our revenues or increase our expenses, and we may
be exposed to litigation from our customers. Service disruptions could also damage our reputation with customers, causing us to lose existing customers or to have difficulty attracting new ones. Many of our customers communications needs are
extremely time sensitive, and delays in delivery may cause significant losses to a customer using our networks. Our circuits may also contain undetected design defects or faults that, despite our testing, may be discovered only after our services
are in use.

The occurrence of a natural disaster or act of terrorism in close proximity to our facilities would substantially harm our business.

The substantial majority of our facilities are located within the New York metropolitan area, with the remainder located in Los Angeles. In
particular, our facilities located at 60 Hudson Street and 111 Eighth Avenue in New York City and 165 Halsey in Newark, New Jersey are critical to our business. Given the concentration of our facilities, the loss of one of our facilities through the
occurrence of a natural disaster, fire or flood, or an act of terrorism would have a material adverse effect on our business, results of operations and financial condition. We may not carry sufficient insurance to compensate us for losses caused by
such an occurrence, and we may not be able to operate our business after the loss of one of our facilities.

We may not be able to manage the growth of
our operations.

We have rapidly and significantly expanded our operations. We anticipate that further expansion will be required to
grow our customer base and successfully implement our business strategy. Our future performance depends in part upon our ability to manage our growth effectively. We may not be able to implement management information and control systems in an
efficient and timely manner, and our current personnel and systems may not be adequate to support our future operations. If we are unable to manage our growth effectively, our business will suffer.



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Our business may be harmed if our information support systems are not further developed.

Sophisticated information processing systems, including provisioning, accounting and network management, are vital to our growth and our ability to
achieve operating efficiencies. Our plans for the development and implementation of these systems rely largely upon acquiring products and services from third party vendors and integrating those products and services. We may be unable to implement
these systems on a timely basis or at all, and these systems may not perform as expected. A failure of these systems could substantially impair our ability to provide services, send invoices and monitor our operations. We may also be unable to
maintain and upgrade our operational support systems as necessary.

We license key software from third parties.

We rely on software licensed from third parties, including applications that are integrated with internally developed software and used in our services.
Most notably, we license Preside and Oracle M6. These third-party technology licenses may not continue to be available to us on commercially reasonable terms, or at all, and we may not be able to obtain licenses for other existing or future
technologies that we desire to integrate into our services. Although we believe that there are alternative suppliers for the software that we rely upon, it could take a significant period of time to establish relationships with alternative suppliers
and integrate their software into our services. The loss of any of our relationships with these suppliers could have a material adverse effect on our business.

We depend on key personnel.

We are highly dependent upon the efforts of our senior management team, none of whom currently
has an employment agreement with us. The death or departure of any of our key personnel could have a material adverse effect on our business.

We may
become the subject of litigation.

In addition to claims that may arise in the normal course of our business, certain stockholders may
sue us in connection with our financing activities. The resolution of such a claim could be costly and time-consuming. Any litigation, even if we are successful, could result in substantial costs and diversion of resources and management attention.
An adverse determination in any litigation could also subject us to significant liability, under the judgment of a court or by default.

Alternative
technologies pose competitive threats.

In addition to fiber-optic technology, there are other technologies that can be used instead of
our networks to provide more capacity and speed than traditional copper wire transmission technology, such as digital subscriber lines, or DSL, and wireless technologies. Furthermore, other new technologies may be developed that provide more
capacity, reliability, scalability and speed than the fiber-optic technology we deploy. The development of new technologies or the significant penetration of alternative technologies into our target markets may reduce the demand for our services and
consequently could have a material adverse effect on our business.

We have outstanding debt that may limit our ability to borrow additional money,
restrict the use of our cash flows and constrain our business strategy. We may not be able to meet our existing debt obligations.

As of
March 27, 2008, we had total outstanding debt of $14.0 million and $5.4 million of outstanding letters of credit. In addition, we have $0.6 million of availability in our revolving line of credit, $5.0 million of availability in a capital
expenditure term facility and $5.0 million in a stock repurchase term facility, subject to compliance with the terms of the credit agreement. As a result of this debt and debt that we may incur in the future, we will need to devote a portion of our
available cash towards debt service payments. In addition, our



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ability to borrow additional money is restricted by our current debt arrangements. Furthermore, we have agreed to terms in the credit agreement (which
governs our credit facility) that expose us to certain risks and limitations, including the following:



| |  |  | principal amortization payments are required to be made quarterly beginning on July 1, 2008 and extend through maturity in 2012;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | we have made affirmative financial covenants that we will breach if our financial results do not meet our expectations; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | we have agreed to certain negative covenants that may cause us to make choices regarding the operation of our business that we would not otherwise make.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------

You should be aware that our ability to repay or refinance our debt depends on our successful financial and operating
performance and on our ability to implement our business strategy successfully. There can be no assurance that our future cash flows and capital resources will be sufficient to repay our existing indebtedness and any indebtedness we may incur in the
future. Further, our borrowings under our credit facility are secured by substantially all of our assets, and our obligations under our facility are guaranteed by our subsidiaries. In the event that we are unable to repay our debts, we may be forced
to reduce or delay any current network expansion projects, sell some of our assets, obtain additional equity capital or refinance or restructure our debt. If we are unable to meet our debt service obligations or comply with our covenants, we would
be in default under our existing debt agreements, which would accelerate the repayment of our indebtedness. Our failure to achieve certain financial results would also violate our credit agreement, potentially accelerating the outstanding balance of
our debt for immediate payment. To avoid a default, we may need waivers from third parties, which might not be granted.

Legislation and government
regulation could adversely affect us.

We are subject to federal, state and local regulatory and taxing authorities that affect our
services. The regulation and taxation of the communications industry can change rapidly and varies from state to state. Changes in the regulatory and taxing environment could affect our operating results by increasing competition, decreasing
revenue, increasing costs and impairing our ability to offer services. Certain communications services are subject to significant regulation and taxation at the federal, state, and local level. The Federal Communications Commission, or FCC,
regulates communications carriers providing intrastate, interstate and international common carrier services. State public utility commissions exercise jurisdiction over intrastate communications services. The FCC and state public utility
commissions do not regulate most enhanced services, which involve more than the pure transmission of customer provided information. Our subsidiary, Local Fiber, LLC, is regulated as a common carrier by virtue of its provision of communications
services directly to the public for a fee. As a common carrier, Local Fiber, LLC is subject to extensive federal, state and local communications regulations, which include the payment of all applicable regulatory assessments.

Many of our competitors and customers, especially ILECs, are subject to federal and state regulations. These regulations change from time to time in ways
that are difficult for us to predict. Although we believe the services we provide today, other than those provided by Local Fiber, LLC, are not subject to regulation imposed on other telecommunications services by the FCC or the state public utility
commissions, changes in regulation or new legislation may impose regulation on our non-regulated services.

As an access provider, we may
incur liability for information disseminated through our networks. The law relating to the liability of access providers and on-line services companies for information carried on or disseminated through their networks is not yet settled. Although we
have not been sued for information carried on our networks, it is possible that we could be. Federal and state statutes have been directed at imposing liability on Internet service providers for aspects of content carried on their networks. There
may be new legislation and court decisions that may affect our services and expose us to potential liability.



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As the law in this area develops, the potential imposition of liability for information carried on and
disseminated through our networks could require us to implement measures to reduce our exposure to such liability, which may require the expenditure of substantial resources or the discontinuation of certain products or service offerings. Any
significant costs that we incur as a result of such measures or the imposition of liability could have a material adverse effect on our business.

Our
principal stockholders, directors and executive officers currently control a significant percentage of the voting rights of our stock, and this may limit your ability to affect the outcome of any stockholder vote or exercise any influence over our
business.

The concentration of ownership of our common stock may have the effect of delaying, deferring or preventing a change in
control, merger, consolidation, or tender offer that could involve a premium over the price of our common stock. Currently, our executive officers, directors and greater-than-five-percent stockholders and their affiliates, in the aggregate,
beneficially own approximately 39% of our outstanding common stock. These stockholders, if they vote together, are able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and
approval of significant corporate transactions and matters.

Anti-takeover provisions could prevent or delay a change of control that stockholders may
consider favorable.

Provisions in our certificate of incorporation, our bylaws and Delaware law could delay or prevent a change of
control or change in management that would provide stockholders with a premium to the market price of their common stock. The authorization of undesignated preferred stock, for example, gives our board the ability to issue preferred stock with
voting or other rights or preferences that could impede the success of any attempt to change control of the company. In addition, we have adopted a change in control plan providing severance benefits for members of senior management in the event of
a change in control. This severance-related plan may delay or prevent a change in our management team and may render more difficult an unsolicited merger of other change in control event. If a change of control or change in management is delayed or
prevented, this premium may not be realized, or the market price of our common stock could decline.

Holders of our common stock will not receive a
return on their shares until they sell them because we do not plan to pay cash dividends on our shares.

We have neither declared nor
paid any dividends on our common stock and do not anticipate paying cash dividends in the future. We currently intend to retain any earnings to fund our operations and future growth. Furthermore, our credit facility currently prohibits, and the
terms of any future debt agreements or preferred stock will likely restrict, the payment of cash dividends on our common stock.

Our stock price is
likely to be highly volatile.

The trading price of our common stock has been highly volatile. Failure to meet market expectations in
our financial results could cause our stock price to decline. Moreover, factors that are not related to our operating performance could cause our stock price to decline. The stock market has periodically experienced significant price and volume
fluctuations that have affected the market prices for securities of technology and communications companies. Consequently, you may experience a decrease in the market value of your common stock, regardless of our operating performance or prospects.

We could issue a substantial number of additional shares of common stock, which could adversely affect the trading price of our common stock.

We have approximately $0.7 million shares of common stock subject to issuance upon exercise of outstanding stock options and
warrants. We cannot predict the effect, if any, that future sales of shares of



20



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common stock, or the availability of shares of common stock for future sale, will have on the market price of our common stock. Sales of substantial amounts
of common stock (including shares issued upon the exercise of stock options or warrants), or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock.



|ITEM 1B.    UNRESOLVED | STAFF COMMENTS
|---------------------- | --------------

None



|ITEM 2. | PROPERTIES
|------- | ----------

Our principal offices are located at 570 Lexington Avenue in New York, New York, where we lease an aggregate of approximately 12,195 square feet, of which we are subleasing approximately 5,100 square feet. The term
for these premises expires in October 2008. Our NOC is located at Gateway Center in Newark, New Jersey, where we occupy 7,987 square feet under a lease that expires in 2010. We have also leased facilities at major carrier hotels in New York, New
York. These facilities are located at 60 Hudson Street and 111 Eighth Avenue. At 60 Hudson Street we have two leases covering an aggregate of 41,174 square feet. The lease at 60 Hudson Street for space on the 19thfloor and 12thfloor expires in 2022. The lease at 60 Hudson Street for the
Meet-Me-Room expires in 2015. The lease at 111 Eighth Avenue is for 5,672 square feet and expires in 2015. In Newark, New Jersey, we lease a 49,000 square foot communications hub and colocation facility located at 165 Halsey Street, which expires in
2016. Additionally, we lease space in carrier hotels at 600 South Federal Street in Chicago, Illinois, consisting of 6,588 square feet under a lease that expires in 2015, and at 707 Wilshire Boulevard in Los Angeles, California, consisting of 7,465
square feet under a lease that expires in 2010. We also lease space for other network-related facilities and in the basements of certain commercial office buildings for our central equipment rooms. We regularly evaluate our requirements for
additional colocation space, and we review our current leases to determine if it is in our best interest to continue with such leases.



|ITEM 3. | LEGAL PROCEEDINGS
|------- | -----------------

We are not currently a party to
any material legal proceedings.



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

No matters were submitted to a vote of our security holders during the fourth quarter of 2007.



21



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PART II



|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|------- | ------------------------------------------------------------------------------------------------------------

Price Range of Our Common Stock

On April 27,
2000, our common stock began trading on the Nasdaq National Market System under the ticker symbol FTGX. Prior to that time, our common stock was quoted on the OTC Bulletin Board under the same ticker symbol. On May 24, 2002, we
received approval from The Nasdaq Stock Market to transfer our listing from the Nasdaq National Market System to the Nasdaq Capital Market System.

The following table sets forth the high and low sales prices for each quarter for our common stock as reported on the Nasdaq Capital Market System from January 1, 2006 through December 31, 2007:



|                            |  |      |      |      |   |      |  |     |      |  |   |     
|--------------------------- |  | ---- | ---- | ---- | - | ---- |  | --- | ---- |  | - | ----
|                            |  | 2007 |      | 2006
|                            |  | High |      | Low  |   | High |  | Low
|Quarter ending March 31     |  | $    | 9.90 |      | $ | 6.15 |  | $   | 3.60 |  | $ | 1.53
|Quarter ending June 30      |  | $    | 9.75 |      | $ | 7.20 |  | $   | 3.55 |  | $ | 1.87
|Quarter ending September 30 |  | $    | 8.69 |      | $ | 7.39 |  | $   | 2.90 |  | $ | 1.70
|Quarter ending December 31  |  | $    | 8.40 |      | $ | 7.55 |  | $   | 6.79 |  | $ | 2.83

As of March 27, 2008, there were 66 holders of record of our common stock and, according to
our estimates, approximately 5,200 beneficial owners of our common stock.

We have not paid any dividends with respect to our common stock
and do not expect to pay dividends on our common stock in the foreseeable future. Any future dividends will be declared at the discretion of our Board of Directors and will depend, among other things, upon our financial condition, capital
requirements, earnings and liquidity. Our credit facility currently prohibits, and future debt agreements and preferred stock will likely restrict, the payment of cash dividends on our common stock.

Securities Authorized for Issuance Under Equity Compensation Plans

Equity Compensation Plan Information

as of December 31, 2007



|                                                           |  |                                                                                             |  |                                                                             |        |                                                                                                                                           |       
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- | ------ | ----------------------------------------------------------------------------------------------------------------------------------------- | ------
|Plan Category                                              |  | Number of Securities tobe Issued Upon Exercise ofOutstanding Options,Warrants and Rights(a) |  | Weighted-AverageExercise Price ofOutstanding Options,Warrants and Rights(b) |        | Number of SecuritiesRemaining Available forFuture Issuance UnderEquity Compensation Plans(Excluding SecuritiesReflected in Column (a))(c)
|Equity compensation plans approved by security holders     |  | 138,100                                                                                     |  | $                                                                           | 136.27 |                                                                                                                                           | 59,199
|Equity compensation plans not approved by security holders |  | 272,486                                                                                     |  | $                                                                           | 4.02   |                                                                                                                                           |      

We have authorized the issuance of equity securities under the compensation plans described below
without the approval of stockholders. No additional options, warrants or rights are available for issuance under any of these plans, except for additional shares which may become purchasable under warrants with anti-dilution protection as noted
below.

Richard E. Sayers Stock Option Agreement, dated March 22, 1999, provided common stock purchase options to
Mr. Sayers, a director, to purchase 833 shares at $562.50 per share, with an expiration date of March 22, 2009.



22



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Settlement Warrants, dated February 28, 2003, provided common stock purchase
warrants to certain stockholders in settlement of certain litigation matters, to purchase an aggregate of 16,667 shares of our common stock at a purchase price of $36.00 per share, which expired on February 28, 2008, without being exercised.

Lease Amendment Warrants, dated October 29, 2004, provided common stock purchase warrants to 60 Hudson Owner LLC
(successor to Westport Communications, LLC) in connection with the amendment of our leases at 60 Hudson Street, to purchase an aggregate of 254,986 shares of our common stock at a purchase price of $0.10 per share, with an expiration date of
September 1, 2009.

Sales of Unregistered Securities

There are no recent sales of unregistered securities during the period covered by this report, which have not been previously disclosed in our public filings.

Issuer Purchases of Equity Securities



|                                      |  |                                |  |                            |      |                                                                                |        |                                                                                   |   |          
|------------------------------------- |  | ------------------------------ |  | -------------------------- | ---- | ------------------------------------------------------------------------------ | ------ | --------------------------------------------------------------------------------- | - | ---------
|Period*                               |  | Total Number ofSharesPurchased |  | AveragePrice Paid perShare |      | Total Number of SharesPurchased as Part of PubliclyAnnounced Plans or Programs |        | Maximum Dollar Value ofShares that May Yet
bePurchased Under the Plans orPrograms
|November 8, 2007 to November 30, 2007 |  | 34,082                         |  | $                          | 8.03 |                                                                                | 34,082 |                                                                                   | $ | 4,725,139
|December 1, 2007 to December 31, 2007 |  | 52,206                         |  | $                          | 7.98 |                                                                                | 52,206 |                                                                                   | $ | 4,306,820



|* | On November 6, 2007, we publicly announced the authorization to repurchase up to $5.0 million of our common stock.
|- | ------------------------------------------------------------------------------------------------------------------



23



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|ITEM 6. | SELECTED FINANCIAL DATA
|------- | -----------------------

You should read the
selected financial data presented below, in conjunction with our consolidated financial statements, the notes to those consolidated financial statements and the managements discussion and analysis of financial condition and results of
operations section appearing elsewhere in this report on Form 10-K.

The consolidated statement of operations data for the years ended
December 31, 2007, 2006, and 2005 and the balance sheet data as of December 31, 2007, and 2006 have been derived from our audited consolidated financial statements included elsewhere herein, and should be read in conjunction with those
consolidated financial statements (including notes thereto). The consolidated statement of operations data for the years ended December 31, 2004 and 2003 and the balance sheet data as of December 31, 2005, 2004, and 2003 have been derived
from audited consolidated financial statements not included herein, but which were previously filed with the Securities and Exchange Commission, or SEC. Our historical results are not necessarily indicative of the operating results to be realized in
the future.

CONSOLIDATED FINANCIAL DATA

(in thousands, except per share amounts)



|                                                              |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------ | - |  | - | ------ | -
|                                                              |  | Year Ended December 31, |        
|                                                              |  | 2003                    |         |   | 2004 |   |         | 2005 |  |   | 2006    |   |  | 2007 |       
|Statement of Operations Data:                                 |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Revenues                                                      |  | $                       | 26,604  |   |      | $ | 34,579  |      |  | $ | 33,824  |   |  | $    | 40,080 |   |  | $ | 49,777 |  
|Operating expenses:                                           |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Cost of services (exclusive of items shown separately below)  |  |                         | 8,806   |   |      |   | 13,776  |      |  |   | 16,444  |   |  |      | 20,224 |   |  |   | 25,519 |  
|Selling, general and administrative expenses                  |  |                         | 16,631  |   |      |   | 16,504  |      |  |   | 17,322  |   |  |      | 15,441 |   |  |   | 17,034 |  
|Impairment of property, plant and equipment                   |  |                         | 1,346   |   |      |   | 9,468   |      |  |   | 2,812   |   |  |      |       |   |  |   |       |  
|Impairment of goodwill                                        |  |                         | 7,509   |   |      |   | 2,309   |      |  |   |        |   |  |      |       |   |  |   |       |  
|Depreciation and amortization                                 |  |                         | 8,840   |   |      |   | 9,013   |      |  |   | 8,840   |   |  |      | 8,998  |   |  |   | 9,419  |  
|                                                              |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Total operating expenses                                      |  |                         | 43,132  |   |      |   | 51,070  |      |  |   | 45,418  |   |  |      | 44,663 |   |  |   | 51,972 |  
|                                                              |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Loss from operations                                          |  |                         | (16,528 | ) |      |   | (16,491 | )    |  |   | (11,594 | ) |  |      | (4,583 | ) |  |   | (2,195 | )
|Loss on early extinguishments of debt                         |  |                         | (8,951  | ) |      |   |        |      |  |   |        |   |  |      |       |   |  |   | (1,146 | )
|Other income                                                  |  |                         |        |   |      |   |        |      |  |   |        |   |  |      | 21     |   |  |   |       |  
|Interest income                                               |  |                         | 46      |   |      |   | 60      |      |  |   | 76      |   |  |      | 159    |   |  |   | 226    |  
|Interest expense                                              |  |                         | (2,342  | ) |      |   | (1,963  | )    |  |   | (2,417  | ) |  |      | (2,522 | ) |  |   | (1,823 | )
|                                                              |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Net loss                                                      |  | $                       | (27,775 | ) |      | $ | (18,394 | )    |  | $ | (13,935 | ) |  | $    | (6,925 | ) |  | $ | (4,938 | )
|                                                              |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Net loss per share: basic and diluted                         |  | $                       | (7.47   | ) |      | $ | (3.67   | )    |  | $ | (2.69   | ) |  | $    | (1.09  | ) |  | $ | (0.66  | )
|Weighted average common shares outstanding: basic and diluted |  |                         | 3,719   |   |      |   | 5,018   |      |  |   | 5,174   |   |  |      | 6,359  |   |  |   | 7,428  |  



24



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On May 25, 2005, we completed our 1-for-10 reverse stock split previously approved by stockholders.
On May 12, 2003, we completed our 1-for-30 reverse stock split previously approved by stockholders. The earnings per share information and all share amounts as presented in these selected financial data have been adjusted to reflect these
reverse stock splits.



|                                   |  |                    |        |      |   |        |  |      |        |      |   |        |  |   |       
|---------------------------------- |  | ------------------ | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | - | ------
|                                   |  | As of December 31,
|                                   |  | 2003               |        | 2004 |   | 2005   |  | 2006 |        | 2007
|Balance Sheet Data:                |  |                    |        |      |   |        |  |      |        |      |   |        |  |   |       
|Cash and cash equivalents          |  | $                  | 3,488  |      | $ | 2,909  |  | $    | 1,899  |      | $ | 6,802  |  | $ | 8,220 
|Other current assets               |  |                    | 6,876  |      |   | 6,832  |  |      | 2,748  |      |   | 3,864  |  |   | 4,430 
|Property, plant and equipment, net |  |                    | 86,958 |      |   | 74,123 |  |      | 66,135 |      |   | 59,534 |  |   | 54,921
|Total assets                       |  |                    | 99,618 |      |   | 87,725 |  |      | 73,235 |      |   | 71,732 |  |   | 70,912
|Long-term liabilities              |  |                    | 19,769 |      |   | 11,155 |  |      | 18,030 |      |   | 18,765 |  |   | 18,852
|Total stockholders equity         |  |                    | 64,734 |      |   | 59,236 |  |      | 45,998 |      |   | 43,020 |  |   | 39,298



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|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

Certain Facts That May Affect Future Results of Operations

This report contains certain
forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such statements are based on managements current expectations and are subject to a number of factors and uncertainties that could cause
actual results to differ materially from those described in the forward-looking statements. Investors are cautioned that there can be no assurance that actual results or business conditions will not differ materially from those projected or
suggested in such forward-looking statements as a result of various factors, including, but not limited to, those discussed below. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of
new information, future events or otherwise.

Overview

We own and operate integrated colocation facilities and diverse transport routes in the two gateway markets of New York/New Jersey and Los Angeles. Our customized connectivity infrastructure provides an advanced, high
bandwidth, fiber-optic solution to support the demand for network capacity and to facilitate the interconnection of multiple customers networks.

Factors Affecting Future Operations

Revenues. We generate revenues from selling network capacity, colocation and
related services to other communications service providers. Revenues are derived from four general types of services:



| |  |  | On-net transport services.Our transport services include the offering of broadband circuits on our metropolitan transport networks and FiberNet in-building
networks (FINs). Over our metropolitan transport networks, we can provision circuits from one of our carrier hotel facilities to another carrier hotel facility or to an on-net building via an interconnection with our FIN in that
building. We can also provision circuits vertically between floors in a carrier hotel facility or an on-net building. In addition, we provide other interconnection services, including hubbing to aggregate lower bandwidth endlink circuits into a
single, higher bandwidth circuit as well as protocol and signaling conversion to exchange traffic between domestic and international circuits and next generation Ethernet, IP and VoIP technologies.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Off-net transport services. We provide our customers with circuits on networks that we do not own. Customers purchase these services from us to benefit from
our network design, provisioning and management expertise. We sell this connectivity to our customers by purchasing the underlying circuits from other wholesale telecommunications carriers. By bundling these services with our on-net transport
services and colocation services, we are able to provide a full range of network services to our customers.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Colocation services. Our colocation services include providing customers with customized cages, cabinets and racks to locate their communications and
networking equipment at certain of our carrier hotel facilities in a secure, technical operating environment. We can also provide our customers with colocation services in the central equipment rooms of certain of our commercial office buildings.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Communications access management services.Our access management services entail providing our customers with access to provide their retail communications
services to tenants in certain commercial office buildings.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our revenues are typically generated on a monthly recurring
basis under contracts with our customers. The terms of these contracts can range from month-to-month to 15 years in length. Our customers typically elect to purchase network services for an initial contract period of one year with month-to-month
renewals. All of our revenues are generated in the United States of America.



26



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Our services are typically sold under fixed price agreements. In the case of transport services, we
provide an optical circuit or other means of connectivity for a fixed price. Revenues from transport services are not dependent on customer usage or the distance between the origination point and termination point of a circuit. The pricing of
colocation services is based upon the size of the colocation space or the number of colocation units, such as cabinets, provided to the customer. Revenues from access management services are typically determined by the square footage of the
commercial office properties to which a customer purchases access. We have experienced price declines for some of our services over the past year due to industry trends, with transport services experiencing the greatest decreases. Our operating
results may continue to be impacted by decreases in the prices of certain of our services.

We believe that the majority of the growth in
our revenues will come from our existing customers. While we continue to add additional customers, particularly domestic subsidiaries of internationally based carriers, we believe the number of companies that are potential customers is not
increasing due to industry consolidation. Consequently, our growth in revenue is largely dependent on the underlying growth of our customers businesses and their need for our services.

The growth of our on-net transport and colocation revenues is also dependent in part upon our ability to provide additional services in our existing
facilities and our current markets. We are currently expanding our colocation footprint in the New York City market, and over the long term, we intend to derive additional colocation revenues, as well as increased transport revenues, from this
expansion. As a result, within each of our facilities and markets, our revenues will depend upon the demand for our services, the competition that we face and our customer service.

We typically begin our sales cycle by entering into a master services agreement. This document outlines the legal and business terms, operating
specifications and commercial standards that are required of us by the customer. After entering into the master service agreement, customers can order specific services from us through individual sales orders.

Customers primarily purchase services from us when their requirements mandate an immediate need for additional services, either for their own internal
network use or for access to their customers or other vendors. As their demand for network connectivity or colocation grows, we benefit by providing new services to them. We also experience disconnections of services, as customers groom their
networks to eliminate excess capacity or adjust their changing network requirements. This loss of revenues may negatively impact our financial results.

Our on-net transport services primarily provide network core connectivity to our customers, enabling them to exchange traffic between their own points of presence or from one of their points of presence to that of
another carrier or service provider. These services accounted for 48.4% of our total revenues in 2007. We can provide on-net transport services utilizing multiple transmission protocols, including legacy North American standards, international
standards and new technologies, such as Ethernet, IP and VoIP. Our ability to provide service using varying standards, as well as to interconnect traffic between standards, is an important factor in the growth of our on-net transport business.

Another key factor in the growth of our on-net transport business is the large number of nodes on our network and the resulting number of
carriers that we can interconnect with. It is important for us to be able to exchange traffic directly with many other carriers in order to offer the greatest value to our customers, by enabling a single interconnection with us to deliver
connectivity to a significant number of other carriers. Additionally, the scalability of our network architecture allows us to increase transport capacity to a greater degree than is possible with our other services, yielding incremental operating
leverage from our existing infrastructure and facilities. We are able to expand capacity in part due to technological advancements in fiber optics, such as dense wave division multiplexing or DWDM.

Our off-net transport services constitute network connectivity that we provide to our customers, utilizing circuits that we purchase from other wholesale
telecommunications carriers. These services produced 29.5% of



27



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our total revenues in 2007 and are the fastest growing portion of our business. In providing these services to our customers, we manage all aspects of the
service delivery, including network design, installation, monitoring and troubleshooting. Our ability to bundle these services with our other offerings allows our customers to utilize a single vendor for their network requirements. We offer these
services in markets that we currently serve with our own infrastructure, in other metropolitan markets that we do not serve with our own networks, and on a long-haul basis to connect metropolitan areas, significantly increasing our addressable
market beyond the metropolitan markets in which we own network infrastructure and facilities.

Historically our transport services have
been negatively impacted by customers disconnecting higher-bandwidth circuits and replacing them with lower-bandwidth circuits to more efficiently manage the access costs of their networks. The new transport services that we are providing typically
are also for lower-bandwidth circuits, as our customers expand their network connections on a more prudent basis. The growth in transport revenues that we have experienced on a quarterly basis in 2006 and 2007 is a result of an increase in the
number of circuits that we have provisioned, which more than offset disconnections and price declines. In the future, we anticipate generating significantly more of our revenues from transport services than from the other services we provide.

Our colocation services produced 20.8% of our total revenues in 2007. Colocation revenues are generally stable in nature, as customers
tend to maintain a more consistent need for a location to house their networking equipment and therefore typically enter into three to five years contracts for colocation services. Upon purchasing colocation space from us, customers secure their
network equipment in our highly conditioned facilities and establish connectivity to exchange traffic with other networks. Our facilities maintain rigorous standards for power, cooling, security, reliability and other environmental controls. It is
the physical constraints of available colocation space in our facilities and our competitors facilities that have created a favorable market environment for colocation services. The growth prospects of our colocation services are a function of
the space that we have available to sell to our customers. Many of our existing colocation facilities are approaching stabilized occupancy rates. As a result, we constructed a new 11,000 square foot facility at 60 Hudson Street in New York City. We
are also converting 8,000 square feet of currently unoccupied colocation space at our location at 165 Halsey Street in Newark, New Jersey into an internet-grade facility with enhanced power capacity to also expand our offering capabilities.

Our access management services business accounted for 1.3% of our total revenues in 2007 and has been steadily declining. We expect that
trend to continue. The revenues that we are generating from this type of service are from long-term contracts entered into in prior years. We do not expect to sign any new contracts for access management in the near future. The remaining terms of
our existing access management service contracts range from a month-to-month basis to expiration in 2012.

Cost of Services. Cost of
services is associated with the operation of our networks and facilities. The largest component of our cost of services is the occupancy expenses at our carrier hotel facilities and commercial office buildings. These occupancy expenses primarily
represent rent expense, utility costs and license fees under direct leases with landlords. They also include charges for colocation space in other carriers facilities and cross connection fees to interconnect our networks with other
carriers networks. Most of our license agreements for our commercial office buildings require us to pay license fees to the owners of these properties. In addition, our two leases at 60 Hudson Street in New York City require us to pay license
fees. These license fees typically are calculated as a percentage of the revenues that we generate in each particular building. In addition, we incur off-net connectivity charges for the costs of purchasing connectivity from other wholesale
telecommunications carriers to provide our customers with transport services on networks that we do not own. As we provide additional off-net transport services, we will purchase more connectivity from other carriers. Other specific costs of
services include maintenance and repair costs. With the exception of off-net connectivity charges and license fees, we do not anticipate that cost of services will change commensurately with any change in our revenues as our cost of services is
generally fixed in nature.



28



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Selling, General and Administrative Expenses. Selling, general and administrative expenses include
all of our personnel costs, stock related costs, occupancy costs for our corporate offices, insurance costs, professional fees, sales and marketing expenses and other miscellaneous expenses. Personnel costs, including wages, benefits and sales
commissions, are our largest component of selling, general and administrative expenses. Stock related expenses relate to the granting of stock options and restricted stock to our employees. We make equity grants to our employees in order to attract,
retain and incentivize qualified personnel. These costs are non-cash charges that are amortized over the vesting term of each employees equity agreement, based on the fair value on the date of the grant. We do not allocate any personnel cost
relating to network operations or sales activities to our cost of services. We had 68 employees as of December 31, 2007 compared to 67 as of December 31, 2006. Prospectively, we believe that our personnel costs will increase moderately.
Professional fees, including legal and accounting expenses and consulting fees, represent the second largest component of our selling, general and administrative expenses. These legal and accounting fees are primarily attributed to our required
activities as a publicly traded company, such as SEC filings and financial statement audits, and could increase prospectively due to the enhanced regulations regarding corporate governance and compliance matters. Other costs included in selling,
general and administrative expenses, such as insurance costs, occupancy costs related to our office space, and marketing costs, may increase due to changes in the economic environment and telecommunications industry.

Depreciation and Amortization. Depreciation and amortization expense includes the depreciation of our network equipment and infrastructure,
computer hardware and software, office equipment and furniture, and leasehold improvements, as well as the amortization of certain deferred charges. We commence the depreciation of network related fixed assets when they are placed into service and
depreciate those assets over periods ranging from three to 20 years.

Critical Accounting Policies

Our significant accounting policies are described in Note 2 to the consolidated financial statements included in Item 8 of this Form 10-K. Our
discussion and analysis of financial condition and results from operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.
The preparation of the consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. We
evaluate the estimates that we have made on an on-going basis. These estimates have been based upon historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions. We believe our most critical accounting policies include revenue recognition, an allowance for doubtful accounts, the impairment of long-lived assets and the recognition of deferred tax assets and
liabilities.

Revenue Recognition

We
recognize revenues when earned as services are provided throughout the life of each sales order with a customer. The majority of our revenues are invoiced on a monthly recurring basis under sales orders that are typically one year in length. Certain
of our contracts require us to invoice our customers for the periods ranging from one year to the full term of the contract. We record deferred revenue for the amount of an invoice that has been paid and not recognized as revenue.

Allowance for Doubtful Accounts

We continuously
monitor collections and payments from our customers and maintain an allowance for doubtful accounts based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically
been within our expectations, there can be no assurance that we will continue to experience the same level of credit losses that we have in the past. A number of our customers filed for bankruptcy or were otherwise in financial distress. A
significant change in the liquidity or



29



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financial position of any one of these customers or a deterioration in the economic environment or telecommunications industry, in general, could have a
material adverse impact on the collectability of our accounts receivable and our future operating results, including a reduction in future revenues and additional allowances for doubtful accounts. If we determine that collection of a receivable is
not reasonably assured, we fully reserve the receivable and reverse that reserve only when collection becomes reasonably assured, which is generally upon receipt of payment.

Impairment of Long-Lived Assets

We assess the fair value and recoverability of our long-lived
assets, whenever events and circumstances indicate the carrying value of an asset may not be recoverable from estimated undiscounted future cash flows expected to result from its use and eventual disposition. In doing so, we make assumptions and
estimates regarding future cash flows and other factors to make our determination. The fair value of our long-lived assets is dependent upon the forecasted performance of our business, changes in the telecommunications industry and the overall
economic environment. When we determine that the carrying value of our long-lived assets may not be recoverable, we measure any impairment based upon a forecasted discounted cash flow method. If these forecasts are not met, we may have to record
additional impairment charges not previously recognized.

Recognition of Deferred Tax Assets and Liabilities

We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and
liabilities. We regularly review our deferred tax assets for recoverability and establish a valuation allowance based upon historical losses, projected future taxable income and the expected timing of the reversals of existing temporary differences.
As a result of this review, we have established a full valuation allowance against our deferred tax assets.

Effective January 1,
2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN No. 48). FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in our financial
statements in accordance with FASB Statement No. 109, Accounting for Income Taxes, FIN No. 48 requires us to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the
technical merits of the position. If the more-likely-than-not threshold is met, we must measure the tax position to determine the amount to recognize in the financial statements. The application of income tax law is inherently complex. Laws and
regulation in this area are voluminous and are often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. Interpretations of and guidance surrounding income tax laws and
regulations change over time. As such, changes in our subjective assumptions and judgments can materially affect amounts recognized in the balance sheets and statements of income. At the adoption date of January 1, 2007, we had no unrecognized
tax benefits which would affect our effective tax rate if recognized. At December 31, 2007, we had no unrecognized tax benefits. We classify interest and penalties arising from the underpayment of income taxes in the statement of income under
selling, general and administrative expenses. As of December 31, 2007, we had no accrued interest or penalties related to uncertain tax positions. The tax years 2000 through 2007 remain open to examination by all taxing jurisdictions to which
we are subject.

Results of Operations

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

Revenues. Revenues for the fiscal year ended
December 31, 2007 were $49.8 million as compared to $40.1 million for the fiscal year ended December 31, 2006. We increased the number of our customers from 243 at the end of 2006 to 254 at the end of 2007, primarily with the addition of
domestic subsidiaries of internationally based carriers. We believe that there are greater opportunities to serve domestic subsidiaries of foreign telecommunications companies in our gateway markets, as domestic carriers consolidate and rationalize.



30



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Revenues were generated by providing transport, colocation and communications access management services to our customers and are quantified as follows:



|                          |  |                                |        |      |   |        |  |   |       |  
|------------------------- |  | ------------------------------ | ------ | ---- | - | ------ |  | - | ----- | -
|                          |  | For the year endedDecember 31, |        |      |  
|(amounts in thousands)    |  | 2007                           |        | 2006 |   | Change | 
|On-net transport revenue  |  | $                              | 24,128 |      | $ | 21,379 |  | $ | 2,749 |  
|Off-net transport revenue |  |                                | 14,675 |      |   | 9,335  |  |   | 5,340 |  
|Colocation revenue        |  |                                | 10,344 |      |   | 8,699  |  |   | 1,645 |  
|Access revenue            |  |                                | 630    |      |   | 667    |  |   | (37   | )
|                          |  |                                |        |      |   |        |  |   |       |  
|Total Revenue             |  | $                              | 49,777 |      | $ | 40,080 |  | $ | 9,697 |  
|                          |  |                                |        |      |   |        |  |   |       |  

We recognized $24.1 million in on-net transport service revenues in 2007, up from $21.4 million in
2006. Off-net transport service revenues for 2007 were $14.7 million, up from $9.3 million in 2006. Revenues from colocation and other services were $10.3 million in 2007 compared to $8.7 million in 2006, and revenues from communications access
management services declined to $0.6 million in 2007 from $0.7 million in 2006.

The majority of our transport and colocation services are
provided within and between our carrier hotel facilities in the New York/New Jersey market. On-net transport revenues increased as we provided a greater number of circuits to our customers. The growth in new on-net transport services more than
offset the disconnections and price decreases that we have experienced. Off-net transport revenues increased over the same period last year as we continued to leverage our current customer base by providing services outside our gateway markets of
New York/New Jersey and Los Angeles. Colocation revenues increased as we licensed additional caged space, cabinets and racks in our facilities. Our network infrastructure has significant capacity to provide additional transport connectivity, and we
also have the network capabilities to deliver connectivity utilizing new technologies, such as Ethernet and IP services. Our access management services business has been steadily declining, and we expect that trend to continue throughout 2008. The
revenues that we are generating from this type of service are from long-term contracts entered into in prior years. The remaining terms of our existing access management service contracts range from month-to-month to expiration in 2012. We do not
expect to sell any additional access services, and we believe our existing contracts for access services may not be renewed when they expire.

For fiscal years 2007 and 2006, there were no individual customers that accounted for over 10% of our total revenues.

Cost of
Services. Cost of services, associated with the operation of our networks and facilities, were $25.5 million in 2007, compared to $20.2 million in 2006. The majority of our cost of services is occupancy expenses, consisting of rent, license
fees, and utility costs for our carrier hotel facilities, on-net buildings and off-net buildings. Other cost of services includes off-net connectivity charges and maintenance and repair costs.



|                                       |  |                                |        |      |   |        |  |   |      
|-------------------------------------- |  | ------------------------------ | ------ | ---- | - | ------ |  | - | -----
|                                       |  | For the year endedDecember 31, |        |     
|(amounts in thousands)                 |  | 2007                           |        | 2006 |   | Change
|Occupancy expenses                     |  | $                              | 14,454 |      | $ | 12,660 |  | $ | 1,794
|Off-net connectivity charges           |  |                                | 10,372 |      |   | 6,903  |  |   | 3,469
|Maintenance and repair and other costs |  |                                | 693    |      |   | 661    |  |   | 32   
|                                       |  |                                |        |      |   |        |  |   |      
|Total Cost of Services                 |  | $                              | 25,519 |      | $ | 20,224 |  | $ | 5,295
|                                       |  |                                |        |      |   |        |  |   |      

Occupancy expenses represented 56.7% of cost of services or $14.5 million in 2007, an increase of
$1.8 million as compared to 62.6% or $12.7 million in 2006. This increase was due to increases in colocation and cross-connection charges associated with new order installations in existing facilities and an increase in utility usage. On
March 1, 2007, we entered into a lease modification with the landlord of the building located at 60



31



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Hudson Street, New York, New York to lease an additional 11,315 square feet of space and to extend the term of the lease to July 2022.

Off-net connectivity charges were 40.6% of cost of services or $10.4 million in 2007, compared to 34.1% of the cost of services or $6.9 million in 2006.
We expect these connectivity charges to increase commensurately with our increase in revenues from off-net transport.

Maintenance and
repair and other costs were 2.7% or $0.7 million of cost of services in 2007, compared to 3.3% or $0.7 million in 2006. These costs will continue to represent a relatively small and fixed component of cost of services.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year ended December 31, 2007 were $17.0
million compared to $15.4 million for 2006. Personnel costs, which were consistent over the period, represented 62.8% or $10.7 million of selling, general and administrative expenses in 2007 compared to 63.6% or $9.8 million for 2006. Professional
fees in 2007 were $1.5 million, as compared to $1.3 million for the same period in 2006. Marketing expenses in 2007 were $0.2 million compared to $0.1 million in 2006. During the year ended December 31, 2006, we expensed $0.1 million for fees
related to the twentieth amendment of our former credit agreement with Deutsche Bank.

Stock related expenses for the years ended
December 31, 2007 and 2006 were $1.1 million and $0.8 million, respectively. This non-cash expense relates to the amortization of restricted stock and stock options granted to our employees. The restricted shares that were granted prior to 2006
become unrestricted on the tenth anniversary of the grant date, while the restricted shares granted during 2006 and 2007 become unrestricted on the fourth anniversary of the grant date, and the related expenses are amortized on a straight-line basis
over their respective restricted period. All other selling, general and administrative items, which include insurance and operating expenses, were $3.5 million for the year ended December 31, 2007 and $3.4 million for the year ended
December 31, 2006.

Loss on early extinguishment of debt. During the year 2007, we recorded a charge of $1.1 million related to
the early extinguishment of our former credit facility on March 21, 2007, including the write-off of unamortized financing related charges that were associated with the former credit facility.

Depreciation and Amortization. Depreciation and amortization expense for 2007 was $9.4 million, compared to $9.0 million for 2006.

Interest Income. Interest income for each of the years ended December 31, 2007 and December 31, 2006 were $0.2 million. Interest income
is generated on our cash balances, which are invested in short-term, highly liquid investments at variable rates of interest.

Interest
Expense. Interest expense for the year ended December 31, 2007 was $1.8 million, compared to $2.5 million for the year ended December 31, 2006. As of March 22, 2006, our loans were converted to a fixed interest rate of 9.0% in
connection with the twentieth amendment to our credit agreement underlying our credit facility. On March 21, 2007 we entered into a new credit facility with a floating interest rate of LIBOR plus 350 basis points on drawn balances. Our interest
rate was 8.61% as of December 31, 2007. Also included in interest expense is the amortization of original issuance discounts and deferred charges that amounted to $0.4 million and $1.1 million for the year ended December 31, 2007 and 2006,
respectively.

Results of Operations

Fiscal Year
Ended December 31, 2006 Compared to Fiscal Year Ended December 31, 2005

Revenues. Revenues for the fiscal year ended
December 31, 2006 were $40.1 million as compared to $33.8 million for the fiscal year ended December 31, 2005. We increased the number of our customers from 236 at the end of 2005 to 243 at the end of 2006, primarily with the addition of
domestic subsidiaries of internationally



32



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based carriers. We believe that there are greater opportunities to serve domestic subsidiaries of foreign telecommunications companies in our gateway
markets, as domestic carriers consolidate and rationalize. Revenues were generated by providing transport, colocation and communications access management services to our customers and are quantified as follows:



|                          |  |                                |        |      |   |        |  |   |       |  
|------------------------- |  | ------------------------------ | ------ | ---- | - | ------ |  | - | ----- | -
|                          |  | For the year endedDecember 31, |        |      |  
|(amounts in thousands)    |  | 2006                           |        | 2005 |   | Change | 
|On-net transport revenue  |  | $                              | 21,379 |      | $ | 19,912 |  | $ | 1,467 |  
|Off-net transport revenue |  |                                | 9,335  |      |   | 5,519  |  |   | 3,816 |  
|Colocation revenue        |  |                                | 8,699  |      |   | 7,494  |  |   | 1,205 |  
|Access revenue            |  |                                | 667    |      |   | 899    |  |   | (232  | )
|                          |  |                                |        |      |   |        |  |   |       |  
|Total Revenue             |  | $                              | 40,080 |      | $ | 33,824 |  | $ | 6,256 |  
|                          |  |                                |        |      |   |        |  |   |       |  

We recognized $21.4 million in on-net transport service revenues in 2006, up from $20.0 million in
2005. Off-net transport service revenues for 2006 were $9.3 million, up from $5.5 million in 2005. Revenues from colocation and other services were $8.7 million in 2006 compared to $7.5 million in 2005, and revenues from communications access
management services declined to $0.7 million in 2006 from $0.9 million in 2005.

The majority of our transport and colocation services are
provided within and between our carrier hotel facilities in the New York/New Jersey market. On-net transport revenues increased as we provided a greater number of circuits to our customers. The growth in new on-net transport services more than
offset the disconnections and price decreases that we experienced. Off-net transport revenues increased over the same period last year as we continued to leverage our current customer base by providing services outside our gateway markets of New
York/New Jersey and Los Angeles. Colocation revenues increased as we licensed additional caged space, cabinets and racks in our facilities. Our network infrastructure has significant capacity to provide additional transport connectivity, and we also
have the network capabilities to deliver connectivity utilizing new technologies, such as Ethernet and IP services.

For fiscal years 2006
and 2005, there were no individual customers that accounted for over 10% of our total revenues.

Cost of Services. Cost of services,
associated with the operation of our networks and facilities, were $20.2 million in 2006, compared to $16.4 million in 2005. The majority of our cost of services is occupancy expenses, consisting of rent, license fees, and utility costs for our
carrier hotel facilities, on-net buildings and off-net buildings. Other cost of services includes off-net connectivity charges and maintenance and repair costs.



|                                       |  |                                |        |      |   |        |  |   |       |  
|-------------------------------------- |  | ------------------------------ | ------ | ---- | - | ------ |  | - | ----- | -
|                                       |  | For the year endedDecember 31, |        |      |  
|(amounts in thousands)                 |  | 2006                           |        | 2005 |   | Change | 
|Occupancy expenses                     |  | $                              | 12,660 |      | $ | 11,756 |  | $ | 904   |  
|Off-net connectivity charges           |  |                                | 6,903  |      |   | 3,958  |  |   | 2,945 |  
|Maintenance and repair and other costs |  |                                | 661    |      |   | 730    |  |   | (69   | )
|                                       |  |                                |        |      |   |        |  |   |       |  
|Total Cost of Services                 |  | $                              | 20,224 |      | $ | 16,444 |  | $ | 3,780 |  
|                                       |  |                                |        |      |   |        |  |   |       |  

Occupancy expenses represented 62.6% of cost of services or $12.7 million in 2006, an increase of
$0.9 million as compared to 71.5% or $11.8 million in 2005. This increase was due to increases in colocation and cross-connection charges associated with new order installations in existing facilities and an increase in utility usage.

Off-net connectivity charges were 34.1% of cost of services or $6.9 million for the year ended December 31, 2006, compared to 24.1% of the cost of
services or $4.0 million for the year ended December 31,



33



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2005. We expect these connectivity charges to increase commensurately with our increase in revenues from off-net transport.

Maintenance and repair and other costs were 3.3% or $0.7 million of cost of services for the year ended December 31, 2006, compared to 4.4% or $0.7
million for the year ended December 31, 2005. These costs will continue to represent a relatively small and fixed component of cost of services.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year ended December 31, 2006 were $15.4 million compared to $17.3 million for 2005. Personnel costs, which
were consistent over the period, represented 63.6% or $9.8 million of selling, general and administrative expenses for the year ended December 31, 2006 compared to 55.9% or $9.7 million for 2005. Professional fees for the year ended
December 31, 2006 were $1.3 million, as compared to $1.7 million for the same period in 2005, due to on going cost control initiatives. Marketing expenses decreased by $0.2 million to $ 0.1 million from the year ended December 31,
2005 also due to on going cost control initiatives. During the year ended December 31, 2006, we expensed $0.1 million for fees related to the twentieth amendment of our credit agreement with Deutsche Bank. During the year ended
December 31, 2005, we expensed $1.2 million of deferred transaction costs related to the termination of our stock purchase agreement with Consolidated Edison, Inc.

Stock related expenses for the years ended December 31, 2006 and 2005 were $0.8 million and $0.5 million, respectively. This non-cash expense relates to the amortization of restricted stock and stock options
granted to our employees. The restricted shares that were granted prior to 2006 become unrestricted on the tenth anniversary of the grant date, while the restricted shares granted during 2006 become unrestricted on the fourth anniversary of the
grant date, and the related expenses are amortized on a straight-line basis over their respective restricted period. All other selling, general and administrative items, which include insurance and operating expenses, were $3.4 million and $3.9
million for the years ended December 31, 2006 and 2005, respectively.

Impairment of Property, Plant and Equipment. During the
year ended December 31, 2005, we recorded an impairment of $2.8 million to reflect our revised business plan and forecast of revenues due to the early termination of a significant access agreement, as well as other renegotiated building access
service orders with other customers, which significantly reduced our future revenues from access services. There were no impairments recorded during the year ended December 31, 2006.

Depreciation and Amortization. Depreciation and amortization expense for 2006 was $9.0 million, compared to $8.8 million for 2005.

Interest Income. Interest income for the year ended December 31, 2006 was approximately $0.2 million, compared to $0.1 million for the year
ended December 31, 2005. Interest income is generated on our cash balance which is at variable rates of interest and is invested in short-term, highly liquid investments.

Interest Expense. Interest expense for the year ended December 31, 2006 was $2.5 million, compared to $2.4 million for the year ended
December 31, 2005. As of March 22, 2006, our loans were converted to a fixed interest rate of 9.0% in connection with the twentieth amendment to our credit agreement underlying our credit facility. Prior to March 22, 2006, our loans
bore interest at a variable rate based upon a spread over LIBOR.

Liquidity and Capital Resources

To date, we have financed our operations through revenues collected from our customers, the issuance of equity securities in private transactions and by
arranging credit facilities. We incurred a loss from operations and a net loss for 2007 of $2.2 million and $4.9 million, respectively, compared to a loss from operations and a net loss of $4.6 million and $6.9 million, respectively, for 2006.
During 2007, cash provided by operating activities was $6.9 million, and cash purchases of property, plant and equipment were $3.8 million, compared to cash provided by operating activities of $5.4 million and $2.9 million of cash purchases of
property, plant and equipment for 2006.



34



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For the year ended December 31, 2007, we used $0.7 million in net cash for financing related
activities. For the year ended December 31, 2006 we received $2.4 million in net cash for financing activities. We believe we will be able to generate sufficient cash flows from operations in order to sustain our current and long-term
operations.

On March 1, 2007, we entered into a Lease Modification and Extension Agreement (the Amendment), with 60
Hudson Owner LLC, which is the landlord of the building located at 60 Hudson Street, New York, New York where we had leased 15,239 square feet of the nineteenth floor of the building. Under the terms of the Amendment, we agreed to lease an
additional 11,315 square feet of space at the building, primarily on the twelfth floor, and to extend the term of the lease until July 31, 2022.

On March 21, 2007, we entered into a Credit Agreement with CapitalSource Finance LLC pursuant to which we and our subsidiaries established a $25.0 million credit facility (the Credit Facility),
consisting of (i) a $14.0 million term loan, (ii) a $6.0 million revolving loan and letter of credit facility and (iii) a $5.0 million capital expenditure loan facility, which was unfunded at closing. The $14.0 million term loan was
used to pay off our former credit facility, which was set to mature in March 2008. The Credit Facility bears interest at floating rates, depending on the type of borrowing and based on either a Prime Rate or LIBOR Rate, as such terms are defined
under the Credit Facility. The $14.0 million term loan is repayable in increasing quarterly installments commencing in July 2008. The Credit Facility matures in March 2012. The Credit Facility is secured by a first lien on all of our and our
subsidiaries existing and future real assets and personal property. The Credit Facility is guaranteed by us and certain of our subsidiaries, and contains restrictive covenants, operating restrictions and other terms and conditions.

On November 7, 2007, we entered into an Amended and Restated Credit Agreement by and among us, our subsidiaries, CapitalSource Finance LLC and
CapitalSource CF LLC pursuant to which we and our subsidiaries established a new $5.0 million loan facility (the New Loan ) solely to enable us to repurchase outstanding shares of our capital stock pursuant to our stock repurchase
program, which is described below. The New Loan, which was unfunded at closing, supplements and is made a part of our existing $25.0 million Credit Facility described above. The New Loan bears interest at floating rates, depending on the type of
borrowing and based on either a Prime Rate or LIBOR Rate, as such terms are defined under the Credit Facility. The applicable margin based upon a LIBOR Rate is 4.50%, and the applicable margin based on a Prime Rate is 3.25%. In addition, the parties
adjusted certain of the financial covenants under the Credit Facility. The New Loan will be payable in equal quarterly installments of 3.75% of the principal amount commencing in April 2010, with the entire Credit Facility maturing in March 2012.

On November 8, 2007, we announced that our Board of Directors had authorized the repurchase of up to $5.0 million of our common
stock, either through open market purchases or in privately negotiated transactions. The timing and amount of the shares to be repurchased will be based on market conditions and other factors, including price, corporate and regulatory requirements
and alternative investment opportunities. Any shares repurchased in the program will be cancelled. The repurchase program is scheduled to terminate on December 31, 2008, and may be modified or discontinued at any time. As of December 31,
2007, 86,288 shares of our common stock had been purchased in repurchase program.

As of December 31, 2007, we had $14.0 million of
indebtedness outstanding under our Credit Facility and $5.4 million of outstanding letters of credit. In addition, we had $0.6 million of availability on a revolving loan facility, $5.0 million of availability in a capital expenditure loan facility
and $5.0 million of availability under the New Loan, which is solely to enable us to repurchase outstanding shares of our capital stock pursuant to our previously announced stock repurchase program subject to compliance with the terms of the credit
agreement. The interest rate on our outstanding borrowings under the facility are variable at LIBOR plus 350 basis points on the term loan, at LIBOR plus 300 basis points on the revolving facility and at LIBOR plus 350 basis points on the capital
expenditures loan. We were in full compliance with all of the covenants contained in the Credit Facility as of December 31, 2007. Our financial covenants include minimum consolidated EBITDA (as defined in the credit agreement underlying the
Credit Facility), maximum capital expenditures, minimum fixed charge coverage ratio,



35



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maximum leverage ratio and minimum consolidated interest coverage ratio. The compliance levels and calculation of such levels with respect to those covenants
are as defined in the Credit Facility, which is on file with the Securities and Exchange Commission. Non-compliance with any of the covenants, requirements, or other terms and conditions under the credit agreement constitutes an event of default and
potentially accelerates the outstanding balance of the Credit Facility for immediate payment.

We spent $3.8 million in capital
expenditures during 2007, of which $2.9 million was primarily for the implementation of customer orders and general network improvements, including the purchase of network equipment to increase capacity and to interconnect with customers, and $0.9
million related to our colocation expansion projects at 60 Hudson Street and at 165 Halsey Street in Newark, New Jersey. Our capital expenditures totaled $2.9 million in 2006. We may expend additional capital for the selected expansion of our
network infrastructure, depending upon market conditions, customer demand and our liquidity and capital resources.

During the year ended
December 31, 2007, 2,400 shares of restricted stock were returned to us as the result of employee terminations.

As of March 27,
2008, we had approximately 7.6 million shares of common stock outstanding, or approximately 8.3 million shares of common stock outstanding on a fully diluted basis, assuming the exercise of all outstanding options and warrants.

From time to time, we may consider private or public sales of additional equity or debt securities and other financings, depending upon market
conditions, in order to provide additional working capital or finance the continued operations of our business, and we may also consider potential strategic alternatives, such as acquisitions or the sale of all or a portion of our business, although
there can be no assurance that we would be able to successfully consummate any such financing or other transaction on acceptable terms, if at all. For additional disclosure and risks regarding future financings and funding our ongoing operations,
please see the subsection entitled, In the future, we may require additional capital to fund the further development of our networks and operation of our business, in the section entitled Factors Affecting our Business
Condition. We do not have any off-balance sheet financing arrangements, except for outstanding letters of credit, nor do we anticipate entering into any.

Commitments and Contingent Liabilities

Our obligations and commitments to make future payments under contracts
primarily include scheduled reductions in the availability of our credit facility and payments under our operating leases.

The chart below
identifies our outstanding contractual obligations and commitments as of December 31, 2007.



|                                                    |  |                                       |        |      |   |        |  |      |        |      |   |        |  |            |        |  |   |        |  |   |       
|--------------------------------------------------- |  | ------------------------------------- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | ---------- | ------ |  | - | ------ |  | - | ------
|                                                    |  | Payments Due by Period (in thousands)
|Contractual Obligation                              |  | Total                                 |        | 2008 |   | 2009   |  | 2010 |        | 2011 |   | 2012   |  | Thereafter
|Mandatory Repayments and Reductions of Indebtedness |  | $                                     | 14,000 |      | $ | 700    |  | $    | 1,750  |      | $ | 2,450  |  | $          | 5,250  |  | $ | 3,850  |  | $ |      
|Operating Leases(1)                                 |  |                                       | 83,171 |      |   | 10,182 |  |      | 9,224  |      |   | 8,431  |  |            | 7,847  |  |   | 8,009  |  |   | 39,478
|                                                    |  |                                       |        |      |   |        |  |      |        |      |   |        |  |            |        |  |   |        |  |   |       
|Total Contractual Obligations                       |  | $                                     | 97,171 |      | $ | 10,882 |  | $    | 10,974 |      | $ | 10,881 |  | $          | 13,097 |  | $ | 11,859 |  | $ | 39,478
|                                                    |  |                                       |        |      |   |        |  |      |        |      |   |        |  |            |        |  |   |        |  |   |       



|(1) | Includes estimated future license fees for carrier hotel facilities. License fees are typically calculated as a percentage of the revenues we generate in the respective facility, as
per our lease agreement with the facility.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On August 17, 2006, we adopted the FiberNet Telecom Group, Inc. Change in
Control Plan (the Plan). Pursuant to the terms of the Plan, members of senior management are entitled to certain benefits upon a termination of employment (other than a termination by FiberNet for Cause or by an employee
without Good



36



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Reason as such terms are defined in the Plan) that occurs within one year after a Change in Control event (as defined in the Plan). Specifically, each
Vice President and Senior Vice President shall be entitled to a cash payment of 50% of his or her current base salary and the President shall be entitled to a cash payment of 100% of his or her current base salary, plus a pro-rated portion of his or
her annual bonus. We shall also pay the premiums for continued health care coverage for six months for each Vice President and Senior Vice President and for twelve months for the President.

In addition, the Plan provides that if the benefits payable in connection with a Change in Control event are subject to an Excise Tax (as defined in the
Plan), then (i) for the President, we agree to make such individual whole by making a gross-up payment, such that the net total amount of benefits actually received is equal to those benefits calculated as if only standard income taxes, and not
the Excise Tax, had applied, and (ii) for each Vice President and Senior Vice President, we shall pay to such individual the greater of (A) the total value of the benefits payable if reduced to avoid triggering the Excise Tax or
(B) the total value of the benefits payable even if the Excise Tax applies, such that the net total amount of benefits actually received by such individual is maximized.

Recent Accounting Pronouncements

In June 2007, the EITF reached a consensus on EITF Issue
No. 06-11, Accounting for Income Tax Benefits on Dividends on Share-Based Payment Awards (EITF 06-11). EITF 06-11 addresses share-based payment arrangements with dividend protection features that entitle employees to
receive (a) dividends on equity-classified nonvested shares, (b) dividend equivalents on equity-classified nonvested share units, or (c) payments equal to the dividends paid on the underlying shares while an equity-classified share
option is outstanding, when those dividends or dividend equivalents are charged to retained earnings under Statement 123(R) and result in an income tax deduction for the employer. A realized income tax benefit from dividends or dividend equivalents
that are charged to retained earnings and are paid to employees for equity-classified nonvested shares, nonvested equity share units, and outstanding equity share options should be recognized as an increase in additional paid-in capital. The amount
recognized in additional paid-in capital for the realized income tax benefit from dividends on those awards should be included in the pool of excess tax benefits available to absorb potential future tax deficiencies on share-based payment awards.
The provisions of EITF 06-11 are effective for FiberNet as of January 1, 2008. We do not expect the adoption of this pronouncement to have a material impact on our financial position or results of operations.

In February 2007, FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of
FASB Statement No. 115 (SFAS No. 159). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007. We are currently evaluating the impact of SFAS No. 159, but do not expect the adoption of SFAS No. 159 to have a material impact on our condensed consolidated interim financial statements.



|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- | ----------------------------------------------------------

Our exposure to financial market risk, including changes in interest rates, relates primarily to our marketable security investments. Borrowings under our credit facility bear interest at floating rates, based upon LIBOR or a base rate plus
an applicable margin. As a result, we are subject to fluctuations in interest rates. A 100 basis point increase in LIBOR would increase our annual interest expense by less than $1.0 million per year. As of March 27, 2007, we had borrowed $14.0
million under our credit facility, with a current weighted average interest rate of 6.10%.

We generally place our cash in marketable
security investments which invest in high credit quality instruments, primarily U.S. government obligations and corporate obligations with contractual maturities of less than three months. We operate only in the United States, and all sales have
been made in U.S. dollars. We do not have any material exposure to changes in foreign currency exchange rates.



37



---

|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- | -------------------------------------------

CONSOLIDATED FINANCIAL STATEMENTS

TABLE OF CONTENTS



|                                                                    |  |     
|------------------------------------------------------------------- |  | ----
|                                                                    |  | Page
|Report of Independent Registered Public Accounting Firm             |  | 39  
|Report of Predecessor Independent Registered Public Accounting Firm |  | 40  
|Consolidated Balance Sheets                                         |  | 41  
|Consolidated Statements of Operations                               |  | 42  
|Consolidated Statements of Stockholders Equity                     |  | 43  
|Consolidated Statements of Cash Flows                               |  | 44  
|Notes to Consolidated Financial Statements                          |  | 45  



38



---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of FiberNet
Telecom Group, Inc.:

We have audited the accompanying consolidated balance sheets of FiberNet Telecom Group, Inc. (FiberNet or
the Company) as of December 31, 2007, and the related consolidated statements of operations, stockholders equity and cash flows for the year ended December 31, 2007. These financial statements are the responsibility of
FiberNets management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted
our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, such consolidated
financial statements present fairly, in all material respects, the financial position of FiberNet Telecom Group, Inc., as of December 31, 2007, and the results of their operations and their cash flows for the year ended December 31, 2007,
in conformity with accounting principles generally accepted in the United States of America.



/S/    FRIEDMAN
LLPEast Hanover, New Jersey March 28, 2008




39



---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of FiberNet
Telecom Group, Inc.:

We have audited the accompanying consolidated balance sheets of FiberNet Telecom Group, Inc. (FiberNet or
the Company) as of December 31, 2006, and the related consolidated statements of operations, stockholders equity and cash flows for each of the two years in the period ended December 31, 2006. These financial statements
are the responsibility of FiberNets management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, such consolidated financial statements present fairly, in all material respects, the financial position of FiberNet Telecom Group, Inc., as of December 31, 2006, and the results of their
operations and their cash flows for each of the two years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 3 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment, effective January 1, 2006.



/S/    DELOITTE & TOUCHE
LLPNew York, New York April 2, 2007




40



---

FIBERNET TELECOM GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)



|                                                                                                                          |  |                  |          |   |                  |   |          |  
|------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                          |  | December 31,2007 |          |   | December 31,2006 |  
|ASSETS                                                                                                                    |  |                  |          |   |                  |   |          |  
|Current Assets:                                                                                                           |  |                  |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                 |  | $                | 8,220    |   |                  | $ | 6,802    |  
|Accounts receivable, net of allowance of $361 and $452                                                                    |  |                  | 3,818    |   |                  |   | 3,208    |  
|Prepaid expenses                                                                                                          |  |                  | 612      |   |                  |   | 656      |  
|                                                                                                                          |  |                  |          |   |                  |   |          |  
|Total current assets                                                                                                      |  |                  | 12,650   |   |                  |   | 10,666   |  
|Property, plant and equipment, net (Note 4)                                                                               |  |                  | 54,921   |   |                  |   | 59,534   |  
|Other Assets:                                                                                                             |  |                  |          |   |                  |   |          |  
|Deferred charges, net of accumulated amortization of $160 and $2,722                                                      |  |                  | 845      |   |                  |   | 755      |  
|Goodwill                                                                                                                  |  |                  | 1,613    |   |                  |   |         |  
|Other assets                                                                                                              |  |                  | 883      |   |                  |   | 777      |  
|                                                                                                                          |  |                  |          |   |                  |   |          |  
|Total other assets                                                                                                        |  |                  | 3,341    |   |                  |   | 1,532    |  
|                                                                                                                          |  |                  |          |   |                  |   |          |  
|TOTAL ASSETS                                                                                                              |  | $                | 70,912   |   |                  | $ | 71,732   |  
|                                                                                                                          |  |                  |          |   |                  |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                      |  |                  |          |   |                  |   |          |  
|Current Liabilities:                                                                                                      |  |                  |          |   |                  |   |          |  
|Accounts payable                                                                                                          |  | $                | 3,553    |   |                  | $ | 3,482    |  
|Accrued expenses                                                                                                          |  |                  | 7,227    |   |                  |   | 4,719    |  
|Notes payablecurrent portion                                                                                             |  |                  | 700      |   |                  |   |         |  
|Deferred revenuescurrent portion                                                                                         |  |                  | 1,282    |   |                  |   | 1,746    |  
|                                                                                                                          |  |                  |          |   |                  |   |          |  
|Total current liabilities                                                                                                 |  |                  | 12,762   |   |                  |   | 9,947    |  
|Long-Term Liabilities:                                                                                                    |  |                  |          |   |                  |   |          |  
|Notes payable, less original issue discount of $0 and $432                                                                |  |                  | 13,300   |   |                  |   | 13,729   |  
|Deferred revenues, long term                                                                                              |  |                  | 3,351    |   |                  |   | 3,728    |  
|Other long-term liabilities                                                                                               |  |                  | 2,201    |   |                  |   | 1,308    |  
|                                                                                                                          |  |                  |          |   |                  |   |          |  
|Total long term Liabilities                                                                                               |  |                  | 18,852   |   |                  |   | 18,765   |  
|                                                                                                                          |  |                  |          |   |                  |   |          |  
|Total liabilities                                                                                                         |  |                  | 31,614   |   |                  |   | 28,712   |  
|Commitments and contingent liabilities (Note 9)                                                                           |  |                  |          |   |                  |   |          |  
|Stockholders Equity:                                                                                                     |  |                  |          |   |                  |   |          |  
|Common stock, $0.001 par value, 2,000,000,000 shares authorized and 7,554,309 and 7,144,464 shares issued and outstanding |  |                  | 8        |   |                  |   | 7        |  
|Additional paid-in-capital                                                                                                |  |                  | 445,368  |   |                  |   | 444,327  |  
|Deferred rent (warrants)                                                                                                  |  |                  | (1,386   | ) |                  |   | (1,559   | )
|Accumulated deficit                                                                                                       |  |                  | (404,692 | ) |                  |   | (399,755 | )
|                                                                                                                          |  |                  |          |   |                  |   |          |  
|Total stockholders equity                                                                                                |  |                  | 39,298   |   |                  |   | 43,020   |  
|                                                                                                                          |  |                  |          |   |                  |   |          |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                |  | $                | 70,912   |   |                  | $ | 71,732   |  
|                                                                                                                          |  |                  |          |   |                  |   |          |  

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



41



---

FIBERNET TELECOM GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)



|                                                             |  |                         |        |   |      |   |        |      |  |   |         |  
|------------------------------------------------------------ |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                                             |  | Year Ended December 31, |       
|                                                             |  | 2007                    |        |   | 2006 |   |        | 2005 | 
|Revenues                                                     |  | $                       | 49,777 |   |      | $ | 40,080 |      |  | $ | 33,824  |  
|Operating expenses:                                          |  |                         |        |   |      |   |        |      |  |   |         |  
|Cost of services (exclusive of items shown separately below) |  |                         | 25,519 |   |      |   | 20,224 |      |  |   | 16,444  |  
|Selling, general and administrative expense                  |  |                         | 17,034 |   |      |   | 15,441 |      |  |   | 17,322  |  
|Impairment of property, plant and equipment                  |  |                         |       |   |      |   |       |      |  |   | 2,812   |  
|Depreciation and amortization                                |  |                         | 9,419  |   |      |   | 8,998  |      |  |   | 8,840   |  
|                                                             |  |                         |        |   |      |   |        |      |  |   |         |  
|Total operating expenses                                     |  |                         | 51,972 |   |      |   | 44,663 |      |  |   | 45,418  |  
|                                                             |  |                         |        |   |      |   |        |      |  |   |         |  
|Loss from operations                                         |  |                         | (2,195 | ) |      |   | (4,583 | )    |  |   | (11,594 | )
|Other income                                                 |  |                         |       |   |      |   | 21     |      |  |   |        |  
|Loss on early extinguishment of debt                         |  |                         | (1,146 | ) |      |   |       |      |  |   |        |  
|Interest income                                              |  |                         | 226    |   |      |   | 159    |      |  |   | 76      |  
|Interest expense                                             |  |                         | (1,823 | ) |      |   | (2,522 | )    |  |   | (2,417  | )
|                                                             |  |                         |        |   |      |   |        |      |  |   |         |  
|Net loss                                                     |  | $                       | (4,938 | ) |      | $ | (6,925 | )    |  | $ | (13,935 | )
|                                                             |  |                         |        |   |      |   |        |      |  |   |         |  
|Net loss per sharebasic and diluted                         |  | $                       | (0.66  | ) |      | $ | (1.09  | )    |  | $ | (2.69   | )
|Weighted average shares outstandingbasic and diluted        |  |                         | 7,428  |   |      |   | 6,359  |      |  |   | 5,174   |  

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



42



---

FIBERNET TELECOM GROUP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(in thousands, except per share amounts)



|                                   |  |              |   |  |                                   |      |   |              |   |         |                    |  |   |        |   |  |   |          |   |  |   |         |  
|---------------------------------- |  | ------------ | - |  | --------------------------------- | ---- | - | ------------ | - | ------- | ------------------ |  | - | ------ | - |  | - | -------- | - |  | - | ------- | -
|                                   |  | Common Stock |   |  | AdditionalPaid inCapitaland Other |      |   | DeferredRent |   |         | AccumulatedDeficit |  |   | Total  |  
|                                   |  | Shares       |   |  | Amount                            |      |   |              |   |        
|Balance at December 31, 2004       |  | 5,098,957    |   |  | $                                 | 5.1  |   |              | $ | 440,032 |                    |  | $ | (1,906 | ) |  | $ | (378,895 | ) |  | $ | 59,236  |  
|Restricted stock surrendered       |  | (9,348       | ) |  |                                   |     |   |              |   | (53     | )                  |  |   |       |   |  |   |         |   |  |   | (53     | )
|Restricted stock grants            |  | 2,500        |   |  |                                   |     |   |              |   |        |                    |  |   |       |   |  |   |         |   |  |   |        |  
|Warrants Exercised                 |  | 104,440      |   |  |                                   | 0.1  |   |              |   | 10      |                    |  |   |       |   |  |   |         |   |  |   | 10      |  
|Warrants ExercisedCashless        |  | 78,051       |   |  |                                   | 0.1  |   |              |   |        |                    |  |   |       |   |  |   |         |   |  |   |        |  
|Deferred compensation amortization |  |             |   |  |                                   |     |   |              |   | 566     |                    |  |   |       |   |  |   |         |   |  |   | 566     |  
|Deferred rent amortization         |  |             |   |  |                                   |     |   |              |   |        |                    |  |   | 173    |   |  |   |         |   |  |   | 173     |  
|Net loss                           |  |             |   |  |                                   |     |   |              |   |        |                    |  |   |       |   |  |   | (13,935  | ) |  |   | (13,935 | )
|                                   |  |              |   |  |                                   |      |   |              |   |         |                    |  |   |        |   |  |   |          |   |  |   |         |  
|Balance at December 31, 2005       |  | 5,274,600    |   |  |                                   | 5.3  |   |              |   | 440,555 |                    |  |   | (1,732 | ) |  |   | (392,830 | ) |  |   | 45,998  |  
|Restricted stock surrendered       |  | (18,850      | ) |  |                                   | (0.0 | ) |              |   |        |                    |  |   |       |   |  |   |         |   |  |   |        |  
|Restricted stock grants            |  | 703,000      |   |  |                                   | 0.7  |   |              |   | 1       |                    |  |   |       |   |  |   |         |   |  |   | 1       |  
|Warrants Exercised                 |  | 135,715      |   |  |                                   | 0.1  |   |              |   | 358     |                    |  |   |       |   |  |   |         |   |  |   | 358     |  
|Issuance of common stock           |  | 1,050,000    |   |  |                                   | 1.0  |   |              |   | 1,471   |                    |  |   |       |   |  |   |         |   |  |   | 1,472   |  
|Warrants Issued                    |  |             |   |  |                                   |     |   |              |   | 1,142   |                    |  |   |       |   |  |   |         |   |  |   | 1,142   |  
|Deferred compensation amortization |  |             |   |  |                                   |     |   |              |   | 801     |                    |  |   |       |   |  |   |         |   |  |   | 801     |  
|Deferred rent amortization         |  |             |   |  |                                   |     |   |              |   |        |                    |  |   | 173    |   |  |   |         |   |  |   | 173     |  
|Net loss                           |  |             |   |  |                                   |     |   |              |   |        |                    |  |   |       |   |  |   | (6,925   | ) |  |   | (6,925  | )
|                                   |  |              |   |  |                                   |      |   |              |   |         |                    |  |   |        |   |  |   |          |   |  |   |         |  
|Balance at December 31, 2006       |  | 7,144,465    |   |  |                                   | 7.1  |   |              |   | 444,327 |                    |  |   | (1,559 | ) |  |   | (399,755 | ) |  |   | 43,020  |  
|Restricted stock surrendered       |  | (2,400       | ) |  |                                   | (0.0 | ) |              |   |        |                    |  |   |       |   |  |   |         |   |  |   |        |  
|Restricted stock grants            |  | 261,440      |   |  |                                   | 0.3  |   |              |   |        |                    |  |   |       |   |  |   |         |   |  |   |        |  
|Warrants Exercised                 |  | 237,093      |   |  |                                   | 0.2  |   |              |   | 626     |                    |  |   |       |   |  |   |         |   |  |   | 626     |  
|Common stock repurchase            |  | (86,288      | ) |  |                                   | (0.1 | ) |              |   | (693    | )                  |  |   |       |   |  |   |         |   |  |   | (693    | )
|Deferred compensation amortization |  |             |   |  |                                   |     |   |              |   | 1,109   |                    |  |   |       |   |  |   |         |   |  |   | 1,109   |  
|Deferred rent amortization         |  |             |   |  |                                   |     |   |              |   |        |                    |  |   | 173    |   |  |   |         |   |  |   | 173     |  
|Net loss                           |  |             |   |  |                                   |     |   |              |   |        |                    |  |   |       |   |  |   | (4,938   | ) |  |   | (4,938  | )
|                                   |  |              |   |  |                                   |      |   |              |   |         |                    |  |   |        |   |  |   |          |   |  |   |         |  
|Balance at December 31, 2007       |  | 7,554,309    |   |  | $                                 | 7.5  |   |              | $ | 445,368 |                    |  | $ | (1,386 | ) |  | $ | (404,692 | ) |  | $ | 39,298  |  
|                                   |  |              |   |  |                                   |      |   |              |   |         |                    |  |   |        |   |  |   |          |   |  |   |         |  

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



43



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FIBERNET TELECOM GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                                      |  |                         |         |   |      |   |        |      |  |   |         |  
|----------------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                                                                                      |  | Year Ended December 31, |        
|                                                                                                      |  | 2007                    |         |   | 2006 |   |        | 2005 | 
|Cash flows from operating activities:                                                                 |  |                         |         |   |      |   |        |      |  |   |         |  
|Net loss                                                                                              |  | $                       | (4,938  | ) |      | $ | (6,925 | )    |  | $ | (13,935 | )
|Adjustments to reconcile net loss to net cash provided by operating activities:                       |  |                         |         |   |      |   |        |      |  |   |         |  
|Depreciation and amortization                                                                         |  |                         | 9,419   |   |      |   | 8,998  |      |  |   | 8,840   |  
|Stock related expense                                                                                 |  |                         | 1,109   |   |      |   | 801    |      |  |   | 513     |  
|Impairment of property, plant and equipment                                                           |  |                         |        |   |      |   |       |      |  |   | 2,812   |  
|Deferred rent expense (warrants)                                                                      |  |                         | 173     |   |      |   | 173    |      |  |   | 173     |  
|Loss on early extinguishment of debt                                                                  |  |                         | 1,146   |   |      |   |       |      |  |   |        |  
|Other non-cash expenses                                                                               |  |                         | 460     |   |      |   | 1,203  |      |  |   | 1,285   |  
|Change in assets and liabilities:                                                                     |  |                         |         |   |      |   |        |      |  |   |         |  
|(Increase) decrease in accounts receivable                                                            |  |                         | (710    | ) |      |   | (908   | )    |  |   | 1,976   |  
|Decrease (increase) in prepaid expenses                                                               |  |                         | 44      |   |      |   | (206   | )    |  |   | 227     |  
|Decrease in other assets                                                                              |  |                         | 58      |   |      |   | 751    |      |  |   | 362     |  
|(Decrease) increase in accounts payable                                                               |  |                         | (535    | ) |      |   | 84     |      |  |   | (591    | )
|Increase in accrued expenses and other long-term liabilities                                          |  |                         | 1,475   |   |      |   | 911    |      |  |   | 1,222   |  
|(Decrease) increase in deferred revenue                                                               |  |                         | (841    | ) |      |   | 494    |      |  |   | (1,708  | )
|                                                                                                      |  |                         |         |   |      |   |        |      |  |   |         |  
|Cash provided by operating activities                                                                 |  |                         | 6,860   |   |      |   | 5,376  |      |  |   | 1,176   |  
|Cash flows from investing activities:                                                                 |  |                         |         |   |      |   |        |      |  |   |         |  
|Capital expenditures                                                                                  |  |                         | (3,798  | ) |      |   | (2,875 | )    |  |   | (2,665  | )
|Common stock repurchase                                                                               |  |                         | (693    | ) |      |   |       |      |  |   |        |  
|Long-term investment                                                                                  |  |                         | (250    | ) |      |   |       |      |  |   |        |  
|Decrease in restricted cash                                                                           |  |                         |        |   |      |   |       |      |  |   | 1,881   |  
|                                                                                                      |  |                         |         |   |      |   |        |      |  |   |         |  
|Cash used in investing activities                                                                     |  |                         | (4,741  | ) |      |   | (2,875 | )    |  |   | (784    | )
|Cash flows from financing activities:                                                                 |  |                         |         |   |      |   |        |      |  |   |         |  
|Proceeds from warrants exercise                                                                       |  |                         | 626     |   |      |   | 358    |      |  |   |        |  
|Payment of financing costs of debt financings                                                         |  |                         | (1,167  | ) |      |   | (9     | )    |  |   | (427    | )
|Repayment of debt financing                                                                           |  |                         | (14,160 | ) |      |   |       |      |  |   | (1,975  | )
|Proceeds from debt financing                                                                          |  |                         | 14,000  |   |      |   |       |      |  |   | 1,000   |  
|Payment of financing costs of equity financings                                                       |  |                         |        |   |      |   | (152   | )    |  |   |        |  
|Proceeds from issuance of equity securities                                                           |  |                         |        |   |      |   | 2,205  |      |  |   |        |  
|                                                                                                      |  |                         |         |   |      |   |        |      |  |   |         |  
|Cash (used in) provided by financing activities                                                       |  |                         | (701    | ) |      |   | 2,402  |      |  |   | (1,402  | )
|                                                                                                      |  |                         |         |   |      |   |        |      |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                                                  |  |                         | 1,418   |   |      |   | 4,903  |      |  |   | (1,010  | )
|Cash and cash equivalents at beginning of year                                                        |  |                         | 6,802   |   |      |   | 1,899  |      |  |   | 2,909   |  
|                                                                                                      |  |                         |         |   |      |   |        |      |  |   |         |  
|Cash and cash equivalents at end of year                                                              |  | $                       | 8,220   |   |      | $ | 6,802  |      |  | $ | 1,899   |  
|                                                                                                      |  |                         |         |   |      |   |        |      |  |   |         |  
|Supplemental disclosures of cash flow information:                                                    |  |                         |         |   |      |   |        |      |  |   |         |  
|Interest paid                                                                                         |  | $                       | 1,435   |   |      | $ | 1,421  |      |  | $ | 873     |  
|Acquisition of property, plant, and equipment not paid                                                |  |                         | 919     |   |      |   | (612   | )    |  |   | (1,953  | )
|Amounts attributable to acquisition of Gateway Colocation recognized in goodwill and accrued expenses |  |                         | 1,613   |   |      |   |       |      |  |   |        |  

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



44



---

FIBERNET TELECOM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND OPERATIONS

FiberNet Telecom
Group, Inc. (hereinafter referred to as the Company or FiberNet) is a communications service provider focused on providing complex interconnection services enabling the exchange of voice, video and data traffic between global
networks. The Company owns and operates integrated colocation facilities and diverse transport routes in the two gateway markets of New York/New Jersey and Los Angeles. FiberNets network infrastructure and facilities are designed to provide
comprehensive broadband interconnectivity for the worlds largest network operators, including leading domestic and international telecommunications carriers, service providers and enterprises. The Company delivers core network backbone
services for mission critical requirements.

FiberNet is a holding company that owns all of the outstanding common stock of FiberNet
Operations, Inc. (Operations), a Delaware corporation and an intermediate level holding company, and 96% of the outstanding membership interests of Devnet L.L.C. (Devnet), a Delaware limited liability company. Operations owns
all of the outstanding common stock of FiberNet Telecom, Inc. (FTI), a Delaware corporation, and the remaining 4% of Devnet. FTI 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. FTI also owns all of the outstanding membership interests of Availius,
LLC (Availius), a New York limited liability company. The Company conducts its primary business operations through its operating subsidiaries, Devnet, Availius, Local Fiber and Equal Access.

The Company has agreements with other entities, including telecommunications license agreements with building landlords, interconnection agreements with
other telecommunications service providers and leases with carrier hotel property owners. FiberNet also has entered into contracts with suppliers for the components of its telecommunications networks.

Under FiberNets current operating plan, including its new credit facility (see Note 6), the Company does not anticipate requiring any additional
external sources of capital to fund its operations in the near term. However, from time to time, the Company may consider private or public sales of additional equity or debt securities and other financings, depending upon market conditions, in
order to provide additional working capital or finance the continued operations of our business. The Company does not have any off-balance sheet financing arrangements, except for outstanding letters of credit, nor does it anticipate entering into
any.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries, Operations, Devnet, FTI, Equal Access, Availius and Local Fiber and have been prepared in accordance with accounting principles generally accepted in the United States of America. All significant intercompany balances and transactions
have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.



45



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FIBERNET TELECOM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Cash and Cash Equivalents

Cash and cash equivalents include highly liquid investments with an original maturity of three months or less when purchased. 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 is calculated 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 Years                                                  
|Computer equipment            |  | 3 Years                                                  
|Office equipment and fixtures |  | 5 Years                                                  
|Leasehold improvements        |  | 15 Years or remaining life of lease, whichever is shorter
|Network equipment             |  | 10 Years                                                 
|Network infrastructure        |  | 20 Years                                                 

Maintenance and repairs are expensed as incurred. Improvements are capitalized as additions to
property, plant and equipment.

Impairment of Long-Lived Assets

The Company reviews the carrying value of long-lived assets for impairment in accordance with Statement of Financial Accounting Standard (SFAS) No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets (SFAS No. 144) whenever events and circumstances indicate the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual
disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss would be recognized equal to an amount by which the carrying value exceeds the fair value of the assets.

Revenue Recognition

FiberNet generates revenues from
selling network capacity and related services to other communications service providers. The Company recognizes revenues when earned as services are provided throughout the life of each sales order with a customer. The majority of the Companys
revenues are generated on a monthly recurring basis under contracts of various lengths, ranging from one month to fifteen years. Most of the Companys services are purchased for a contract period of one year. Revenue is recognized over the
service contract period for all general services. If the Company determines that collection of a receivable is not reasonably assured, it defers the revenue and recognizes it at the time collection becomes reasonably assured, which is generally upon
receipt of payment. Deferred revenues consist primarily of payments received in advance of revenue being earned under the service contracts.

Allowance
for Doubtful Accounts

The Company maintains an allowance for uncollectible accounts receivable for estimated losses resulting from
customers failure to make payments. Management determines the estimate of the allowance for uncollectible accounts receivable by considering a number of factors, including: (1) historical experience; (2) aging of the accounts
receivable; and (3) specific information obtained by the Company on the financial condition and the current creditworthiness of its customers.



46



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FIBERNET TELECOM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Fair Value of Financial Instruments

The Company estimates that the carrying value of its financial instruments approximates fair value, as all financial instruments are short term in nature
or bear interest at variable rates.

Goodwill

Cost in excess of net assets of an acquired business, principally goodwill, is accounted for under SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). SFAS No. 142 requires goodwill and
certain intangible assets no longer be amortized, but instead be reviewed for recoverability. The Company performs its annual impairment test in December. The Company also tests for impairment if an event occurs that is more likely than not to
reduce the fair value of the Company below its book value.

Deferred Charges

Deferred charges include the cost to access buildings and deferred financing costs. Costs to access buildings are being amortized over 12 years, which was
the term of the related contracts at their inception. Deferred financing costs are amortized over the term of the related credit facility.

Earnings Per
Share

Basic earnings per share has been computed using the weighted average number of shares outstanding during the period. Diluted
earnings per share is computed by including the dilutive effect on common stock that would be issued assuming conversion of stock options, warrants and other dilutive securities. Options, warrants and other securities did not have an effect on the
computation of diluted earnings per share for the years ended December 31, 2007, 2006 and 2005, as they were anti-dilutive due to the fact that the Company was in a loss position for the respective periods.

Concentration of Credit Risk

The Company provides
trade credit to its customers. The Company performs ongoing credit evaluations of its customers financial conditions, in an attempt to mitigate this risk. As of December 31, 2007, one customer accounted for 32.3% of the Companys
total accounts receivable. As of December 31, 2006, one customer accounted for 21.1% of the Companys total accounts receivable

For each of the years ended December 31, 2007, 2006 and 2005, there was no individual customer that accounted for more than 10% of the Companys total revenues.

The Company continuously monitors collections and payments from its customers and maintains an allowance for doubtful accounts based upon its historical
experience and any specific customer collection issues that are identified. While such credit losses have historically been within the Companys expectations, there can be no assurance that the Company will continue to experience the same level
of credit losses that it has in the past. A significant change in the liquidity or financial position of any one of these customers or a further deterioration in the economic environment or telecommunications industry, in general, could have a
material adverse impact on the collectability of the Companys accounts receivable and its future operating results, including a reduction in future revenues and additional expenses from increases in the allowance for doubtful accounts.

Stock Based Compensation

The Company
makes equity grants comprising of stock options or shares of restricted stock to its employees as part of its employee equity incentive plan. As of December 31, 2007, the Company has approximately



47



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FIBERNET TELECOM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



1.6 million shares authorized for issuance under the plan. Stock options are typically granted to vest in three equal annual installments, commencing on
the grant date, and expire ten years from the date of grant. Restricted stock is typically granted with a four year period before it becomes unrestricted. Equity grants under the plan are made at the discretion of the Compensation Committee of the
Board of Directors.

Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), Share Based Payment
(SFAS No. 123(R)), applying the modified prospective method. Under the modified prospective method, SFAS No. 123(R) applies to new awards and to awards that were outstanding as of December 31, 2005 that are subsequently
vested, modified, repurchased or cancelled. Compensation expense recognized during the year ended December 31, 2007 includes the portion vesting during the period for (1) all share-based payments granted prior to, but not yet vested as of,
December 31, 2005 based on the grant-date fair value estimated in accordance with the original provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS
No. 123) and (2) all share-based payments granted subsequent to December 31, 2005, based on the grant-date fair value estimated using the Black-Scholes option-pricing model.

Accounting for Income Taxes

The Company accounts for
income taxes in accordance with SFAS No. 109, Accounting for Income Taxes (SFAS No. 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 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.

Effective January 1, 2007,
the Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN No. 48). FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in a
companys financial statements in accordance with SFAS No. 109. FIN No. 48 requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of
the position. If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements. The application of income tax law is inherently complex. Laws and regulation in
this area are voluminous and are often ambiguous. As such, the Company is required to make many subjective assumptions and judgments regarding its income tax exposures. Interpretations of and guidance surrounding income tax laws and regulations
change over time. As such, changes in the Companys subjective assumptions and judgments can materially affect amounts recognized in the balance sheets and statements of income. At the adoption date of January 1, 2007, the Company had no
unrecognized tax benefits which would affect its effective tax rate if recognized. At December 31, 2007, the Company has no unrecognized tax benefits. The Company classifies interest and penalties arising from the underpayment of income taxes
in the statement of income under general and administrative expenses. As of December 31, 2007, the Company has no accrued interest or penalties related to uncertain tax positions. The tax years 2000 through 2007 remain open to examination by
all taxing jurisdictions to which the Company is subject.

In June 2006, the EITF reached a consensus on EITF Issue No. 06-3,
How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That is, Gross versus Net Presentation) (EIFT 06-3). EITF 06-3 provides that the presentation of taxes
assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer on either a gross basis (included in revenues and costs) or on a net basis (excluded from revenues) is an accounting
policy decision that should be disclosed. The Company presents these taxes on a net basis.



48



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FIBERNET TELECOM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Segment Reporting

The Company is a single segment operating company providing telecommunications services. Revenues were generated by providing transport, colocation and communications access management services to customers. All of
our revenues are generated in the United States of America.

Recent Accounting Pronouncements

In June 2007, the EITF reached a consensus on EITF Issue No. 06-11, Accounting for Income Tax Benefits on Dividends on Share-Based Payment
Awards (EITF 06-11). EITF 06-11 addresses share-based payment arrangements with dividend protection features that entitle employees to receive (a) dividends on equity-classified nonvested shares, (b) dividend equivalents
on equity-classified nonvested share units, or (c) payments equal to the dividends paid on the underlying shares while an equity-classified share option is outstanding, when those dividends or dividend equivalents are charged to retained
earnings under Statement 123(R) and result in an income tax deduction for the employer. A realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings and are paid to employees for equity-classified
nonvested shares, nonvested equity share units, and outstanding equity share options should be recognized as an increase in additional paid-in capital. The amount recognized in additional paid-in capital for the realized income tax benefit from
dividends on those awards should be included in the pool of excess tax benefits available to absorb potential future tax deficiencies on share-based payment awards. The provisions of EITF 06-11 are effective for FiberNet as of January 1, 2008.
The Company does not expect the adoption of this pronouncement to have a material impact on its financial position or results of operations.

In February 2007, FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115 (SFAS No. 159). SFAS No. 159
permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Earlier adoption is permitted, provided the company also
elects to apply the provisions of SFAS No. 157. The Companys management is currently evaluating the impact of SFAS No. 159, but does not expect the adoption of SFAS No. 159 to have a material impact on its consolidated financial
statements.

3. EQUITY INCENTIVE PLAN

On January 1, 2006, the Company adopted SFAS No. 123(R), applying the modified prospective method. Prior to the adoption of SFAS No. 123(R), the Company applied the provisions of APB No. 25, in accounting for its
stock-based awards, and accordingly, recognized no compensation cost for its stock plans other than for its restricted stock awards. Under the modified prospective method, SFAS No. 123(R) applies to new awards and to awards that were
outstanding as of December 31, 2005 that are subsequently vested, modified, repurchased or cancelled. Compensation expense recognized during the year ended December 31, 2006 includes the portion vesting during the period for (1) all
share-based payments granted prior to, but not yet vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 and (2) all share-based payments granted
subsequent to December 31, 2005, based on the grant-date fair value estimated using the Black-Scholes option-pricing model. The Company recognizes the cost of all employee stock awards on a straight-line basis over their respective vesting
period, net of estimated forfeitures.

Prior to the adoption of SFAS No. 123(R), the Company applied APB No. 25 to account for
its stock-based awards. Under the provisions of APB No. 25, the Company was not required to recognize compensation expense for the cost of stock options issued under its equity compensation plans as all options were granted with an exercise
price equal to the market value of the underlying common stock on the date of grant. The Company has not changed its valuation model used for estimating the fair value of options granted after January 1, 2006, from



49



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FIBERNET TELECOM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



the Black-Scholes option-pricing model previously used for pro forma presentation purposes as required under SFAS No. 123, as amended by SFAS
No. 148, Accounting for Stock-Based CompensationTransition and Disclosures.

The following table illustrates the
effect on net loss and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 for the year ended December 31, 2005:



|                                                                                                                             |  |                                     |         |  
|---------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------- | ------- | -
|(in thousands, except per share data) (unaudited)                                                                            |  | For the year endedDecember 31, 2005 |        
|Net loss, as reported                                                                                                        |  | $                                   | (13,935 | )
|Deduct: Total stock-based employee compensation expense determined under fair value based method, net of related tax effects |  |                                     | (146    | )
|                                                                                                                             |  |                                     |         |  
|Pro forma net loss                                                                                                           |  | $                                   | (14,081 | )
|Net loss per share:                                                                                                          |  |                                     |         |  
|As reported: Basic and diluted                                                                                               |  | $                                   | (2.69   | )
|Pro forma: Basic and diluted                                                                                                 |  | $                                   | (2.72   | )

Before adoption of SFAS No. 123(R), pro forma disclosures reflected the fair value of each
option grant estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions for grants for the year ended December 31, 2005: risk-free interest rate of 4.35%, expected dividend yield of 0%, expected
life of six years to expiration and expected volatility of 308%.

On August 20, 2007, the Company issued 261,440 shares of restricted
stock that will become unrestricted four years after the grant date. The Company determined the fair value of the restricted stock granted during 2007 to be $1.9 million. On August 17, 2006, the Company issued 703,000 shares of restricted stock
that will become unrestricted four years after the grant date, and 75,000 stock options with a strike price of $2.11 per share that vest in three equal annual installments. The Company determined the fair value of the restricted stock granted during
2006 to be $1.5 million. The Company determined the fair value of the options issued to be $0.1 million using the Black-Scholes option-pricing model, with the following assumptions: risk-free interest rate of 4.82%, expected dividend yield of 0%,
expected life of six years to expiration and expected volatility of 133%.

The Black-Scholes option-pricing model is used to value options
when issued. The expected volatility assumption used is based solely on historical volatility, calculated using the daily price changes of the Companys common stock over the most recent period equal to the expected life of the stock option on
the date of grant. The risk-free interest rate is determined using the implied yield for zero-coupon U.S. government issues with a remaining term equal to the expected life of the stock option. The Company does not currently intend to pay cash
dividends, and thus assumes a 0% dividend yield. Beginning on January 1, 2006, the expected life of an option is calculated using the simplified method set out in SEC Staff Accounting Bulletin No. 107, Share Based Payment,
using the vesting term of 3 years and the contractual term of 10 years. The simplified method defines the expected life as the average of the contractual term of the options and the weighted average vesting period for all option tranches.

As part of the requirements of SFAS No. 123(R), the Company is required to estimate potential forfeitures of stock grants and adjust
compensation cost recorded accordingly. The forfeiture rate was estimated based on relevant historical forfeitures. The estimate of forfeitures will be adjusted over the requisite service period to the extent that the actual forfeitures differ, or
are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock compensation expense to be recognized in
future periods.



50



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FIBERNET TELECOM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



During the year ended December 31, 2006 the adoption of SFAS No. 123(R) resulted in
incremental stock-based compensation expense of approximately $0.2 million. The incremental stock-based compensation expense caused net loss to increase by approximately $0.2 million, and basic and diluted earnings per share to decrease by $0.01 per
share. As a result of the Companys decision to adopt the modified prospective method, prior period results have not been restated, as permitted by SFAS No. 123(R).

A summary of stock option activity within the Companys stock-based compensation plans for the year ended December 31, 2007 is as follows:



|                                 |  |                 |   |  |                               |        |                                                 |     |                          |   |        
|-------------------------------- |  | --------------- | - |  | ----------------------------- | ------ | ----------------------------------------------- | --- | ------------------------ | - | -------
|                                 |  | Number ofShares |   |  | WeightedAverageExercise Price |        | WeightedAverageRemainingContractualTerm (Years) |     | AggregateIntrinsic Value
|Outstanding at January 1, 2007   |  | 142,070         |   |  | $                             | 151.58 |                                                 |     |                          |   |        
|Granted                          |  |                |   |  |                               |       |                                                 |     |                          |   |        
|Exercised                        |  |                |   |  |                               |       |                                                 |     |                          |   |        
|Forfeited                        |  | (2,007          | ) |  | $                             | 564.74 |                                                 |     |                          |   |        
|                                 |  |                 |   |  |                               |        |                                                 |     |                          |   |        
|Outstanding at December 31, 2007 |  | 140,063         |   |  | $                             | 145.66 |                                                 | 6.6 |                          | $ | 439,519
|                                 |  |                 |   |  |                               |        |                                                 |     |                          |   |        
|Exercisable at December 31, 2007 |  | 90,063          |   |  | $                             | 225.36 |                                                 | 5.5 |                          | $ | 146,519
|                                 |  |                 |   |  |                               |        |                                                 |     |                          |   |        

A summary of stock option activity within the Companys stock-based compensation plans for
the year ended December 31, 2006 is as follows:



|                                 |  |                 |   |  |                               |        |                                                 |     |                          |   |        
|-------------------------------- |  | --------------- | - |  | ----------------------------- | ------ | ----------------------------------------------- | --- | ------------------------ | - | -------
|                                 |  | Number ofShares |   |  | WeightedAverageExercise Price |        | WeightedAverageRemainingContractualTerm (Years) |     | AggregateIntrinsic Value
|Outstanding at January 1, 2006   |  | 71,108          |   |  | $                             | 322.26 |                                                 |     |                          |   |        
|Granted                          |  | 75,000          |   |  | $                             | 2.11   |                                                 |     |                          |   |        
|Exercised                        |  |                |   |  |                               |       |                                                 |     |                          |   |        
|Forfeited                        |  | (4,038          | ) |  | $                             | 368.06 |                                                 |     |                          |   |        
|                                 |  |                 |   |  |                               |        |                                                 |     |                          |   |        
|Outstanding at December 31, 2006 |  | 142,070         |   |  | $                             | 151.58 |                                                 | 7.6 |                          | $ | 341,250
|                                 |  |                 |   |  |                               |        |                                                 |     |                          |   |        
|Exercisable at December 31, 2006 |  | 66,731          |   |  | $                             | 320.27 |                                                 | 5.2 |                          | $ |       
|                                 |  |                 |   |  |                               |        |                                                 |     |                          |   |        

The aggregate intrinsic value for stock options outstanding and exercisable is defined as the
difference between the market value of the Companys stock as of the end of the period and the exercise price of the stock options. All exercisable and cancelled options during the year ended December 31, 2006 had no intrinsic value.

The following is a summary of nonvested stock option activity:



|                               |  |                 |   |  |                                     |     
|------------------------------ |  | --------------- | - |  | ----------------------------------- | ----
|                               |  | Number ofShares |   |  | WeightedAverageGrant-Date FairValue
|Nonvested at December 31, 2006 |  | 75,339          |   |  | $                                   | 2.17
|Granted                        |  |                |   |  |                                     |    
|Vested                         |  | (25,339         | ) |  |                                     | 2.08
|Forfeited                      |  |                |   |  |                                     |    
|                               |  |                 |   |  |                                     |     
|Nonvested at December 31, 2007 |  | 50,000          |   |  | $                                   | 2.11
|                               |  |                 |   |  |                                     |     



51



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FIBERNET TELECOM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                               |  |                 |   |  |                                     |      
|------------------------------ |  | --------------- | - |  | ----------------------------------- | -----
|                               |  | Number ofShares |   |  | WeightedAverageGrant-DateFair Value
|Nonvested at December 31, 2005 |  | 12,740          |   |  | $                                   | 11.34
|Granted                        |  | 75,000          |   |  |                                     | 2.11 
|Vested                         |  | (11,847         | ) |  |                                     | 11.34
|Forfeited                      |  | (554            | ) |  |                                     | 11.19
|                               |  |                 |   |  |                                     |      
|Nonvested at December 31, 2006 |  | 75,339          |   |  | $                                   | 2.17 
|                               |  |                 |   |  |                                     |      

At December 31, 2007, there was approximately $0.1 million of total unrecognized compensation
cost related to nonvested stock options. The cost is expected to be recognized over a weighted average period of 1.6 years.

Transactions
during the year ended December 31, 2005 involving stock options are summarized as follows:



|                                                   |  |                 |   |  |                                      |       
|-------------------------------------------------- |  | --------------- | - |  | ------------------------------------ | ------
|                                                   |  | 2005           
|                                                   |  | Number ofShares |   |  | AverageOption ExercisePrice PerShare
|Options outstanding at the beginning of the period |  | 72,287          |   |  | $                                    | 325.00
|Granted                                            |  |                |   |  |                                      |      
|Exercised                                          |  |                |   |  |                                      |      
|Terminated                                         |  | (1,179          | ) |  |                                      | 487.22
|                                                   |  |                 |   |  |                                      |       
|Options outstanding at the end of the period       |  | 71,108          |   |  | $                                    | 322.26
|                                                   |  |                 |   |  |                                      |       
|Options exercisable at the end of the period       |  | 58,368          |   |  |                                      | 390.12
|                                                   |  |                 |   |  |                                      |       

The following table summarizes information about stock options outstanding as of December 31,
2007



|                        |  |                             |  |                                          |  |                               |          |                            |        |                                |     |                               |   |         
|----------------------- |  | --------------------------- |  | ---------------------------------------- |  | ----------------------------- | -------- | -------------------------- | ------ | ------------------------------ | --- | ----------------------------- | - | --------
|                        |  | Options Outstanding         |  | Options Exercisable                     
|Range of Exercise Price |  | Outstandingas of 12/31/2007 |  | Weighted-AverageRemainingContractualLife |  | Weighted-AverageExercisePrice |          | Exercisableas of12/31/2007 |        | Weighted-AverageRemaining Life |     | Weighted-AverageExercisePrice
|$0.00-$5.00             |  | 75,000                      |  | 8.6                                      |  | $                             | 2.11     |                            | 25,000 |                                | 8.6 |                               | $ | 2.11    
|$5.01-$20.00            |  | 35,431                      |  | 5.5                                      |  | $                             | 11.39    |                            | 35,431 |                                | 5.5 |                               | $ | 11.36   
|$20.00-$100.00          |  | 14,591                      |  | 3.9                                      |  | $                             | 96.00    |                            | 14,591 |                                | 3.9 |                               | $ | 96.00   
|$100.01-$1,000.00       |  | 6,808                       |  | 1.7                                      |  | $                             | 459.08   |                            | 6,808  |                                | 1.7 |                               | $ | 486.54  
|$1,000.01-$6,050.90     |  | 8,233                       |  | 2.0                                      |  | $                             | 1,860.07 |                            | 8,233  |                                | 2.0 |                               | $ | 1,859.80
|                        |  |                             |  |                                          |  |                               |          |                            |        |                                |     |                               |   |         
|Total                   |  | 140,063                     |  | 6.6                                      |  | $                             | 145.66   |                            | 90,063 |                                | 6.6 |                               | $ | 225.36  
|                        |  |                             |  |                                          |  |                               |          |                            |        |                                |     |                               |   |         

The Company also grants restricted stock awards to its employees. Restricted stock awards are
valued at the closing market value of the Companys common stock on the day of the grant, and the total value of the award is recognized as expense ratably over the vesting period of the employees receiving the grants. During the year ended
December 31, 2007, the Company granted 261,440 shares of restricted stock that will become unrestricted four years after the grant date.

As of December 31, 2007, the total amount of unrecognized compensation expense related to restricted stock awards was approximately $5.4 million, which is expected to be recognized over a weighted-average



52



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FIBERNET TELECOM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



period of approximately 4.0 years. The Company recognized compensation expense of approximately $1.1 million during 2007 on existing restricted stock awards.

During the year ended December 31, 2007, 2,400 shares of restricted stock were returned to the Company as the result of employee
terminations, and during the year ended December 31, 2006, 18,850 shares of restricted stock were returned. All shares of restricted stock granted before 2006 become unrestricted on the tenth anniversary of the grant date, or on the fourth
anniversary for restricted stock granted in 2007 and 2006. Stock options vest in three equal annual installments, commencing on the issuance date, subject to the terms and conditions of the Equity Incentive Plan. As of December 31, 2007 and
2006 the outstanding shares of restricted stock totaled 1,386,718 and 1,127,678, respectively.

For the year ended December 31, 2007
and 2006, total stock-based compensation was $1.1 million and $0.8 million, respectively.

4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following (dollars in thousands):



|                                                   |  |                  |         |   |                  |   |         |  
|-------------------------------------------------- |  | ---------------- | ------- | - | ---------------- | - | ------- | -
|                                                   |  | December 31,2007 |         |   | December 31,2006 |  
|Computer software                                  |  | $                | 1,037   |   |                  | $ | 572     |  
|Computer equipment                                 |  |                  | 887     |   |                  |   | 749     |  
|Leasehold improvements                             |  |                  | 31      |   |                  |   | 31      |  
|Office equipment and furniture                     |  |                  | 348     |   |                  |   | 228     |  
|Network equipment and infrastructure               |  |                  | 110,549 |   |                  |   | 107,339 |  
|                                                   |  |                  |         |   |                  |   |         |  
|Total                                              |  |                  | 112,852 |   |                  |   | 108,919 |  
|Accumulated depreciation                           |  |                  | (58,715 | ) |                  |   | (49,385 | )
|                                                   |  |                  |         |   |                  |   |         |  
|Property, plant and equipment, net of depreciation |  | $                | 54,137  |   |                  | $ | 59,534  |  
|Construction-in-progress                           |  |                  | 784     |   |                  |   |        |  
|                                                   |  |                  |         |   |                  |   |         |  
|Total Property, plant and equipment, net           |  | $                | 54,921  |   |                  | $ | 59,534  |  
|                                                   |  |                  |         |   |                  |   |         |  

Depreciation expense on property, plant and equipment was $9.3 million, $8.9 million and $8.7
million for the years ended December 31, 2007, 2006 and 2005, respectively.

5. IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT

The Company reviews the carrying value of its assets for impairment whenever events and circumstances indicate the carrying value of an asset may not be
recoverable from the estimated future cash flows expected to result from its use and eventual disposition.

During 2005, the Company
recorded an impairment of $2.8 million to reflect its revised business plan and forecast of revenues due to the early termination of a significant access agreement as well as other renegotiated building access service orders with other customers,
which significantly reduced the Companys future revenues from access services.



53



---

FIBERNET TELECOM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



6. CREDIT FACILITY

On March 21, 2007, the Company entered into a Credit Agreement by and among the Company, its subsidiaries and CapitalSource Finance LLC pursuant to which the Company and its subsidiaries established a $25.0
million credit facility (the Credit Facility), consisting of (i) a $14.0 million term loan, (ii) a $6.0 million revolving loan and letter of credit facility and (iii) a $5.0 million capital expenditure loan facility, which
was unfunded at closing. The $14.0 million term loan was used to pay off the Companys existing credit facility with Deutsche Bank A.G. discussed below, which was set to mature in March 2008. The Credit Facility bears interest at floating
rates, depending on the type of borrowing and based on either a Prime Rate or LIBOR Rate, as such terms are defined under the Credit Facility. Borrowing on the $14.0 million term loan are payable in increasing quarterly installments commencing in
July 2008. The Credit Facility matures in March 2012. The Credit Facility is secured by a first lien on all of the Companys and its subsidiaries existing and future real assets and personal property. The Credit Facility is guaranteed by
the Company and certain of its subsidiaries, and contains restrictive covenants, operating restrictions and other terms and conditions. The Credit Agreement prohibits the payment of cash dividends on common stock. As of December 31, 2007, the
outstanding balance under the Credit Facility was $14.0 million. In addition, as of December 31, 2007, the Company had $5.4 million of outstanding letters of credit and $0.6 million of availability under its revolving loan credit facility,
again subject to compliance with the terms of the credit agreement. As of December 31, 2007, the interest rate on its outstanding borrowings under the facility was at 8.61%. There were no events of default under its credit agreement.

On November 7, 2007, the Company entered into an Amended and Restated Credit Agreement by and among the Company, its subsidiaries,
CapitalSource Finance LLC and CapitalSource CF LLC pursuant to which the Company and its subsidiaries established a new $5.0 million loan facility (the New Loan ) solely to enable the Company to repurchase outstanding shares of its
capital stock pursuant to its recently announced stock repurchase program. The New Loan, which was unfunded at closing, supplements and is made a part of the Companys existing $25.0 million Credit Facility. The New Loan will bear interest at
floating rates, depending on the type of borrowing and based on either a Prime Rate or LIBOR Rate, as such terms are defined under the Credit Facility. The applicable margin based upon a LIBOR Rate is 4.50%, and the applicable margin based on a
Prime Rate is 3.25%. In addition, the parties adjusted certain of the financial covenants under the Credit Facility. The New Loan will be payable in equal quarterly installments of 3.75% of the principal amount commencing in April 2010, with the
entire Credit Facility maturing in March 2012.

The Company recorded a charge of $1.1 million related to the early extinguishment of its
former credit facility on March 21, 2007, including the write-off of unamortized financing related charges that were associated with the former credit facility.

As of December 31, 2006, the Company maintained a senior secured credit facility (the Former Facility) with Deutsche Bank AG New York Branch, Wachovia Investors, Inc., and IBM Credit LLC (the
Lenders). As of December 31, 2006, the Former Facility was scheduled to mature on March 7, 2008, and was secured by the Companys assets, and contained certain restrictive covenants customary for a financing of this type.
The Former Facility prohibited the payment of cash dividends on common stock. The total commitment under the Former Facility was $19.8 million as of December 31, 2006.

As of December 31, 2006, the outstanding balance under the Fomer Facility was $14.2 million. The amount included in notes payable in the
accompanying consolidated balance sheets is net of an original issue discount of $0.4 million at December 31, 2006. This discount represented the fair value of the warrants issued to the lenders in connection with the origination of the Former
Facility. In addition, as of December 31, 2006, the Company had $5.5 million of outstanding letters of credit and $0.1 million of availability to issue letters of credit under its Former Facility, again subject to compliance with the terms of
the credit agreement.



54



---

FIBERNET TELECOM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



As of December 31, 2006, the interest rate on its outstanding borrowings under the Former
Facility was at 9.0%. There were no events of default under its credit agreement. As of such date, the Lenders under the Companys Former Facility owned approximately 10% of the outstanding shares of the Companys common stock.

7. EQUITY TRANSACTIONS

On November 8, 2007,
the Company announced that its Board of Directors has authorized the repurchase of up to $5.0 million of the Companys common stock, either through open market purchases or in privately negotiated transactions. The timing and amount of the
shares to be repurchased will be based on market conditions and other factors, including price, corporate and regulatory requirements and alternative investment opportunities. Any shares repurchased in the program will be cancelled. The repurchase
program is scheduled to terminate on December 31, 2008, and may be modified or discontinued at any time. As of December 31, 2007, the Company repurchased 86,288 shares of common stock for an average prices of $8.00 per share, and has
approximately $4.3 million available for future repurchases.

On March 22, 2006, the Company entered into a common stock purchase
agreement (the Stock Purchase Agreement), with certain investors, pursuant to which the Company issued to the investors, in a private offering, an aggregate of 1.05 million shares of common stock at a price of $2.10 per share, for
gross proceeds to the Company of $2.2 million. Pursuant to the terms of the Stock Purchase Agreement, the Company also issued to such investors warrants (with an expiration date three and one-half years after closing) to purchase an aggregate of
0.3 million shares of common stock at an exercise price of $2.64 per share. Additionally, the Company paid its placement agent a fee of $0.1 million and issued warrants (with an expiration date three and one-half years after closing) to
purchase an aggregate of 0.1 million shares of common stock at an exercise price of $2.64 per share. Michael Liss, chairman of the Companys board of directors was (and is currently) associated with the placement agent but did not receive,
directly or indirectly, any fees or other compensation in connection with the Stock Purchase Agreement and the transactions contemplated thereunder. The Company also paid $0.2 million in professional fees in connection with the execution of the
Stock Purchase Agreement. The Company recorded the fees incurred as a result of the Stock Purchase Agreement as a reduction of the net cash proceeds.

In connection with the Stock Purchase Agreement, the Company entered into a registration rights agreement with the investors, dated as of March 22, 2006, which required the Company to file a registration
statement with the Securities and Exchange Commission with respect to the resale of (i) the shares of common stock issued to the investors, (ii) the shares of common stock underlying the warrants issued to the investors and (iii) the
shares of common stock underlying the warrants issued to the placement agent. The registration statement was filed on April 21, 2006 and declared effective by the Securities and Exchange Commission on May 10, 2006.

On March 22, 2006, the Company and the lenders executed a twentieth amendment to the Former Facility, pursuant to which, among other things, the
lenders consented to the above-referenced transaction. The twentieth amendment, which was effective as of March 22, 2006, extended the maturity date for the credit agreement from February 9, 2007 to March 7, 2008. The amendment also
fixed the applicable interest rate at 9.0% and revised the amortization payment schedule to $0.1 million for June 30, 2007, $0.2 million for September 30, 2007 and $0.3 million for December 31, 2007, with the balance due on maturity.
The amendment also (i) required the Company on or before May 15, 2006, to engage a financial advisor to assist the Company in preparing a comprehensive strategic business plan and (ii) required the Company on or prior to May 30,
2007, to issue equity to raise proceeds of at least $3.0 million. In addition, the twentieth amendment removed the lenders observation right for the Companys board of directors and incorporated adjustments to the financial covenants of
the credit facility. During the quarter ended March 31, 2006, the Company expensed $0.1 million for fees related to the twentieth



55



---

FIBERNET TELECOM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



amendment of the credit agreement which was determined to represent a modification of terms under the guidelines set forth in EITF No. 96-19. On
April 24, 2006, the Company engaged a financial advisor to assist us in preparing a comprehensive strategic business plan. The Former Facility was refinanced on March 21, 2007.

As a condition to the lenders entering into the twentieth amendment, the Company entered into a warrant agreement with the lenders on March 22, 2006
(the Warrant Agreement), pursuant to which the Company agreed to issue warrants (with an expiration date three and one-half years after closing) to the lenders to purchase an aggregate of 0.3 million shares of common stock at an
exercise price of $2.64 per share. The Company determined the fair value of the warrants issued in connection with the twentieth amendment to be $0.6 million using the Black-Scholes option-pricing model, with the following assumptions; risk-free
interest rates of 4.72%, expected dividend yields of 0%, expected life of three and one half years to expiration and expected volatility of 121%. The fair value amount was included in deferred charges and was amortized over the remaining life of the
credit facility. In connection with the Warrant Agreement, the Company entered into a registration rights agreement with the lenders, dated as of March 22, 2006, which required the Company to file a registration statement with the Securities
and Exchange Commission with respect to the resale of the shares of common stock underlying the warrants issued to the lenders. The registration statement was filed on April 21, 2006 and declared effective by the Securities and Exchange
Commission on May 10, 2006.

On August 22, 2005, the Company entered into the eighteenth amendment to the Former Facility with
its lenders, which waived the requirement that the Company issue securities in an amount sufficient to result in net proceeds of at least $6.5 million. The lenders also agreed to extend the amortization schedule under the Credit Facility such that
the Company had until August 2006 to prepay $3.0 million, with the balance due in February 2007 and no other principal payments required until such time. As a condition to the lenders entering into the eighteenth amendment, the Company agreed to
reduce the exercise price of certain previously issued outstanding warrants held by the lenders to purchase 49,623 shares of common stock from $36.00 per share to $0.001 per share, which were subsequently exercised in September 2005 by the lenders.
The Company compared the value of the warrants prior to repricing with the value of the warrants after the repricing using the Black-Scholes option pricing model and determined that there was no difference in value. Therefore, the repricing of
warrants had no impact on the Companys consolidated financial statements. Additionally, the amendment changes the interest rate on the loans to a fixed rate of 8.5%, which will increase by 25 basis points on a quarterly basis beginning
January 1, 2006 until the date of maturity. The Company also agreed to permit a representative of the lenders to attend and observe its Board of Directors meetings. The amendment required that the Company deliver to the lenders a strategic plan
on or before November 20, 2005 and a business plan on or before March 31, 2006. In addition, the Amendment provides that Jon A. DeLuca, its President and Chief Executive Officer, is deemed a key employee under the Credit
Facility, such that his failure to serve in those offices would be considered an event of default. In conjunction with the execution of the eighteenth amendment the lenders released the Companys restricted cash of $1.9 million, which was then
used to reduce the outstanding principle on the credit facility. Also in conjunction with the eighteenth amendment, the Company expensed approximately $0.2 million in professional fees under the guidelines set forth in Emerging Issues Task Force
Issue (EITF) 96-19, Debtors Accounting for a Modification or Exchange of Debt Instruments (EITF No. 96-19), since the amendment was not deemed an extinguishment.

On June 21, 2005, the Company entered into the fifteenth amendment to the Former Facility, which extended the date by which it must issue securities
in an amount sufficient to result in net proceeds of at least $6.5 million pursuant to a purchase agreement in form and substance satisfactory to the lenders, from June 23, 2005 to July 15, 2005. On July 11, 2005, the Company entered
into the sixteenth amendment extended the date from July 15, 2005 to July 22, 2005. On July 22, 2005, the Company entered into the seventeenth amendment, which further extended the date July 22, 2005 to August 23, 2005. In
connection with the execution of the seventeenth amendment on July 22, 2005, the Company paid an amendment fee to the lenders in an amount equal



56



---

FIBERNET TELECOM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



to fifty basis points of the total commitments of the lenders under the credit facility, approximately $0.1 million. On August 5, 2005, the Company paid
an extension fee to the lenders in an amount equal to one hundred basis points of the commitments to the lenders, approximately $0.3 million.

On March 22, 2005, the Company executed with its lenders the fourteenth amendment to the Former Facility, pursuant to which, the amortization payments for 2005 were deferred until March 2006, and financial covenant levels were changed.
This amendment required the Company to raise a minimum of $6.5 million of additional equity capital by June 30, 2005. As a condition to the lenders entering into the fourteenth amendment, the Company agreed to reduce the exercise price of
certain previously issued outstanding warrants held by the lenders to purchase 49,623 shares of common stock from $36.00 per share to $0.10 per share, which were subsequently exercised in April 2005 by the lenders. The Company compared the value of
the warrants prior to repricing with the value of the warrants after the repricing using the Black-Scholes option pricing model and determined that there was no difference in value. Therefore, the repricing of warrants had no impact on its
consolidated financial statements.

8. COMMITMENTS AND CONTINGENCIES

The Company has entered into various operating lease agreements for office space and other space relating to the Companys operations. Occupancy expense for the years ended December 31, 2007, 2006 and 2005
was approximately $15.1 million, $12.7 million, and $11.8 million, respectively.

Estimated future minimum notes payable and operating
lease payments are as follows (dollars in thousands):



|                                                    |  |                                       |        |      |   |        |  |      |        |      |   |        |  |            |        |  |   |        |  |   |       
|--------------------------------------------------- |  | ------------------------------------- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | ---------- | ------ |  | - | ------ |  | - | ------
|                                                    |  | Payments Due by Period (in thousands)
|Contractual Obligation                              |  | Total                                 |        | 2008 |   | 2009   |  | 2010 |        | 2011 |   | 2012   |  | Thereafter
|Mandatory Repayments and Reductions of Indebtedness |  | $                                     | 14,000 |      | $ | 700    |  |      | 1,750  |      | $ | 2,450  |  | $          | 5,250  |  | $ | 3,850  |  | $ |      
|Operating Leases(1)                                 |  |                                       | 83,171 |      |   | 10,182 |  |      | 9,224  |      |   | 8,431  |  |            | 7,847  |  |   | 8,009  |  |   | 39,478
|                                                    |  |                                       |        |      |   |        |  |      |        |      |   |        |  |            |        |  |   |        |  |   |       
|Total Contractual Obligations                       |  | $                                     | 97,171 |      | $ | 10,882 |  | $    | 10,974 |      | $ | 10,881 |  | $          | 13,097 |  | $ | 11,859 |  | $ | 39,478
|                                                    |  |                                       |        |      |   |        |  |      |        |      |   |        |  |            |        |  |   |        |  |   |       



|(1) | Includes estimated future license fees for carrier hotel facilities. License fees are typically calculated as a percentage of the revenues the Company generates in the respective
facility, as per its lease agreement with the facility.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On May 16, 2006, the Company issued $0.7 million in letters of
credit under its current credit facility to replace cash security deposits previously placed with landlords.

The Company had $5.4 and $5.5
million in outstanding letters of credit as of December 31, 2007 and December 31, 2006, respectively.

On August 17, 2006,
the Company adopted the FiberNet Telecom Group, Inc. Change in Control Plan (the Plan). Pursuant to the terms of the Plan, members of senior management are entitled to certain benefits upon a termination of employment (other than a
termination by FiberNet for Cause or by an employee without Good Reason as such terms are defined in the Plan) that occurs within one year after a Change in Control event (as defined in the Plan). Specifically, each Vice
President and Senior Vice President shall be entitled to a cash payment of 50% of his or her current base salary and the President shall be entitled to a cash payment of 100% of his or her current base salary, plus a pro-rated portion of his or her
annual bonus. FiberNet shall also pay the premiums for continued health care coverage for six months for each Vice President and Senior Vice President and for twelve months for the President.



57



---

FIBERNET TELECOM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In addition, the Plan provides that if the benefits payable in connection with a Change in Control
event are subject to an Excise Tax (as defined in the Plan), then (i) for the President, FiberNet agrees to make such individual whole by making a gross-up payment, such that the net total amount of benefits actually received is equal to those
benefits calculated as if only standard income taxes, and not the Excise Tax, had applied, and (ii) for each Vice President and Senior Vice President, FiberNet shall pay to such individual the greater of (A) the total value of the benefits
payable if reduced to avoid triggering the Excise Tax or (B) the total value of the benefits payable even if the Excise Tax applies, such that the net total amount of benefits actually received by such individual is maximized.

The Company and its subsidiaries, in the normal course of business, may become party to any number of judicial, regulatory and administrative
proceedings. The Companys management does not believe that any material liability will be imposed as a result of any of these matters.

9. STOCK
RESERVED FOR FUTURE ISSUANCE

In addition to shares of common stock underlying outstanding stock options, the Company has reserved for
future issuance of additional shares of common stock relating to outstanding warrants. As of December 31, 2007, the Company had outstanding warrants exercisable into approximately 0.8 million shares of common stock at exercise prices
ranging from $0.10 to $36.00 per share.

10. RELATED PARTY TRANSACTIONS

As a result amendments to the Former Facility in 2003, the Companys Lenders became related parties. Deutsche Bank Trust Company North America, as
subsidiary of Deutsche Bank AG, is the Companys primary bank, where it maintains its cash accounts.

On February 1, 2005, the
Company entered into a consulting agreement with Michael Liss, the Chairman of the Board of Directors and former President and Chief Executive Officer. Pursuant to the terms of this agreement, Mr. Liss provided general financial advisory
services, including assisting the Company in analyzing and evaluating potential strategic transactions and public or private placements of debt or equity securities. For the year ended December 31, 2005, Mr. Liss received $0.2 million as
compensation for his services, including reimbursement for the payment of health, life and disability insurance premiums and for travel expenses incurred in connection with the performance of his agreement, as well as customary indemnification. The
consulting agreement was terminated on October 31, 2005.

11. INCOME TAXES

The Company accounts for income taxes in accordance with the provisions of SFAS No. 109. During 2007, 2006 and 2005 the Company did not record a
current or deferred federal income tax provision because the Company had losses for federal income tax purposes. The Company has recorded a full valuation allowance, as it does not expect to realize the benefits of the net operating tax losses
generated in those years.



58



---

FIBERNET TELECOM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



A reconciliation of the actual income tax (provision)/benefit and the tax computed by applying the
U.S. federal rate (34%) to the loss from continuing operations, before income taxes, for the three years ended December 31, 2007, 2006 and 2005 follows (dollars in thousands):



|                                                       |  |                         |        |   |      |   |        |      |  |   |        |  
|------------------------------------------------------ |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                       |  | Year Ended December 31, |       
|                                                       |  | 2007                    |        |   | 2006 |   |        | 2005 | 
|Computed tax at federal statutory rate                 |  | $                       | (1,679 | ) |      | $ | (2,362 | )    |  | $ | (4,738 | )
|State and local tax, net of federal income tax benefit |  |                         | (717   | ) |      |   | (2,342 | )    |  |   | (2,240 | )
|Other                                                  |  |                         | 20     |   |      |   | 840    |      |  |   | (1,482 | )
|Change in valuation allowance                          |  |                         | 2,376  |   |      |   | 3,864  |      |  |   | 8,460  |  
|                                                       |  |                         |        |   |      |   |        |      |  |   |        |  
|                                                       |  | $                       |       |   |      | $ |       |      |  | $ |       |  
|                                                       |  |                         |        |   |      |   |        |      |  |   |        |  

The tax effects of temporary differences that give rise to significant portions of the deferred
tax assets and deferred tax liabilities, for the two years ended December 31, 2007 and 2006, consist of the following (dollars in thousands):



|                                                             |  |                        |         |   |      |   |         |  
|------------------------------------------------------------ |  | ---------------------- | ------- | - | ---- | - | ------- | -
|                                                             |  | Year EndedDecember 31, |        
|                                                             |  | 2007                   |         |   | 2006 |  
|Deferred tax assets/(liabilities):                           |  |                        |         |   |      |   |         |  
|Deferred expenses                                            |  | $                      | 235     |   |      | $ | 162     |  
|Deferred rent                                                |  |                        | 910     |   |      |   | 542     |  
|Capital loss                                                 |  |                        | 61      |   |      |   | 61      |  
|Deferred revenue                                             |  |                        | 1,364   |   |      |   | 1,507   |  
|Restructuring charges                                        |  |                        | 696     |   |      |   | 691     |  
|Stock options                                                |  |                        | 5,816   |   |      |   | 5,324   |  
|Depreciation and impairment of property, plant and equipment |  |                        | (2,223  | ) |      |   | (4,244  | )
|Goodwill                                                     |  |                        | 6,439   |   |      |   | 6,954   |  
|Net operating loss                                           |  |                        | 80,077  |   |      |   | 80,746  |  
|Bad debts                                                    |  |                        | 158     |   |      |   | 183     |  
|Valuation allowance                                          |  |                        | (93,533 | ) |      |   | (91,926 | )
|                                                             |  |                        |         |   |      |   |         |  
|Net deferred tax asset/(liability)                           |  | $                      |        |   |      | $ |        |  
|                                                             |  |                        |         |   |      |   |         |  

The temporary differences described above represent differences between the tax basis of assets or
liabilities and their reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future years when the reported amounts of the assets or liabilities are recovered or settled.

During the tax years ended December 31, 2007 and 2006, a valuation allowance for the full amount of the net deferred tax asset was recorded. The
valuation allowance represents the portion of tax net operating loss carryforwards and other items for which it is more likely than not that the benefit of such items will not be realized. Based upon the level of historical losses and projections
for the future taxable periods, it is more likely than not that the Company will not realize the benefit of the deferred tax asset.

As of
December 31, 2007, the Company had net operating loss carryforwards for federal income tax purposes of approximately $206 million substantially all of which are subject to a de minimus annual limitation on future utilization under
Section 382 of the Internal Revenue Code of 1986. These tax loss carryforwards begin expiring in 2012.

Section 382 imposes
limitations on the availability of a Companys net operating losses after a more than 50 percentage point ownership change occurs. The Company believes that the most recent ownership changes



59



---

FIBERNET TELECOM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



occurred during the years ended December 31, 2003 and 2002. The amount of the Companys net operating losses incurred prior to the ownership change
is limited based on the value of the Company on the date of the ownership change.

12. QUARTERLY INFORMATION (dollars in thousands, except per share
data) (unaudited)



|                                                      |  |                   |        |   |              |   |        |                   |  |   |                  |   |  |   |        |  
|----------------------------------------------------- |  | ----------------- | ------ | - | ------------ | - | ------ | ----------------- |  | - | ---------------- | - |  | - | ------ | -
|                                                      |  | March 31,2007 (a) |        |   | June 30,2007 |   |        | September 30,2007 |  |   | December 31,2007 |  
|Revenues                                              |  | $                 | 11,634 |   |              | $ | 12,060 |                   |  | $ | 12,501           |   |  | $ | 13,582 |  
|Net loss from operations                              |  |                   | (720   | ) |              |   | (693   | )                 |  |   | (568             | ) |  |   | (214   | )
|Net loss                                              |  |                   | (2,397 | ) |              |   | (1,040 | )                 |  |   | (919             | ) |  |   | (582   | )
|Net loss per sharebasic and diluted                  |  | $                 | (0.33  | ) |              | $ | (0.14  | )                 |  | $ | (0.12            | ) |  | $ | (0.08  | )
|Weighted average shares outstandingbasic and diluted |  |                   | 7,271  |   |              |   | 7,353  |                   |  |   | 7,411            |   |  |   | 7,616  |  



|                                                      |  |               |        |   |              |   |        |                   |  |   |                  |   |  |   |        |  
|----------------------------------------------------- |  | ------------- | ------ | - | ------------ | - | ------ | ----------------- |  | - | ---------------- | - |  | - | ------ | -
|                                                      |  | March 31,2006 |        |   | June 30,2006 |   |        | September 30,2006 |  |   | December 31,2006 |  
|Revenues                                              |  | $             | 9,027  |   |              | $ | 9,489  |                   |  | $ | 10,377           |   |  | $ | 11,187 |  
|Net loss from operations                              |  |               | (1,573 | ) |              |   | (1,278 | )                 |  |   | (977             | ) |  |   | (755   | )
|Net loss                                              |  |               | (2,260 | ) |              |   | (1,841 | )                 |  |   | (1,540           | ) |  |   | (1,284 | )
|Net loss per sharebasic and diluted                  |  | $             | (0.42  | ) |              | $ | (0.29  | )                 |  | $ | (0.23            | ) |  | $ | (0.18  | )
|Weighted average shares outstandingbasic and diluted |  |               | 5,378  |   |              |   | 6,306  |                   |  |   | 6,650            |   |  |   | 7,081  |  



|(a) | Includes a $ 1.1million loss on early extinguishment of debt
|--- | ------------------------------------------------------------

13.
ACQUISITION OF GATEWAY COLOCATION

On January 30, 2004, the Company completed the acquisition of the operating assets of
gateway.realty.new jersey.llc, also known as Gateway Colocation. The transaction was structured as an acquisition of assets, and the purchase agreement included an earn-out payment based upon the achievement of certain financial
objectives with respect to the revenues generated by the facility, which if payable, will be paid in shares of the Companys common stock. On March 22, 2006, the Company entered into an amendment to the purchase agreement. The terms of the
amendment extend the duration of the earn-out provision for an additional twenty-four months retroactive to January 30, 2006(see subsequent event- Note 15).

14. TERMINATION OF CONSOLIDATED EDISON COMMUNICATIONS STOCK PURCHASE AGREEMENT

On December 10,
2004, the Company entered into a stock purchase agreement with Consolidated Edison, Inc. (the Con Ed Agreement) for the purchase of all of the issued and outstanding shares of Consolidated Edison Communications Holding Company, Inc.
(CEC), a wholly-owned subsidiary. On May 4, 2005, the Company entered into a Mutual Termination and Release Agreement (the Termination Agreement), with Consolidated Edison, Inc., which terminated the Con Ed Agreement.
The Con Ed Agreement was terminated because of the parties inability to resolve certain contractual issues. The Termination Agreement contains mutual releases of liability. The Company did not incur any early termination penalties in
connection with the termination of the Con Ed Agreement. As a result of the termination of the Con Ed Agreement the Company included a total of $1.1 million of transaction costs in selling, general and administrative expenses for the year ended
December 31, 2005.



60



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FIBERNET TELECOM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



15. SUBSEQUENT EVENTS

On January 31, 2008, the Company received written notice from Gateway Colocation pursuant to the terms of the earn out provision acknowledging that the financial objectives had been achieved and, in
accordance with such provisions, issued to Gateway Colocation 204,847 shares of its common stock on February 5, 2008. FiberNet recorded goodwill of $1.6 million as of December 31, 2007 to account for the fair value of the earn-out.



61



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|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- | ------------------------------------------------------------------------------------

None.



|ITEM 9A. | CONTROLS AND PROCEDURES
|-------- | -----------------------



| | (a) | Evaluation of Disclosure Controls and Procedures
| | --- | ------------------------------------------------

Our
management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2007. The term disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the
reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by a company in the reports that it files and submits under the Exchange Act is accumulated and communicated to the companys management, including its principal
executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as of December 31, 2007, our chief executive officer and chief
financial officer concluded that, as of such date, our disclosure controls and procedures were effective.

The Audit Committee of the Board
of Directors, which is composed solely of independent directors, meets regularly with our independent registered public accounting firm, Friedman LLP, and representatives of management to review accounting, financial reporting, internal control and
audit matters, as well as the nature and extent of the audit effort. The Audit Committee is responsible for the engagement of the independent auditors. The independent auditors have free access to the Audit Committee.



| | (b) | Managements Responsibility for Financial Statements
| | --- | ----------------------------------------------------

Our management is responsible for the integrity and objectivity of all information presented in this report. The consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United
States of America and include amounts based on managements best estimates and judgments. Management believes the consolidated financial statements fairly reflect the form and substance of transactions and that the financial statements fairly
represent the Companys consolidated financial position and results of operations for the periods and as of the dates stated therein.



| | (c) | Managements Assessment of Internal Control Over Financial Reporting
| | --- | --------------------------------------------------------------------

The management of FiberNet Telecom Group, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting as defined by Rules 13a15(f) and 15(d)-15(f) under the Securities
and Exchange Act of 1934. This system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principals
generally accepted in the United States of America.

Our internal control over financial reporting includes those policies and procedures
that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors
of the



62



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Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the
Companys assets that could have a material effect on the financial statements.

Because of its inherent limitations, a system of
internal control over financial reporting can only provide reasonable assurance and may not prevent or detect misstatements. Further, because of changes in conditions, effectiveness of internal control over financial reporting may vary over
time.

With the participation of our chief executive officer and chief financial officer, management conducted an evaluation of the
effectiveness of the system of internal control over financial reporting based on the framework in Internal Control-Integrated Framework, published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on
this evaluation, management determined that the Companys system of internal control over financial reporting was effective as of December 31, 2007.



| | (d) | Report of Independent Registered Public Accounting Firm
| | --- | -------------------------------------------------------

This annual report does not include an attestation report of the companys registered public accounting firm regarding internal control over financial reporting. Managements report was not subject to attestation by the
companys registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only managements report in this annual report.



|ITEM 9B. | OTHER INFORMATION
|-------- | -----------------

None.



63



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PART III



|ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|-------- | ------------------------------------------------------

The response to this item is incorporated by reference from the discussion responsive thereto under the captions Management, Compliance with Section 16(a) of the Securities Exchange Act of 1934 and
Corporate Governance in our Proxy Statement for the 2008 Annual Meeting of Stockholders, which we will file with the SEC within 120 days after our December 31, 2007 fiscal year end.



|ITEM 11. | EXECUTIVE COMPENSATION
|-------- | ----------------------

The response to this item
is incorporated by reference from the discussion responsive thereto under the caption Executive Compensation in our Proxy Statement for the 2008 Annual Meeting of Stockholders, which we will file with the SEC within 120 days after our
December 31, 2007 fiscal year end.



|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|-------- | ----------------------------------------------------------------------------------------------

The response to this item is incorporated by reference from the discussion responsive thereto under the caption Share Ownership in our Proxy
Statement for the 2008 Annual Meeting of Stockholders, except for the information required by Regulation S-K, Item 201(d), which is set forth under Item 5 of this report, which we will file with the SEC within 120 days after our
December 31, 2007 fiscal year end.



|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|-------- | -------------------------------------------------------------------------

The response to this item is incorporated by reference from the discussion responsive thereto under the captions Certain Relationships and Related Transactions, Executive CompensationEmployment
Agreements, Termination of Employment and Change of Control Arrangements and Director Independence in our Proxy Statement for the 2008 Annual Meeting of Stockholders, which we will file with the SEC within 120 days after our
December 31, 2007 fiscal year end.



|ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES
|-------- | --------------------------------------

The
response to this item is incorporated by reference from the discussion responsive thereto under the caption Principal Accounting Fees and Services in our Proxy Statement for the 2008 Annual Meeting of Stockholders, which we will file
with the SEC within 120 days after our December 31, 2007 fiscal year end.



64



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PART IV



|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|-------- | ------------------------------------------

(a)
Financial Statements

(1) and (2) See Index to Consolidated Financial Statements and Supplemental
Schedules at Item 8 of this Annual Report on Form 10-K.

Schedules not included herein are omitted because they
are not applicable or the required information appears in the Consolidated Financial Statements or Notes thereto.

(3) Exhibits



|            |  |                                                                                                                                                                                                                                                                                                                                                                
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit Name                                                                                                                                                                                                                                                                                                                                                   
|2.1         |  | Agreement and Plan of Reorganization, dated as of June 2, 2000, by and among us, FiberNet Holdco, Inc., FiberNet Merger Sub, Inc., Devnet Merger Sub, LLC, Devnet L.L.C. and
FP Enterprises L.L.C. (excluding the annexes, schedules and exhibits thereto) (incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K, filed on June 8, 2000).
|            | 
|3.1         |  | Certificate of Incorporation, dated May 17, 2000 (incorporated by reference to Exhibit 3.1 to our Registration Statement on Form S-1, filed on August 15, 2001).                                                                                                                                                                                               
|            | 
|3.2         |  | Certificate of Amendment to Certificate of Incorporation, dated July 31, 2000 (incorporated by reference to Exhibit 3.2 to our Registration Statement on Form S-1, filed on August 15, 2001).                                                                                                                                                                  
|            | 
|3.3         |  | Certificate of Designation of Series C Preferred Stock, dated July 31, 2000 (incorporated by reference to Exhibit 3.3 to our Registration Statement on Form S-1, filed on August 15, 2001).                                                                                                                                                                    
|            | 
|3.4         |  | Certificate of Designation of Series D Preferred Stock, dated July 31, 2000 (incorporated by reference to Exhibit 3.4 to our Registration Statement on Form S-1, filed on August 15, 2001).                                                                                                                                                                    
|            | 
|3.5         |  | Certificate of Designation of Series E Preferred Stock, dated July 31, 2000 (incorporated by reference to Exhibit 3.5 to our Registration Statement on Form S-1, filed on August 15, 2001).                                                                                                                                                                    
|            | 
|3.6         |  | Certificate of Designation of Series F Preferred Stock, dated July 31, 2000 (incorporated by reference to Exhibit 3.6 to our Registration Statement on Form S-1, filed on August 15, 2001).                                                                                                                                                                    
|            | 
|3.7         |  | Certificate of Designation of Series H Preferred Stock, dated July 31, 2000 (incorporated by reference to Exhibit 3.7 to our Registration Statement on Form S-1, filed on August 15, 2001).                                                                                                                                                                    
|            | 
|3.8         |  | Certificate of Designation of Series I Preferred Stock, dated July 31, 2000 (incorporated by reference to Exhibit 3.8 to our Registration Statement on Form S-1, filed on August 15, 2001).                                                                                                                                                                    
|            | 
|3.9         |  | Certificate of Designation of Series J Preferred Stock, dated December 6, 2001 (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K, filed on December 7,
2001).                                                                                                                                                                        
|            | 
|3.10        |  | Amended and Restated By-Laws of the Company adopted August 17, 2000 (incorporated by reference to Exhibit 3.9 to our Registration Statement on Form S-1, filed on September 8,
2000).                                                                                                                                                                          
|            | 
|3.11        |  | Certificate of Amendment to Certificate of Incorporation, dated October 25, 2002 (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K, filed on November 1,
2002).                                                                                                                                                                      
|            | 
|3.12        |  | Certificate of Amendment to Certificate of Incorporation, dated May 8, 2003 (incorporated by reference to Exhibit 3.12 to our Quarterly Report on Form 10-Q, filed on May 12,
2003).                                                                                                                                                                           
|            | 
|3.13        |  | Certificate of Amendment to Certificate of Incorporation, dated May 24, 2005 (incorporated by reference to Exhibit 3.1 to our Quarterly Report on Form 10-Q, filed on August 15,
2005).                                                                                                                                                                        
|            | 
|4.1         |  | Form of Certificate for our Common Stock (incorporated by reference to Exhibit 4.1 to our Registration Statement on Form S-1, filed on August 15, 2000).                                                                                                                                                                                                       



65



---

|            |  |                                                                                                                                                                                                                                                           
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit Name                                                                                                                                                                                                                                              
|4.2         |  | Stockholders Agreement, dated as of October 30, 2002, by and among us and the stockholders listed therein (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K, filed on
November 1, 2002).                                        
|            | 
|4.3         |  | Investors Rights Agreement, dated as of October 30, 2002, by and among us and the investors listed therein (incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K,
filed on November 1, 2002).                                      
|            | 
|4.4         |  | Registration Rights Agreement, dated as of October 30, 2002, by and among us and the stockholders listed therein (incorporated by reference to Exhibit 4.3 to our Current Report on Form 8-K,
filed on November 1, 2002).                                 
|            | 
|4.7         |  | First Amended and Restated Stockholders Agreement, dated as of November 11, 2002, by and among us and the stockholders listed therein (incorporated by reference to Exhibit 4.1 to our Current
Report on Form 8-K, filed on November 12, 2002).           
|            | 
|4.8         |  | First Amended and Restated Investors Rights Agreement, dated as of November 11, 2002, by and among the Company and the investors listed therein (incorporated by reference to Exhibit 4.2
to our Current Report on Form 8-K, filed on November 12, 2002).
|            | 
|4.10        |  | Registration Rights Agreement, dated as of January 10, 2003, by and among us and the stockholders listed therein (incorporated by reference to Exhibit 4.1 to Amendment No. 1 to our Current
Report on Form 8-K/A, filed on January 16, 2003).            
|            | 
|4.13        |  | Registration Rights Agreement, dated as of January 30, 2004, by and among us, Local Fiber, L.L.C. and gateway.realty.new jersey.llc (incorporated by reference to Exhibit 4.1 to our Current
Report on Form 8-K, filed on February 6, 2004).              
|            | 
|4.14        |  | Registration Rights Agreement, dated as of January 30, 2004, by and among us and the stockholders listed therein (incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K,
filed on February 6, 2004).                                 
|            | 
|4.16        |  | Warrant Agreement by and between 60 Hudson Owner LLC (successor to Westport Communications LLC) and us, dated as of October 29, 2004 (incorporated by reference to Exhibit 4.27 to our
Annual Report on 10-K, filed on March 30, 2005).                   
|            | 
|4.17        |  | Form of Incentive Stock Option Agreement (incorporated by reference to Exhibit 4.28 to our Annual Report on 10-K, filed on March 30, 2005).                                                                                                               
|            | 
|4.18        |  | Form of Nonqualified Stock Option Agreement (incorporated by reference to Exhibit 4.29 to our Annual Report on 10-K, filed on March 30, 2005).                                                                                                            
|            | 
|4.19        |  | Form of Restricted Stock Agreement (incorporated by reference to Exhibit 4.30 to our Annual Report on 10-K, filed on March 30, 2005).                                                                                                                     
|            | 
|4.20        |  | Registration Rights Agreement, dated March 22, 2006, by and among us and the entities identified therein as the Banks (incorporated by reference to Exhibit 4.31 to our Annual Report on 10-K,
filed on March 30, 2006).                                  
|            | 
|4.21        |  | Registration Rights Agreement, dated March 22, 2006, by and among us and the entities identified therein as the Investors (incorporated by reference to Exhibit 4.32 to our Annual Report on
10-K, filed on March 30, 2006).                              
|            | 
|4.22        |  | Warrant Agreement, dated March 22, 2006, by and among us and the entities identified therein as the Banks (incorporated by reference to Exhibit 4.33 to our Annual Report on 10-K, filed on
March 30, 2006).                                              



66



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|            |  |                                                                                                                                                                                                                                                                                                                         
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit Name                                                                                                                                                                                                                                                                                                            
|4.23        |  | Form of Warrant to purchase our Common Stock at a purchase price of $2.64 per share, issued in connection with the Common Stock Purchase Agreement, dated March 22, 2006 (incorporated by
reference to Exhibit 4.34 to our Annual Report on 10-K, filed on March 30, 2006).                                             
|            | 
|4.24        |  | Form of Warrant to purchase our Common Stock at a purchase price of $2.64 per share, issued in connection with the Twentieth Amendment to the Amended and Restated Credit Agreement, dated as
of March 22, 2006 (incorporated by reference to Exhibit 4.35 to our Annual Report on 10-K, filed on March 30, 2006).      
|            | 
|10.1        |  | Office Lease Agreement, between Hudson Telegraph Associates and us, dated as of February 17, 1998 (incorporated by reference to our Quarterly Report on Form 10-QSB, filed on November 16,
1998).                                                                                                                       
|            | 
|10.2        |  | Agreement of Lease, between 570 Lexington Company, L.P. and us, dated as of August 3, 1998 (incorporated by reference to Exhibit 10.5 to our Quarterly Report on Form 10-QSB filed on
May 15, 1998).                                                                                                                    
|            | 
|*10.3       |  | Private Network Agreement, dated as of November 30, 1999 between us and Metromedia Fiber Network Services, Inc. (incorporated by reference to Exhibit 10.9 to our Annual Report on 10-KSB,
filed on March 30, 2000).                                                                                                    
|            | 
|10.4        |  | Master Purchase Agreement, dated as of December 31, 1999 between us and Nortel Networks Inc. (incorporated by reference to Exhibit 10.16 to our Registration Statement on Form S-1, filed on
September 8, 2000).                                                                                                        
|            | 
|10.5        |  | Lease Agreement, dated February 29, 2000 between 111 Eighth Avenue LLC and us (incorporated by reference to Exhibit 10.11 to our Annual Report on 10-KSB, filed on March 30,
2000).                                                                                                                                     
|            | 
|10.6        |  | Assignment and Assumption Agreement, dated as of August 11, 2000 by and between us and FiberNet Operations, Inc. (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K,
filed on August 15, 2000).                                                                                               
|            | 
|10.7        |  | Amendment Number 1 to Master Purchase Agreement, effective as of June 22, 2000 between us and Nortel Networks Inc. (incorporated by reference to Exhibit 10.50 to our Registration
Statement on Form S-1, filed on September 8, 2000).                                                                                  
|            | 
|10.8        |  | Agreement of Lease, between 60 Hudson Owner LLC (successor to Westport Communications, LLC) and us, dated as of April 1, 2001, including amendments dated January 30, 2002, November 7,
2002 and April 1, 2003 (incorporated by reference to Exhibit 10.57 to our Quarterly Report on Form 10-Q, filed on May 12, 2003).
|            | 
|10.9        |  | Amendment of Lease, between 60 Hudson Owner LLC (successor to Westport Communications, LLC) and us, dated as of October 31, 2003 (incorporated by reference to Exhibit 10.58 to our
Quarterly Report on Form 10-Q, filed on November 12, 2003).                                                                         
|            | 
|10.10       |  | Asset Purchase Agreement, dated as of December 31, 2003, by and among us, Local Fiber, LLC and gateway.realty.new jersey.llc (incorporated by reference to Exhibit 10.1 to our Current Report
on Form 8-K, filed on February 6, 2004).                                                                                  
|            | 
|10.11       |  | Common Stock Purchase Agreement, dated as of January 30, 2004, by and among us and certain investors listed therein (incorporated by reference to Exhibit 10.2 to our Current Report on Form
8-K, filed on February 6, 2004).                                                                                           
|            | 
|10.12       |  | Amendment of Lease, by and between Hudson Telegraph Associates, L.P. and FiberNet Equal Access LLC, dated as of October 29, 2004 (incorporated by reference to Exhibit 10.65 to our Annual
Report on 10-K, filed on March 30, 2005).                                                                                    



67



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|            |  |                                                                                                                                                                                                                                                                                         
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit Name                                                                                                                                                                                                                                                                            
|10.13       |  | Executive Compensation Arrangements (incorporated by reference to Exhibit 10.72 to our Annual Report on 10-K, filed on March 30, 2005).                                                                                                                                                 
|            | 
|10.14       |  | Amended and Restated Board of Directors Compensation Plan (incorporated by reference to Exhibit 10.2 to our Quarterly Report on 10-Q, filed on November 10, 2005).                                                                                                                      
|            | 
|10.15       |  | Common Stock Purchase Agreement, dated as of March 22, 2006, by and among us and each of the purchasers identified therein (incorporated by reference to Exhibit 10.83 to our Annual Report on
10-K, filed on March 30, 2006).                                                          
|            | 
|10.16       |  | First Amendment to the Asset Purchase Agreement, dated as of March 22, 2006, by and among us, Local Fiber, LLC and gateway.realty.new jersey.llc. (incorporated by reference to Exhibit 10.84
to our Annual Report on 10-K, filed on March 30, 2006).                                   
|            | 
|10.17       |  | Change in Control Plan (incorporated by reference to Exhibit 10.1 to our Quarterly Report on 10-Q, filed on November 2, 2006).                                                                                                                                                          
|            | 
|10.18       |  | Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.2 to our Quarterly Report on 10-Q, filed on November 2, 2006).                                                                                                                                              
|            | 
|10.19       |  | Form of Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.3 to our Quarterly Report on 10-Q, filed on November 2, 2006).                                                                                                                                        
|            | 
|10.20       |  | Amendment of Lease, between 60 Hudson Owner LLC (successor to Westport Communications LLC) and us, dated as of January 11, 2007 (incorporated by reference to Exhibit 10.20 to our Annual
Report on 10-K, filed on April 2, 2007).                                                      
|            | 
|10.21       |  | Amendment of Lease, between 60 Hudson Owner LLC (successor to Hudson Telegraph Associates, L.P., formerly known as Hudson Telegraph Associates) and us, dated as of March 1, 2007 (incorporated
by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on March 6, 2007).
|            | 
|10.22       |  | Amendment of Lease, between 60 Hudson Owner LLC (successor to Westport Communications LLC) and us, dated as of March 2, 2007 (incorporated by reference to Exhibit 10.22 to our Annual
Report on 10-K, filed on April 2, 2007).                                                         
|            | 
|10.23       |  | Credit Agreement between CapitalSource Finance LLC and us dated as of March 21, 2007 (incorporated by reference to Exhibit 10.23 to our Annual Report on 10-K, filed on April 2,
2007).                                                                                                 
|            | 
|10.24       |  | Amendment of Lease, between 60 Hudson Owner LLC (successor to Westport Communications LLC) and us, dated as of April 4, 2007 (incorporated by reference to Exhibit 10.1 to our Quarterly
Report on 10-Q, filed on May 15, 2007).                                                        
|            | 
|10.25       |  | 2003 Equity Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on July 11, 2007).                                                                                                                                           
|            | 
|10.26       |  | Amended and Restated Credit Agreement between CapitalSource Finance LLC and us dated as of November 7, 2007 (incorporated by reference to Exhibit 99.1 to our Current Report on Form 8-K,
filed on November 8, 2007).                                                                   
|            | 
|10.27       |  | Amended and Restated 2007 Board of Directors Compensation Plan as adopted on August 20, 2007 (incorporated by reference to Exhibit 10.1 to our Quarterly Report on 10-Q, filed on
November 8, 2007).                                                                                    
|            | 
|14          |  | Corporate Code of Conduct and Ethics (incorporated by reference to Exhibit 14 to our Annual Report on Form 10-K, filed on March 30, 2004).                                                                                                                                              
|            | 
|16.1        |  | Deloitte & Touche LLP Acknowledgement Letter (incorporated by reference to Exhibit 16.1 to our Current Report on Form 8-K, filed on July 13, 2007).                                                                                                                                     



68



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|            |  |                                                
|----------- |  | -----------------------------------------------
|Exhibit No. |  | Exhibit Name                                   
|21.1        |  | Subsidiaries of Fibernet Telecom Group, Inc.** 
|            | 
|23.1        |  | Consent of AccountantsDeloitte & Touche LLP **
|            | 
|23.2        |  | Consent of AccountantsFriedman LLP**          
|            | 
|31.1        |  | Certification of Principal Executive Officer **
|            | 
|31.2        |  | Certification of Principal Financial Officer **
|            | 
|32.1        |  | Section 906 Certification **                   



|* | Confidential treatment has been requested for portions of this exhibit. These portions have been omitted and filed separately with the Commission.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------

|** | Filed herewith.
|-- | ---------------



69



---

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



| |  |                              |  |                                      
| |  | ---------------------------- |  | -------------------------------------
| |  | FIBERNET TELECOM GROUP, INC.
| |  |                             
| |  | By:                          |  | /S/    JON A.
DELUCA                 
| |  | Name:                        |  | Jon A. DeLuca                        
| |  | Title:                       |  | President and Chief Executive Officer
| |  |                             
| |  | Date:                        |  | March 28, 2008                       

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



|                                                           |  |                                                                                  |  |               
|---------------------------------------------------------- |  | -------------------------------------------------------------------------------- |  | --------------
|Name                                                       |  | Title                                                                            |  | Date          
|/S/    JON A.
DELUCA Jon A. DeLuca                         |  | Director, President and Chief Executive Officer (Principal Executive Officer)    |  | March 28, 2008
|                                                           |  |                                                                                 
|/s/    CHARLES S.
WIESENHART JR. Charles S. Wiesenhart
Jr. |  | Chief Financial Officer and Vice President-Finance (Principal Financial Officer) |  | March 28, 2008
|                                                           |  |                                                                                 
|/s/    MICHAEL S.
LISS Michael S. Liss                     |  | Director, Chairman                                                               |  | March 28, 2008
|                                                           |  |                                                                                 
|/s/    RICHARD E.
SAYERS Richard E. Sayers                 |  | Director, Vice Chairman                                                          |  | March 28, 2008
|                                                           |  |                                                                                 
|/s/    TIMOTHY P.
BRADLEY Timothy P. Bradley               |  | Director                                                                         |  | March 28, 2008
|                                                           |  |                                                                                 
|/s/    OSKAR
BRECHER Oskar Brecher                         |  | Director                                                                         |  | March 28, 2008
|                                                           |  |                                                                                 
|/s/    ADAM M.
BRODSKY Adam M. Brodsky                     |  | Director                                                                         |  | March 28, 2008
|                                                           |  |                                                                                 
|/s/    ROY (TREY) D. FARMER
III Roy (Trey) D. Farmer III   |  | Director                                                                         |  | March 28, 2008
|                                                           |  |                                                                                 
|/s/    ROBERT E.
LABLANC Robert E. LaBlanc                 |  | Director                                                                         |  | March 28, 2008
|                                                           |  |                                                                                 
|/s/    CHARLES J.
MAHONEY Charles J. Mahoney               |  | Director                                                                         |  | March 28, 2008



70