##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE PERIOD ENDED SEPTEMBER 30, 2003.

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

Commission File Number 000-31105

LEXENT INC.




(Exact name of registrant as specified in its charter)


Delaware
    
    13-3990223(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer Identification No.)Three New York Plaza
New York, New York
    
    10004(Address of principal executive offices)
    
    (Zip Code)


Registrants telephone number, including area code:
    
    212-981-0700


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 whether the registrant is an accelerated filer (as
defined in Rule 12 b-2 of the Securities Exchange Act of 1934)

Yes [   ] No [X]

Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date. Common Stock, $.001 par
value, 42,290,561 shares outstanding as of November 6, 2003.





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TABLE OF CONTENTS



|                              |                                                                                               |                                                      |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I- FINANCIAL INFORMATION
|                              | ITEM 1. Financial Statements                                                                 
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                              |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                              | ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | ITEM 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                              | ITEM 4. Controls and Procedures                                                              
|PART II  OTHER INFORMATION  
|                              | ITEM 1. Legal Proceedings                                                                    
|                              | ITEM 5. Other Information                                                                    
|                              | ITEM 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                   
|CERTIFICATION                
|CERTIFICATION                
|CERTIFICATION                



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##### Table of Contents



LEXENT INC. AND SUBSIDIARIES

TABLE OF CONTENTS

Page No.PART I.
    
    Financial InformationITEM 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets as of September 30, 2003
(unaudited) and December 31, 2002
    
    
    3Condensed Consolidated Statements of Operations (unaudited) for the
Three Months and Nine Months Ended September 30, 2003 and
September 30, 2002
    
    
    4Condensed Consolidated Statements of Cash Flows (unaudited) for the
Nine Months Ended September 30, 2003 and September 30, 2002
    
    
    5Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    6-13ITEM 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    14-18ITEM 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    18ITEM 4.
    
    Controls and Procedures
    
    
    18-19PART II.
    
    Other InformationITEM 1.
    
    Legal Proceedings
    
    
    19ITEM 5.
    
    Other Information
    
    
    19-20ITEM 6.
    
    Exhibits and Reports on Form 8-K
    
    
    20-21Signatures
    
    
    22Certifications
    
    
    23-25


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##### Table of Contents






PART I- FINANCIAL INFORMATION




ITEM 1. Financial Statements




LEXENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)

September 30,
    
    December 31,2003
    
    2002Assets:
    
    (unaudited)Current assets:Cash and cash equivalents
    
    $
    61,683
    
    
    $
    28,109Certificate of deposit (restricted cash)
    
    
    2,013
    
    
    
    2,012Available-for-sale investments
    
    
    1,010
    
    
    
    44,302Receivables, net
    
    
    30,786
    
    
    
    28,311Prepaid expenses and other current assets
    
    
    2,030
    
    
    
    2,048Income taxes receivable
    
    
    
    
    
    
    14,750Total current assets
    
    
    97,522
    
    
    
    119,532Property and equipment, net
    
    
    4,704
    
    
    
    4,033Other assets
    
    
    826
    
    
    
    880Total assets
    
    $
    103,052
    
    
    $
    124,445Liabilities and Stockholders Equity:Current liabilities:Accounts payable
    
    $
    3,690
    
    
    $
    7,494Accrued expenses and other liabilities
    
    
    8,013
    
    
    
    6,229Restructure reserve
    
    
    2,375
    
    
    
    4,023Billings in excess of costs and estimated
earnings on uncompleted projects
    
    
    3,503
    
    
    
    1,837Provision for contract losses
    
    
    2,315
    
    
    
    3,472Subordinated note payable to stockholder
    
    
    791
    
    
    
    1,582Equipment and capital lease obligations
    
    
    99
    
    
    
    451Total current liabilities
    
    
    20,786
    
    
    
    25,088Subordinated note payable to stockholder
    
    
    
    
    
    
    396Accrued liabilities  noncurrent
    
    
    700
    
    
    
    600Restructure reserve  noncurrent
    
    
    5,534
    
    
    
    6,566Equipment and capital lease obligations
    
    
    
    
    
    
    70Total liabilities
    
    
    27,020
    
    
    
    32,720Commitments and contingenciesStockholders equity:Common stock, $.001 par value, 120,000,000
shares authorized, 42,290,561 and 42,168,396 shares
outstanding at September 30, 2003 and December 31, 2002
respectively
    
    
    42
    
    
    
    42Additional paid-in capital
    
    
    156,105
    
    
    
    156,035Deferred stock-based compensation
    
    
    (479
    )
    
    
    (2,126
    )Accumulated other comprehensive income
    
    
    
    
    
    
    105Accumulated deficit
    
    
    (79,636
    )
    
    
    (62,331
    )Total stockholders equity
    
    
    76,032
    
    
    
    91,725Total liabilities and stockholders equity
    
    $
    103,052
    
    
    $
    124,445


See accompanying notes to condensed consolidated financial statements.

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LEXENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
(unaudited)

For the Three Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,2003
    
    2002
    
    2003
    
    2002Revenues
    
    $
    27,716
    
    
    $
    27,718
    
    
    $
    68,928
    
    
    $
    92,183Cost of revenues
    
    
    30,917
    
    
    
    34,158
    
    
    
    74,798
    
    
    
    94,966Gross margin
    
    
    (3,201
    )
    
    
    (6,440
    )
    
    
    (5,870
    )
    
    
    (2,783
    )Operating expenses:General and administrative expenses
    
    
    2,204
    
    
    
    4,600
    
    
    
    8,937
    
    
    
    13,117Depreciation and amortization
    
    
    463
    
    
    
    1,229
    
    
    
    1,455
    
    
    
    3,751Non-cash stock-based compensation*
    
    
    478
    
    
    
    760
    
    
    
    1,637
    
    
    
    2,541Restructuring charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,441Total operating expenses
    
    
    3,145
    
    
    
    6,589
    
    
    
    12,029
    
    
    
    20,850Loss from operations
    
    
    (6,346
    )
    
    
    (13,029
    )
    
    
    (17,899
    )
    
    
    (23,633
    )Other income and expense:Interest expense
    
    
    21
    
    
    
    57
    
    
    
    82
    
    
    
    198Interest income
    
    
    (174
    )
    
    
    (325
    )
    
    
    (689
    )
    
    
    (1,021
    )Other (income) expense, net
    
    
    (3
    )
    
    
    8
    
    
    
    (43
    )
    
    
    1,456Total other (income) expense, net
    
    
    (156
    )
    
    
    (260
    )
    
    
    (650
    )
    
    
    633Loss before income taxes
    
    
    (6,190
    )
    
    
    (12,769
    )
    
    
    (17,249
    )
    
    
    (24,266
    )Provision for (benefit from) income taxes
    
    
    
    
    
    
    (5,620
    )
    
    
    56
    
    
    
    (7,935
    )Net loss
    
    $
    (6,190
    )
    
    $
    (7,149
    )
    
    $
    (17,305
    )
    
    $
    (16,331
    )Net loss per share:Basic and diluted
    
    $
    (0.15
    )
    
    $
    (0.17
    )
    
    $
    (0.41
    )
    
    $
    (0.39
    )Weighted average common shares outstanding:Basic
    
    
    42,269
    
    
    
    42,076
    
    
    
    42,236
    
    
    
    41,870Diluted
    
    
    *
    *
    
    
    *
    *
    
    
    *
    *
    
    
    *
    *


*Substantially these amounts would have been classified as general and administrative expenses.

** Anti-dilutive, therefore, not presented.

See accompanying notes to condensed consolidated financial statements.

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LEXENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)

For the Nine Months EndedSeptember 30,2003
    
    2002Cash flows from operating activities:Net loss
    
    $
    (17,305
    )
    
    $
    (16,331
    )Adjustments to reconcile net loss to net cash used in operating activities:Restructuring charges
    
    
    
    
    
    
    1,441Depreciation and amortization
    
    
    1,455
    
    
    
    3,751Provision for uncollectible accounts
    
    
    (1,286
    )
    
    
    580Loss on investment/ disposition of assets
    
    
    
    
    
    
    1,455Provision for deferred tax benefit
    
    
    
    
    
    
    (8,086
    )Provision for contract losses
    
    
    (1,157
    )
    
    
    2,995Non-cash stock-based compensation
    
    
    1,637
    
    
    
    2,541Changes in working capital items:Receivables
    
    
    (1,189
    )
    
    
    11,967Deferred tax asset/income taxes receivable
    
    
    14,750
    
    
    
    3,284Prepaid expenses and other current assets
    
    
    18
    
    
    
    668Other assets
    
    
    54
    
    
    
    413Accounts payable
    
    
    (3,804
    )
    
    
    (560
    )Accrued liabilities
    
    
    (681
    )
    
    
    (5,567
    )Billings in excess of costs and estimated earnings on
uncompleted projects
    
    
    1,666
    
    
    
    1,298Net cash used in operating activities
    
    
    (5,842
    )
    
    
    (151
    )Cash flows from investing activities:Capital expenditures
    
    
    (2,231
    )
    
    
    (913
    )Purchase of certificate of deposit
    
    
    (1
    )
    
    
    (2,005
    )Proceeds from sale of available-for-sale investments
    
    
    43,187
    
    
    
    3,422Net cash provided by investing activities
    
    
    40,955
    
    
    
    504Cash flows from financing activities:Proceeds from exercise of stock options and stock purchase plan
    
    
    70
    
    
    
    567Repayments of subordinated note payable to stockholder
    
    
    (1,187
    )
    
    
    (1,187
    )Repayments of equipment loans and capital leases
    
    
    (422
    )
    
    
    (1,252
    )Net cash used in financing activities
    
    
    (1,539
    )
    
    
    (1,872
    )Net increase (decrease) in cash and cash equivalents
    
    
    33,574
    
    
    
    (1,519
    )Cash and cash equivalents at beginning of period
    
    
    28,109
    
    
    
    75,839Cash and cash equivalents at end of period
    
    $
    61,683
    
    
    $
    74,320Supplemental cash flow information:Cash paid for:Interest
    
    $
    86
    
    
    $
    211Taxes
    
    $
    91
    
    
    $
    157Supplemental disclosures of non-cash investing and financing activitiesReduction in deferred stock-based compensation
    
    $
    9
    
    
    $
    3,658


See accompanying notes to condensed consolidated financial statements.

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LEXENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)

The condensed consolidated financial statements of Lexent Inc. and
Subsidiaries (the Company) included herein have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to SEC rules and
regulations. The condensed consolidated financial statements of the Company
reflect, in the opinion of management, all adjustments necessary to present
fairly the financial position of the Company at September 30, 2003 and the
results of its operations and cash flows for the periods ended September 30,
2003 and September 30, 2002. All adjustments are of a normal recurring nature.
These financial statements should be read in conjunction with the annual
financial statements and notes thereto for the year ended December 31, 2002.
The results of operations for the three and nine months ended September 30,
2003 are not necessarily indicative of the results of operations to be expected
for the year ending December 31, 2003.

Certain amounts in the prior period have been reclassified to conform with
the current period presentation.

The Company received a letter, dated March 3, 2003, from the Nasdaq Stock
Market notifying the Company that, as a result of the resignations of its
independent directors, Lexent did not meet the independent director and audit
committee requirements for continued listing on the Nasdaq National Market.

Because Lexent was not able to regain compliance with the independent
director and audit committee requirements for continued listing on the Nasdaq
Stock Market, the Nasdaq Listing Qualifications Panel made a determination to
delist Lexents common stock from The Nasdaq National Market effective with the
opening of business on June 26, 2003. As of such date, Lexents common stock
began trading on the OTC Bulletin Board under the same symbol, LXNT.

1. NET LOSS PER SHARE

Net loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding for the period. Diluted loss per
share reflects the potential dilution of other securities by including in the
weighted average number of common shares outstanding for each period, the
dilutive effect of stock options and shares issuable under the employee stock
purchase plan. Details of the calculations are as follows:

Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002(in thousands, except per share amounts)Net loss per share-basic:Net loss
    
    $
    (6,190
    )
    
    $
    (7,149
    )
    
    $
    (17,305
    )
    
    $
    (16,331
    )Weighted average shares-basic
    
    
    42,269
    
    
    
    42,076
    
    
    
    42,236
    
    
    
    41,870Net loss per share-basic
    
    $
    (0.15
    )
    
    $
    (0.17
    )
    
    $
    (0.41
    )
    
    $
    (0.39
    )Net loss per share-diluted:Net loss
    
    $
    (6,190
    )
    
    $
    (7,149
    )
    
    $
    (17,305
    )
    
    $
    (16,331
    )Weighted average shares-basic
    
    
    42,269
    
    
    
    42,076
    
    
    
    42,236
    
    
    
    41,870Dilutive effect of stock options
    
    
    415
    
    
    
    549
    
    
    
    384
    
    
    
    843Dilutive effect of employee stock purchase plan
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    2Weighted average shares-diluted
    
    
    42,684
    
    
    
    42,627
    
    
    
    42,620
    
    
    
    42,715Net loss per share-diluted
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    *


*Inclusion of common stock equivalent shares would result in an
anti-dilutive net loss per share. As a result, the computation for diluted
loss per share is not presented.

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LEXENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)

2.ACCUMULATED OTHER COMPREHENSIVE INCOME

Comprehensive income includes net loss and unrealized gains from
available-for-sale investments, net of income tax effect. The unrealized gains
from available-for-sale investments were $0.1 million for 2002.

The change in accumulated other comprehensive income for 2003 was as
follows:

Unrealized gain
    
    Accumulatedon available-for-
    
    othersale
    
    comprehensiveinvestments
    
    income(in thousands)Balance, December 31, 2002
    
    $
    105
    
    
    $
    105Change for 2003
    
    
    (105
    )
    
    
    (105
    )Balance, September 30, 2003
    
    $
    
    
    
    $
    


3. CERTIFICATE OF DEPOSIT (RESTRICTED CASH)

In
August 2002, Lexent Metro Connect, LLC (LMC), a wholly owned subsidiary of Lexent Inc., entered into a franchise agreement with the City of
New York, whereunder LMC will be permitted to construct, operate and provide
local high capacity telecommunications networks and services within the New
York metropolitan area. In connection therewith, the City of New York required
that LMC post $2.0 million to secure its obligations. LMC provided the $2.0
million in the form of an unconditional letter of credit. A certificate of
deposit for $2.0 million was pledged as collateral for the $2.0 million letter
of credit, and was renewed during the third quarter 2003. Based upon the City
of New York requirements, the unconditional letter of credit was reduced to
$1.0 million in September 2003. The certificate of deposit was reduced to $1.0
million on the date of maturity, October 7, 2003.

4. RECEIVABLES, NET

September 30,
    
    December 31,2003
    
    2002(in thousands)Accounts receivable  billed to customers
    
    $
    22,980
    
    
    $
    23,891Unbilled receivables on completed projects accounted
for under the completed contract method
    
    
    699
    
    
    
    717Costs and estimated earnings in excess of billings on
projects accounted for under the percentage-of-
completion method
    
    
    5,736
    
    
    
    5,044Costs of uncompleted projects accounted for under the
completed contract method
    
    
    1,401
    
    
    
    661Retainage
    
    
    4,285
    
    
    
    2,63835,101
    
    
    
    32,951Less: allowance for uncollectible amounts
    
    
    (4,315
    )
    
    
    (4,640
    )$
    30,786
    
    
    $
    28,311


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LEXENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)

For the nine months ended September 30, 2003 recoveries, net of amounts
written off against the allowance were $1.0 million. The amounts written off
against the allowance for the same period last year were $8.1 million.

Amounts retained by customers related to projects that are progress-billed
may be outstanding for periods that exceed one year.

5. INVESTMENTS

Available-for-sale investments represents investment grade securities
backed by U.S. government, Federal Agency bonds, and AA rated corporate notes
that have original maturities in excess of 90 days.

6. EMPLOYEE STOCK PURCHASE PLAN

At September 30, 2002, 11,558 shares were issuable to employees based on
payroll deductions of $0.01 million through that date. The Employee Stock
Purchase Plan was terminated in January 2003.

7. RELATED PARTY TRANSACTIONS

During the nine months ended September 30, 2003, the Company repaid $1.2
million including interest expense of $0.1 million on a subordinated note
payable to a common stockholder.

The Company leases buildings for office and warehouse purposes in New York
City and in South Plainfield, New Jersey from entities owned by its two
principal common stockholders and another common stockholder. Rent expense for
these premises was $0.4 million for the nine months ended September 30, 2003.

In May 2000, the Company entered into a ten-year lease for a garage and
warehouse facility in Long Island City, New York. Lease payments were $0.5
million for the nine months ended September 30, 2003. The facility is leased
from an entity owned by the Companys two principal common stockholders.

On July 9, 2003, the Company executed an Agreement and Plan of Merger (the
Merger Agreement) between LX Merger Corp. (Purchaser) and the Company
pursuant to which Purchaser will merge with and into the Company and the
Company will be the surviving corporation (the Merger). Purchaser is a newly
formed corporation owned by Hugh J. OKane, Jr., Chairman of the Board of
Lexent, and Kevin M. OKane, Chief Executive Officer and Vice Chairman of the
Board of Lexent (together, the Purchaser Stockholders) and organized for the
sole purpose of entering into the Merger Agreement and consummating the
transactions contemplated thereby. If the Merger is completed, the Companys
common stock will no longer be publicly traded and the Company will become a
privately-held company owned entirely by the Purchaser Stockholders.

Pursuant to the terms of the Merger Agreement, the stockholders of the
Company will receive $1.50 in cash for each outstanding share of the Companys
common stock. Outstanding options to purchase shares of the Companys common
stock will be canceled and each holder of such options will receive $1.50 per
share minus the exercise price of the options, but only to the extent that the
exercise price is lower than $1.50. Notwithstanding, the Purchaser
Stockholders have agreed, pursuant to their settlement with the plaintiffs in
the litigation challenging the Merger, that they will receive the cash merger
consideration for no more than 20% of their shares of Lexent common stock. In
addition, the Purchaser Stockholders do not hold any options that have an
exercise price that is less than $1.50, so they will not receive any
consideration upon the cancellation of their options. The Purchaser
Stockholders have not yet determined the precise number of shares beneficially
owned by them that they will cause to be converted

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LEXENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)

into the right to receive the merger consideration in the merger. Based on the
20% limitation, they are expected to receive no more than approximately $6.3
million in the aggregate, in connection with the Merger with respect to their
shares of Lexent common stock not contributed to the Purchaser.

The closing of the Merger is subject to various conditions, including that
the Amended Stipulation of Settlement entered into on September 9, 2003, by the
Company, Hugh J. OKane, Jr., Kevin M. OKane and the plaintiffs named in the
lawsuits consolidated under the caption In re Lexent Inc. Shareholders
Litigationand filed with the Court of Chancery of the State of Delaware, is in
full force and effect, approval of the transaction by stockholders of the
Company representing a majority of the shares of common stock actually voted on
the transaction (other than shares owned by the Purchaser or the Purchaser
Stockholders), regulatory approvals, absence of any pending or threatened
litigation related to the transaction and other customary conditions to
closing, and there can be no assurance that the conditions to closing will be
satisfied or that the Merger will be completed.

The Company has filed preliminary proxy materials with the Securities and
Exchange Commission for a special meeting of the Companys stockholders to vote
on the Merger.

The Companys Board of Directors, which consists entirely of the Purchaser
Stockholders, approved the Merger Agreement and the Merger. In reaching its
decision to approve the Merger Agreement and the Merger, the Board of Directors
considered the opinion of Rodman & Renshaw, Inc., a New York based investment
banking firm and the Companys independent financial advisor, that, as of July
9, 2003, the $1.50 per share merger consideration is fair, from a financial
point of view, to the Companys stockholders, other than the Purchaser
Stockholders and their affiliates.

On November 5, 2003 the Company and the Purchaser entered into a First
Amendment to Agreement and Plan of Merger to extend the termination date under
the Merger Agreement to December 31, 2003.

8. CONTINGENCIES

From time to time, the Company is involved in various suits and legal
proceedings, which arise in the ordinary course of business.

On February 15, 2003 through February 28, 2003, in response to the
announcement by the Company of its receipt of an offer from Hugh J. OKane,
Jr., the Companys Chairman, and Kevin M. OKane, the Companys Chief Executive
Officer and Vice Chairman, to purchase all outstanding shares of common stock
of the Company (other than those owned by Hugh J. OKane, Jr. and Kevin M.
OKane) at $1.25 per share, six putative class actions were filed in the Court
of Chancery for the State of Delaware. All of the lawsuits named Lexent Inc.,
Hugh J. OKane, Jr. and Kevin M. OKane as defendants. One of the lawsuits
also named, as defendants, several former members of Lexents Board of
Directors. The suits alleged, inter alia, that the offer was unfair and
inadequate, the buying group had engaged in self-dealing and had not acted in
good faith, and that the Company and its Board of Directors, present and
former, had breached their fiduciary duty to shareholders.

By order dated April 7, 2003, the court consolidated the class actions
under the caption In re Lexent Inc. Shareholders Litigation, Cons. C.A. No.
20177. The complaint adopted in the consolidated action named only Lexent
Inc., Hugh J. OKane, Jr. and Kevin M. OKane as defendants. The plaintiffs
seek various forms of relief, including but not limited to, damages and
enjoining the Company and the Purchaser Stockholders from proceeding with,
consummating or closing the proposed merger.

On June 17, 2003, Lexent publicly announced an agreement in principle
among Lexent, Hugh J. OKane, Jr., Kevin M. OKane and the plaintiffs named in
the lawsuits consolidated under the caption In re Lexent Inc. Shareholders
Litigation. Under the proposed terms of the settlement, the Purchaser
Stockholders agreed, among other things, to raise the per share merger
consideration to $1.50 per share.

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LEXENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)

On August 6, 2003, the Company, Hugh J. OKane, Jr., Kevin M. OKane and
the plaintiffs named in the lawsuits consolidated under the caption In re
Lexent Inc. Shareholders Litigationfiled a Stipulation of Settlement with the
Court of Chancery of the State of Delaware.

On September 9, 2003, the Company, Hugh J. OKane, Jr., Kevin M. OKane
and the plaintiffs named in the lawsuits consolidated under the caption In re
Lexent Inc. Shareholders Litigationfiled an Amended Stipulation of Settlement
with the Court of Chancery of the State of Delaware.

Pursuant to the settlement, the plaintiffs (on their own behalf and on
behalf of a class of holders of Lexent common stock) agreed to dismiss the
litigation and release the defendants from all related claims. In exchange, as
previously announced, the defendants, without admitting any liability, agreed
to, among other things, (i) raise the consideration to be paid in the proposed
merger to $1.50 per share and (ii) condition the approval of the proposed
merger on the receipt of the vote of a majority of shares of Lexent common
stock actually voted with respect to the adoption and approval of the merger
agreement and the proposed merger (other than shares held by Purchaser and the
Purchaser Stockholders).

On October 15, 2003, the Court of Chancery of the State of Delaware issued
an order determining that the settlement is fair, reasonable, and adequate to
the holders of Lexent common stock (other than Purchaser and the Purchaser
Shareholders). The Court of Chancery of the State of Delaware further awarded
plaintiffs attorneys fees and expenses in the aggregate amount of $500,000.
In the event that the stockholders of the Company approve the proposed Merger
and the proposed Merger is completed, plaintiffs court-approved attorneys
fees and expenses will be paid by the Company.

As indicated in previous filings, a shareholder class action lawsuit was
filed on October 26, 2001, Labansky, et al. v. Lexent Inc. et al., in the
Southern District of New York against the Company, certain of its present and
former senior executives and its underwriters. The complaint alleged that the
registration statement and prospectus relating to the Companys initial public
offering contained material misrepresentations and/or omissions in that those
documents did not disclose that: (1) certain underwriters had solicited and
received undisclosed fees and commissions and other economic benefits from some
investors in connection with the distribution of the Companys stock in the
initial public offering; and (2) certain underwriters had entered into
arrangements with some investors that were designed to distort and/or inflate
the market price for the Companys stock in the aftermarket following the
initial public offering. The suit against the Company was one of a number of
initial public offering securities claims against approximately 308 other
issuers and underwriters. For the purpose of coordination, the suits were
consolidated as In re Initial Public Offering Securities Litigation, 21 MC 92
(SAS) (the IPO Litigation). On June 26, 2003, the plaintiffs executive
committee, responsible for coordinating and managing the IPO Litigation for all
plaintiffs, announced a proposed settlement between plaintiffs, on the one
hand, and the issuer defendants and their respective officer and director
defendants, including Lexent Inc. and its named officers and directors, on the
other. The proposed settlement does not resolve plaintiffs claims against the
underwriter defendants. A memorandum of understanding to settle plaintiffs
claims against the issuers and their directors and officers has been approved
as to form by counsel for the issuers and the process of obtaining individual
approval by each of the other 308 issuer defendants has begun. On July 9, 2003,
the Company elected to adopt the plaintiffs settlement proposal set forth in
the memorandum of understanding. The principal components of the proposed
settlement include: (i) a release of all plaintiffs claims against the issuer
defendants and their officers and directors which have, or could have, been
asserted in the IPO Litigation arising out of the conduct alleged in the
complaints to be wrongful; (ii) the assignment by the issuers to the plaintiffs
of certain potential claims against the underwriter defendants and the
agreement by the issuers not to assert certain claims against the underwriter
defendants; and (iii) an undertaking by the insurers of the issuer defendants
to pay to plaintiffs the difference between $1 billion and any lesser amount
recovered by plaintiffs from the underwriter defendants in the IPO Litigation.
If recoveries in excess of $1 billion are obtained by plaintiffs from the
underwriters, the insurers of the settling issuer defendants will owe no money
to the plaintiffs. The plaintiffs proposed settlement is contingent upon a
substantial majority of the issuer defendants entering into the settlement and
is further subject to approval by the Court.

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LEXENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)

On or about July 22, 2002, the Company was served with a complaint in the
Northern District of Illinois, Annecca Inc. et al. v. Lexent Inc., brought by
several plaintiffs associated with U.S. Electric LLC, alleging that the
Companys decisions neither to complete the purchase of U.S. Electric nor to
employ certain of U.S. Electrics principals constitute a breach of contract.
Plaintiffs seek damages for lost profits, salaries, etc. The Company believes
that the complaint is without merit and will vigorously defend itself. The
Companys Answer has been filed, and the Company has asserted several
counterclaims. The parties are currently engaged in discovery. It is too early
to assess the ultimate outcome of the litigation. Therefore, at present, it
cannot be determined whether the ultimate outcome will have a material impact
on the Companys financial position or results of operations.

HOK continues to be involved in litigation in the Southern District of New
York, U.S. Information Systems, Inc. et al. v. International Brotherhood of
Electrical Workers Local Union 3, AFL-CIO et al., served on or about March 10,
2002, brought by three electrical contractors alleging a conspiracy among
certain other contractors (including HOK) and the International Brotherhood of
Electrical Workers, Local Union Number 3, AFL-CIO (IBEW). The suit alleges
violations of the federal Sherman Antitrust Act and state laws and claims that
the defendants exercise market power restricting the ability of plaintiffs, who
employ workers from the Communication Workers of America (CWA), from
performing telecommunications services work in the New York metropolitan area.
Plaintiffs seek treble damages. The Company believes that this suit is part of
an ongoing labor dispute between the IBEW and the CWA and that the allegations
against HOK are without merit. HOK intends to defend itself vigorously in this
litigation. Discovery is complete, but it is too early to assess the ultimate
outcome of the litigation. Notwithstanding, a damage judgment against HOK
could have a material adverse effect on the Companys business operating
results and financial condition.

9. STOCK OPTIONS AND AWARDS

During the nine months ended September 30, 2003, no options were granted
to purchase common shares, 767,065 options were terminated and expired and
120,626 options were exercised. As of September 30, 2003, options to purchase
4,238,076 common shares were outstanding.

Deferred stock-based compensation is recorded for options and restricted
stock grants for which the exercise or sale prices are lower than the deemed
fair values for financial reporting purposes of the underlying common stock on
the grant date. Deferred stock-based compensation also includes the fair value
at grant date of options granted to non-employees and options which were
remeasured to fair value on the date optionees status was changed from
employee to consultant. Deferred stock-based compensation is amortized to
expense over the vesting term of the options. To the extent that unvested
options are forfeited, the balance of unamortized deferred stock-based
compensation is reversed.

During the nine months ended September 30, 2003, no deferred stock-based
compensation was recorded and $0.1 million was recorded during the nine months
ended September 30, 2002. Also during the nine months ended September 30, 2003
and 2002, $0.01 million and $3.8 million, respectively, was reversed for
unvested options, which were forfeited.

Amortization of deferred stock-based compensation was $0.5 million and
$0.8 million for the three months ended September 30, 2003 and 2002,
respectively, and $1.6 million and $2.5 million for the nine months ended
September 30, 2003 and September 30, 2002, respectively. Deferred tax benefits
were $0.2 million and $0.1 million for the three months ended September 30,
2003 and 2002, respectively and $0.5 million and $0.3 million for the nine
months ended September 30, 2003 and 2002, respectively, in connection with
amortization of deferred stock-based compensation for nonqualified options.
With respect to such deferred tax benefits, to the extent that nonqualified
options are forfeited or are exercised when the fair value of the stock is
lower than the deemed fair value of the stock for financial reporting purposes
on the grant date ($22.80 per share), a portion of such deferred tax benefits
would not be realized and such portion may be charged to expense. During the
nine months ended September 30, 2003 and 2002, $0.2 million and $2.4 million of
deferred tax assets was charged to expense in connection with forfeited

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LEXENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)

options, respectively. For the nine months ended September 30, 2003 such
charges were offset by a corresponding reduction in the deferred tax asset
valuation allowance.

In December 2002, the Financial Accounting Standards Board (FASB),
issued Statement of Accounting Standards No. (SFAS) 148, Accounting for
Stock-Based Compensation  Transition Disclosure, An Amendment of FASB
Statement No. 123. This statement provides alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS 148 amends the disclosure
requirements of Statement No. 123 to require more prominent and more frequent
disclosures in financial statements about the effects of the stock-based
compensation. The provisions of SFAS 148 are effective for fiscal years ending
after December 15, 2002. The adoption did not have a material impact on the
Companys results of operations or financial position and the additional
required disclosures have been provided below.

The Company applies the Accounting Principles Board Opinion No. (APB) 25
Accounting for Stock Issued to Employees, and related interpretations, in
accounting for its stock-based compensation plans. Accordingly, no
compensation costs have been recognized for its stock option plans and its
stock purchase plan. Had compensation cost for the Companys stock-based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans consistent with SFAS 123, the Companys net loss
and loss per share would have been increased to the pro forma amounts indicated
below:

Three months ended
    
    Nine months ended(in thousands, except amounts per share)
    
    September 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002Net loss as reported
    
    $
    (6,190
    )
    
    $
    (7,149
    )
    
    $
    (17,305
    )
    
    $
    (16,331
    )Deduct: Total stock-based employee compensation
expense determined under the fair value based
method for all awards net of related tax effects
    
    
    (204
    )
    
    
    (784
    )
    
    
    (1,227
    )
    
    
    (2,109
    )Pro forma net loss
    
    $
    (6,394
    )
    
    $
    (7,933
    )
    
    $
    (18,532
    )
    
    $
    (18,440
    )Basic and diluted net loss per share as reported:Basic
    
    $
    (0.15
    )
    
    $
    (0.17
    )
    
    $
    (0.41
    )
    
    $
    (0.39
    )Diluted
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    *Basic and diluted pro forma net loss per share:Basic
    
    $
    (0.15
    )
    
    $
    (0.19
    )
    
    $
    (0.44
    )
    
    $
    (0.44
    )Diluted
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    *


10. PROVISION FOR RESTRUCTURING CHARGES

In 2002, the Company recorded $9.1 million in restructuring expense,
primarily in connection with the closing of eleven offices and reduction in its
workforce. The restructuring charges were comprised primarily of $6.5 million
for obligations under leases for premises which the Company has vacated, $0.7
million for severance and related contractual obligations for approximately
fifteen non-unionized personnel and executives in areas closed or scaled back,
and $2.3 million for write-offs of property and equipment offset against a
reversal of $0.4 million for the unused restructure reserve for severance from
2001. During 2002, the Company scaled back its expansion plans and closed a
number of offices, and changed its business plans to focus primarily on its
traditional markets, including the New York metropolitan region, Washington
D.C., and Florida.

A summary of the restructuring reserve at September 30, 2003, is as
follows:

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LEXENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)

ReserveReserve
    
    
    
    
    
    
    
    
    
    Balance atBalance at
    
    
    
    
    
    
    
    
    
    September 30,December 31, 2002
    
    Restructuring
    
    
    
    
    
    2003(including
    
    Charges
    
    Amounts
    
    (includingnoncurrent
    
    Recorded in
    
    Charged to
    
    noncurrentportion)
    
    2003
    
    the Reserve
    
    portion)(in thousands)Severance and related
contractual obligations
    
    $
    639
    
    
    $
    
    
    
    $
    (508
    )
    
    $
    131Lease obligations
    
    
    9,921
    
    
    
    
    
    
    
    (2,143
    )
    
    
    7,778Property and equipment
    
    
    29
    
    
    
    
    
    
    
    (29
    )
    
    
    Total
    
    $
    10,589
    
    
    $
    
    
    
    $
    (2,680
    )
    
    $
    7,909


11. DEFERRED INCOME TAXES

Statement of Financial Accounting Standards No. 109 Accounting for Income
Taxes requires that a valuation allowance be established when it is more
likely than not that all or a portion of deferred tax assets will not be
realized. Based on the Companys performance in the past few years and the
current challenging economic environment that has negatively impacted the
Companys operating results, the Company concluded that it was appropriate to
establish a full valuation allowance for its net deferred tax assets at
December 31, 2002. The Company is continuing to provide a full valuation
allowance on future tax benefits until it can substantiate a level of
profitability that demonstrates its ability to utilize the assets. Adjustments
to increase or decrease the valuation allowance are charged or credited,
respectively, to income tax expense. For the nine months ended September 30,
2003, the Company recorded a charge to the provision for income taxes of
approximately $56,000 which included payments for state and local taxes.

12. RECENT ACCOUNTING PRONOUNCEMENTS

In December 2002, the Financial Accounting Standards Board (FASB),
issued Statement of Accounting Standards No. (SFAS) 148, Accounting for
Stock-Based Compensation  Transition Disclosure, An Amendment of FASB
Statement No. 123. This statement provides alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS 148 amends the disclosure
requirements of Statement No. 123 to require more prominent and more frequent
disclosures in financial statements about the effects of the stock-based
compensation. The provisions of SFAS 148 are effective for fiscal years ending
after December 15, 2002. The Company adopted SFAS 148 during the quarter ended
December 31, 2002. The adoption did not have a material impact on the
Companys results of operations or financial position and the additional
required disclosures are provided in Note 9 of Notes to Condensed Consolidated
Financial Statements.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46). FIN 46 clarifies the application of
Accounting Research Bulletin No. 51 and applies immediately to any variable
interest entities created after January 31, 2003 and to variable interest
entities in which an interest is obtained after that date. For variable
interest entities created or acquired prior to February 1, 2003, the provisions
of FIN 46 must be applied for the first interim or annual period beginning
after June 15, 2003. The Company believes that the adoption of FIN 46 will not
have a material impact on the Companys consolidated financial position and
results of operations.

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|        |                                                                                     
|------- | ------------------------------------------------------------------------------------
|ITEM 2. | Managements Discussion and Analysis ofFinancial Condition and Results of Operations

The following discussion and analysis provides information that should be
read in conjunction with the historical condensed consolidated financial
statements, including the notes thereto, included elsewhere in this Form 10-Q.

OVERVIEW

We are an infrastructure services company, which designs, deploys and
maintains telecommunications, electrical, life safety and other systems. We
deliver a full spectrum of services including engineering, program management,
deployment and installation in certain local metropolitan markets. Our
principal focus is to provide the expertise and resources our customers need to
design, build, and operate their infrastructure systems. We generally offer
our services 24 hours a day, 7 days a week.

During our most recent fiscal years, our customers included primarily
competitive local exchange carriers, internet service providers and carriers
carriers. Given the current market conditions in the telecommunications
industry, we have taken steps to broaden our customer base to include large
enterprise customers, the real estate community and government entities and to
diversify our service offerings to include systems integration, electrical
contracting, installation of security systems, and other infrastructure
services.

We have offices in New York City, Washington D.C. metro, Boston metro,
Long Island, and in the states of Florida, North Carolina and New Jersey.

Our two largest customers for the nine months ended September 30, 2003
were AT&T and a general contractor in the NY metro area. We generated 19% and
10%, respectively, of our revenues from each of these customers for the nine
months ended September 30, 2003. Some of our key customers include IBM, Con
Edison, general contractors in the New York metro area, and the Dormitory
Authority of the State of New York.

Lexent was incorporated in Delaware in January 1998. Our wholly owned
subsidiaries, Hugh OKane Electric Co., LLC, National Network Technologies LLC,
Lexent Services, Inc., HOK Datacom, Inc., Lexent Capital, Inc., and Lexent
Metro Connect LLC, were formed in June 1998, August 1998, May 2000, November
2000, July 2001 and March 2002, respectively. On August 22, 2002, Lexent Metro
Connect was awarded a 15 year Franchise for Local High Capacity
Telecommunications Services for the City of New York, which expires on or about
August 22, 2017, unless terminated earlier.

In July 1998, Hugh OKane Electric Co., Inc., our predecessor company,
merged into Lexent, and Lexent issued 22,716,600 shares of common stock to the
stockholders of our predecessor. Following the merger, substantially all of
our assets were contributed to our subsidiary, Hugh OKane Electric Co., LLC,
and that entity also assumed all of the obligations of Lexent, including those
of our predecessor company.

In August of 2002, Lexent Metro Connect (LMC) entered into a 15-year
franchise agreement with the City of New York, whereunder LMC will be permitted
to construct, operate and provide local high capacity telecommunications
networks and services. As compensation for the franchise, LMC is obligated to
pay the City of New York, a franchise fee. The franchise fee commencement date
is the completion of the initial backbone or August 2004. The franchise fee is
5% of gross revenue per year, with a minimum of $200,000 per year. The initial
backbone will be completed in the fourth quarter of 2003.

In May 2003, LMC entered into a 20-year agreement with a New York State
based non-profit organization to lease dark fiber capacity on a dark fiber
network that LMC will install throughout certain parts of New York City. The
dark fiber network will be connected to various educational and research
institutions throughout New York City who are customers of the non-profit
organization. Under the terms of the lease, LMC will fund the costs related to
construction of the dark fiber network and connection costs and shall recover
these costs through lease payments paid by the non-profit organization over the
20-year

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lease period. The net cash commitment that LMC will recover over the 20-year
lease period is approximately $4 million.

The Company received a letter, dated March 3, 2003, from the Nasdaq Stock
Market notifying the Company that, as a result of the resignations of its
independent directors, Lexent did not meet the independent director and audit
committee requirements for continued listing on the Nasdaq National Market.
Because Lexent was not able to regain compliance with the independent director
and audit committee requirements for continued listing on the Nasdaq Stock
Market, the Nasdaq Listing Qualifications Panel made a determination to delist
Lexents common stock from The Nasdaq National Market effective with the
opening of business on June 26, 2003. As of such date, Lexents common stock
began trading on the OTC Bulletin Board under the same symbol, LXNT.

On July 9, 2003, the Company executed an Agreement and Plan of Merger
between LX Merger Corp. and the Company, pursuant to which LX Merger Corp. will
merge with and into the Company and the Company will be the surviving
corporation. See Item 5  Other Information.

On August 6, 2003, the Company, Hugh J. OKane, Jr., Kevin M. OKane and
the plaintiffs named in the lawsuits consolidated under the caption In re
Lexent Inc. Shareholders Litigationfiled a Stipulation of Settlement with the
Court of Chancery of the State of Delaware. See Item 5  Other Information.

On September 9, 2003, the Company, Hugh J. OKane, Jr., Kevin M. OKane
and the plaintiffs named in the lawsuits consolidated under the caption In re
Lexent Inc. Shareholders Litigationfiled an Amended Stipulation of Settlement
with the Court of Chancery of the State of Delaware. See Item 5-Other
Information.

CRITICAL ACCOUNTING POLICIES

Please refer to the description of our Critical Accounting Policies in
the Managements Discussion and Analysis section of our Form 10-K for the year
ended December 31, 2002.

RESULTS OF OPERATIONS

THIRD QUARTER 2003 COMPARED TO THIRD QUARTER 2002

Revenues.Our revenues were $27.7 million for the three months ended
September 30, 2003 and September 30, 2002.

Cost of revenues.Our cost of revenues represented 112% of revenues in
the third quarter of 2003 compared with 123% of revenues in the same period
last year. The decrease is attributed to the reduction of the establishment of
job loss provisions due to revisions in certain electrical contracting
projects, and the decrease in overhead expenses.

General and administrative expenses.Our general and administrative
expenses decreased 52% to $2.2 million in the third quarter 2003 from $4.6
million in the same period last year. The decrease is the net effect of a
decrease in wages and benefits, facilities expenses, bad debt provision, travel
and entertainment expenses, office expenses offset against an increase in
insurance expenses, and legal fees.

Depreciation and amortization: Our depreciation and amortization expense
decreased to $0.5 million in the third quarter of 2003 from $1.2 million in the
same period of last year. The decrease reflects a reduction in equipment and
leasehold improvements resulting from the closing of offices in 2002.

Non-cash stock-based compensation.Amortization of deferred stock-based
compensation declined to $0.5 million in the third quarter of 2003 from $0.8
million in the same period of last year. The

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decrease was attributed to the decrease in the unamortized balance of non-cash
stock-based compensation as a result of resignations, terminations and fully
amortized balances.

Interest expense. Interest expense in the third quarter of 2003 was $0.02
million compared to $0.06 million in the same period last year. The decrease
was due primarily to lower average outstanding balances on equipment and
vehicle loans and a subordinated note payable to a stockholder.

Provision for income taxes. Based upon our performance in the past few
years and the current challenging economic environment that has negatively
impacted our operating results, we have established a full valuation allowance
to fully offset deferred tax assets, including those related to tax
carryforwards, at December 31, 2002 and to date, resulting in no income tax
benefit for financial reporting purposes for the three months ended September
30, 2003.

NINE MONTHS 2003 COMPARED TO NINE MONTHS 2002

Revenues.Our revenues decreased by 25.2% to $68.9 million in the first
nine months of 2003, from $92.2 million for the same period last year. The
decrease in revenues was primarily a result of lower capital expenditures by
several of our large telecommunications customers due to changing conditions in
the telecommunications industry and the completion of the engineering,
procurement and construction contract in the fourth quarter of 2002.

Cost of revenues.Our cost of revenues represented 109% of revenues in
the nine months ended September 30, 2003, compared with 103% of revenues in the
same period last year. The increased percentage was due in part to the fixed
overhead costs, which represented a higher percentage of a lower level of
revenues, to the inclement weather causing a decrease in productivity and
delays in completing projects.

General and administrative expenses.Our general and administrative
expenses decreased 32% to $8.9 million for the nine months of 2003 from $13.1
million in the same period last year. The decrease is attributed to a
reduction in wages and related benefits as a result of a headcount reduction, a
reduction in rent and facilities expenses, a reduction in the bad debt
provision, a reduction in board of directors fees, reduction in entertainment
expenses and a reduction in office expenses offset against an increase in legal
and insurance expenses.

Depreciation and amortization: Our depreciation and amortization expense
decreased to $1.5 million for the nine months ended September 30, 2003 from
$3.8 million in the same period of last year. The decrease reflects a reduction
in equipment and leasehold improvements resulting from the closing of offices
in 2002.

Non-cash stock-based compensation.Amortization of deferred stock-based
compensation declined to $1.6 million for the nine months ended September 30,
2003 from $2.5 million in the same period of last year. The decrease was
attributed to the decrease in the unamortized balance of non-cash stock-based
compensation as a result of resignations, terminations and fully amortized
balances.

Interest expense. Interest expense for the nine months ended September
30, 2003 was $0.08 million compared to $0.2 million in the same period last
year. The decrease was due primarily to lower average outstanding balances on
equipment and vehicle loans and a subordinated note payable to a stockholder.

Provision for income taxes. Based upon our performance in the past few
years and the current challenging economic environment that has negatively
impacted our operating results, we have established a full valuation allowance
to fully offset deferred tax assets, including those related to tax
carryforwards, at December 31, 2002 and to date, resulting in no income tax
benefit for financial reporting purposes for the nine months ended September
30, 2003. Additionally, in 2003, we recorded a charge to the provision of
approximately $56,000 which included payments for state and local taxes.

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Liquidity and Capital Resources

Net cash
used in operations was $5.8 million for the nine months ended
September 30, 2003. Cash provided by investing activities was $40.9 million,
representing $43.2 million of proceeds from available-for-sale investments,
offset by $2.3 million for capital expenditures. Net cash used in financing
activities was $1.5 million, comprised of repayments of $0.4 million for
equipment and capital leases and $1.1 million of repayments on a subordinated
note payable to a stockholder.

We have no material commitments other than installment obligations related
to equipment purchases, leases for facilities, computer equipment and vehicles,
franchise fees to the City of New York, investments into LMC to fund the
capital requirements related to the construction of the fiber optic network and
a subordinated note payable to a stockholder. We anticipate that available
cash and cash equivalents and cash flows from operations will be sufficient to
satisfy our working capital requirements for the foreseeable future. Our
future working capital requirements and liquidity will depend upon many
factors, including our customers financial condition and their ability to pay
amounts owing to us, our ability to replace the revenues previously derived
from several of our large telecommunications-carrier customers with revenue
from other customers, and our ability to reduce costs at a rate commensurate
with any reduction in revenues which we are unable to replace with new
revenues.

In connection with the restructuring plan initiated during 2001, we
recorded restructuring charges of $9.1 million during the year ended December
31, 2002. These charges primarily related to the expense associated with
certain lease obligations, the write-offs of property, equipment and leasehold
improvements, and severance costs related to our organizational restructuring,
partially offset by the reduction to the 2001 accrual for restructuring costs.
Refer to our audited consolidated financial statements and notes thereto for
the year ended December 31, 2002 for further details and components of these
charges. During the nine months ended September 30, 2003, we had cash outflows
of approximately $2.7 million, related to the expenses associated with certain
lease obligations, property equipment and leasehold improvements and severance
that were accrued for as of December 31, 2002. The current accrued liability
for additional cash outflows, related to the expense associated with certain
lease obligations and severance are payable as follows: $1.3 million
throughout the remainder of 2003, $1.4 million during 2004, $1.2 million during
2005, $0.7 million during 2006, $0.8 million during 2007, 2008, 2009 and 2010,
and $0.1 million during 2011.

Impact of Recently Issued Accounting Standards

In December 2002, the Financial Accounting Standards Board (FASB),
issued Statement of Accounting Standards No. (SFAS) 148, Accounting for
Stock-Based Compensation  Transition Disclosure, An Amendment of FASB
Statement No. 123. This statement provides alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS 148 amends the disclosure
requirements of Statement No. 123 to require more prominent and more frequent
disclosures in financial statements about the effects of the stock-based
compensation. The provisions of SFAS 148 are effective for fiscal years ending
after December 15, 2002. We adopted SFAS 148 during the quarter ended December
31, 2002. The adoption did not have a material impact on our results of
operations or financial position and the additional required disclosures are
provided in Note 9 of Notes to Condensed Consolidated Financial Statements.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46). FIN 46 clarifies the application of
Accounting Research Bulletin No. 51 and applies immediately to any variable
interest entities created after January 31, 2003 and to variable interest
entities in which an interest is obtained after that date. For variable
interest entities created or acquired prior to February 1, 2003, the provisions
of FIN 46 must be applied for the first interim or annual period beginning
after September 15, 2003. We believe that the adoption of FIN 46 will not have a
material impact on our consolidated financial position and results of
operations.

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FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains both historical and
forward-looking statements. All statements other than statements of historical
fact are, or may be deemed to be, forward-looking statements within the meaning
of section 27A of the Securities Act of 1933 and section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are only predictions
and generally can be identified by use of statements that include phrases such
as believe, expect, anticipate, intend, plan, foresee or other
words or phrases of similar import. Similarly, statements that describe the
Companys objectives, plans or goals also are forward-looking statements. The
Companys operations are subject to certain risks and uncertainties that could
cause actual results to differ materially from those contemplated by the
relevant forward-looking statement. These risks are more fully outlined in the
Companys Annual Report on Form 10-K for the year ended December 31, 2002 and
other SEC filings. The forward-looking statements included herein are made
only as of the date of this Quarterly Report on Form 10-Q and the Company
undertakes no obligation to publicly update such forward-looking statements to
reflect subsequent events or circumstances. No assurances can be given that
projected results or events will be achieved.




ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Financial instruments, which potentially subject the Company to credit
risk, consist primarily of cash, cash equivalents, available-for-sale
investments, and trade receivables. Cash balances may at times, exceed amounts
covered by FDIC insurance. The Company believes it mitigates its risk by
depositing cash balances with high quality financial institutions that it
believes are financially sound. Recoverability is dependent upon the
performance of the institution. The Companys cash equivalents are diversified
and consist primarily of investment grade securities with original maturities
of three months or less. Investments are made in obligations of high-quality
financial institutions, government and government agencies and corporations,
thereby reducing credit risk concentrations. Interest rate fluctuations impact
the carrying value of the portfolio.

Trade receivables are primarily short-term receivables from
telecommunications companies and general contractor companies. To attempt to
reduce credit risk, the Company performs credit evaluations of its customers
but does not generally require collateral and, therefore, the majority of its
trade receivables are unsecured. Credit risk is affected by conditions within
the economy. The Company establishes an allowance for doubtful accounts based
upon its evaluation of factors surrounding the credit risk of specific
customers, historical trends, and other information.

For the nine months ended September 30, 2003, the Company had revenues
from two separate customers, which comprised 19% and 10%, respectively, of the
Companys total revenues.

We currently do not own any investments in publicly traded equity
securities. Therefore, we do not currently have any direct equity market price
risk.

We currently do not have any international operations, and we currently do
not enter into forward exchange contracts or other financial instruments with
respect to foreign currency. Accordingly, we currently do not have any foreign
currency exchange rate risk.




ITEM 4. Controls and Procedures



|(a) |  | Disclosure controls and procedures. As of the end of the
Companys most recently completed fiscal quarter (the registrants
fourth fiscal quarter in the case of an annual report) covered by this
report, the Company carried out an evaluation, with the participation
of the Companys management, including the Companys Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
Companys disclosure controls and procedures pursuant to Securities
Exchange Act Rule 13a-15. Based upon the evaluation, the Companys
Chief Executive Officer and the Chief Financial Officer concluded that
the Companys disclosure controls and procedures are effective in
ensuring that information required to be disclosed by the Company in
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | the reports that it files or submits under the Securities Exchange Act
is recorded, processed, summarized and reported, within the time period
specified in the SECs rules and forms.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) |  | Changes in internal controls over financial
reporting. There have
been no changes in the Companys internal controls over financial
reporting that occurred during the Companys last fiscal quarter to
which this report relates that have materially affected, or are
reasonably likely to materially affect, the Companys internal control
over financial reporting.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




PART II  OTHER INFORMATION




ITEM 1. Legal Proceedings

See Note 8 to the unaudited interim condensed consolidated financial
statements.




ITEM 5. Other Information

Execution of Merger Agreement

On July 9, 2003, the Company executed an Agreement and Plan of Merger (the
Merger Agreement)
between LX Merger Corp. (Purchaser) and the Company pursuant to which
Purchaser will merge with and into the Company and the Company will be the
surviving corporation (the Merger). Purchaser is a newly formed corporation
owned by Hugh J. OKane, Jr., Chairman of the Board of Lexent, and Kevin M.
OKane, Chief Executive Officer and Vice Chairman of the Board of Lexent
(together, the Purchaser Stockholders) and organized for the sole purpose of
entering into the Merger Agreement and consummating the transactions
contemplated thereby. If the Merger is completed, the Companys common stock
will no longer be publicly traded and the Company will become a privately-held
company owned entirely by the Purchaser Stockholders.

Pursuant to the terms of the Merger Agreement, the stockholders of the
Company will receive $1.50 in cash for each outstanding share of the Companys
common stock. Outstanding options to purchase shares of the Companys common
stock will be canceled and each holder of such options will receive $1.50 per
share minus the exercise price of the options, but only to the extent that the
exercise price is lower than $1.50. Notwithstanding, the Purchaser
Stockholders have agreed, pursuant to their settlement with the plaintiffs in
the litigation challenging the Merger, that they will receive the cash merger
consideration for no more than 20% of their shares of Lexent common stock. In
addition, the Purchaser Stockholders do not hold any options that have an
exercise price that is less than $1.50, so they will not receive any
consideration upon the cancellation of their options. The Purchaser
Stockholders have not yet determined the precise number of shares beneficially
owned by them that they will cause to be converted into the right to receive
the merger consideration in the merger. Based on the 20% limitation, they are
expected to receive no more than approximately $6.3 million in the aggregate,
in connection with the Merger with respect to their shares of Lexent common
stock not contributed to the Purchaser.

The closing of the Merger is subject to various conditions, including that
the Amended Stipulation of Settlement entered into on September 9, 2003, by
the Company, Hugh J. OKane, Jr., Kevin M. OKane and the plaintiffs named in
the lawsuits consolidated under the caption In re Lexent Inc. Shareholders
Litigationand filed with the Court of Chancery of the State of Delaware, is in
full force and effect, approval of the transaction by stockholders of the
Company representing a majority of the shares of common stock actually voted on
the transaction (other than shares owned by the Purchaser or the Purchaser
Stockholders), regulatory approvals, absence of any pending or threatened
litigation related to the transaction and other customary conditions to
closing, and there can be no assurance that the conditions to closing will be
satisfied or that the Merger will be completed.

The Company has filed preliminary proxy materials with the Securities and
Exchange Commission for a special meeting of the Companys stockholders to vote
on the Merger.

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The Companys Board of Directors, which consists entirely of the Purchaser
Stockholders, approved the Merger Agreement and the Merger. In reaching its
decision to approve the Merger Agreement and the Merger, the Board of Directors
considered the opinion of Rodman & Renshaw, Inc., a New York based investment
banking firm and the Companys independent financial advisor, that, as of July
9, 2003, the $1.50 per share merger consideration is fair, from a financial
point of view, to the Companys stockholders, other than the Purchaser
Stockholders and their affiliates.

On November 5, 2003 the Company and the Purchaser entered into a First
Amendment to Agreement and Plan of Merger to extend the termination date under
the Merger Agreement to December 31, 2003.

Execution of Stipulation of Settlement

On August 6, 2003, the Company, Hugh J. OKane, Jr., Kevin M. OKane and
the plaintiffs named in the lawsuits consolidated under the caption In re
Lexent Inc. Shareholders Litigationfiled a Stipulation of Settlement with the
Court of Chancery of the State of Delaware.

On September 9, 2003, the Company, Hugh J. OKane, Jr., Kevin M. OKane
and the plaintiffs named in the lawsuits consolidated under the caption In re
Lexent Inc. Shareholders Litigationfiled an Amended Stipulation of Settlement
with the Court of Chancery of the State of Delaware. The Amended Stipulation
of Settlement served to revise the description of the consideration to be
received by Lexent option holders in the proposed going private transaction
to clarify that each outstanding Lexent option, whether or not presently
exercisable, will be accelerated, if necessary, and canceled in consideration
for a cash amount equal to the product of (i) the excess, if any, of the $1.50
merger consideration per share over the applicable exercise price and (ii) the
number of shares subject to such option. It further clarifies that to the
extent that the exercise price of such option is greater than or equal to
$1.50, such option will be terminated and canceled without consideration. The
original Stipulation of Settlement indicated that only vested options that were
in-the-money would be cashed out.

Pursuant to the settlement, the plaintiffs (on their own behalf and on
behalf of a class of holders of Lexent common stock) agreed to dismiss the
litigation and release the defendants from all related claims. In exchange, as
previously announced, the defendants, without admitting any liability, agreed
to, among other things, (i) raise the consideration to be paid in the proposed
merger to $1.50 per share and (ii) condition the approval of the proposed
merger on the receipt of the vote of a majority of shares of Lexent common
stock actually voted with respect to the adoption and approval of the merger
agreement and the proposed merger (other than shares held by Purchaser and the
Purchaser Stockholders).

On October 15, 2003, the Court of Chancery of the State of Delaware issued
an order determining that the settlement is fair, reasonable, and adequate to
the holders of Lexent common stock (other than Purchaser and the Purchaser
Shareholders). The Court of Chancery of the State of Delaware further awarded
plaintiffs attorneys fees and expenses in the aggregate amount of $500,000.
In the event that the stockholders of the Company approve the proposed Merger
and the proposed Merger is completed, plaintiffs court-approved attorneys
fees and expenses will be paid by the Company.




ITEM 6. Exhibits and Reports on Form 8-K

Exhibits:

31.1
    
    Certification of the Companys Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    Certification of the Companys President and Chief Operating Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.


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32
    
    Certification of the Companys Chief Executive Officer and President and
Chief Operating Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


Reports:

Reports on Form 8-K

On July 1, 2003, the Company filed a Form 8-K for the delisting of the
Companys common stock from the Nasdaq National Market effective with the open
of business on June 26, 2003 and the resignation of Norman G. Fornella as the
Chief Financial Officer and the assumption of the Chief Financial Officer
responsibilities by Bruce Levy the Companys President and the Chief Operating
Officer.

On
July 11, 2003, the Company filed a Form 8-K for the signing of an
Agreement and Plan of Merger between LX Merger Corp. and the Company.

On
July 31, 2003, the Company filed a Form 8-K furnishing second quarter
2003 operating results.

On August 12, 2003, the Company filed a Form 8-K announcing that Lexent
Inc., Hugh J. OKane, Jr., Kevin M. OKane and the plaintiffs named in the
lawsuits consolidated under the caption In re Lexent Inc. Shareholders
Litigation entered into and filed a Stipulation of Settlement with the Court of
Chancery of the State of Delaware.

On September 9, 2003, the Company filed a Form 8-K announcing that Lexent
Inc., Hugh J. OKane, Jr., Kevin M. OKane and the plaintiffs named in the
lawsuits consolidated under the caption In re Lexent Inc. Shareholders
Litigation entered into and filed an Amended Stipulation of Settlement with the
Court of Chancery of the State of Delaware.

On October 14, 2003, the Company filed a Form 8-K announcing the
resignation of Victor P. DeJoy, Sr., an Executive Vice President of Lexent Inc.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.

Dated: November 12, 2003
    
    
    
    By:
    
    /s/ Kevin M. OKaneKevin M. OKaneChief Executive Officer and Vice ChairmanDated: November 13, 2003
    
    
    
    By:
    
    /s/ Bruce LevyBruce LevyPresident and Chief Operating Officer


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