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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-K



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(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, 2004



OR



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



Commission file number 000-24661



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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)



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



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



Common Stock, par value $.001 per share



(Title of Class)



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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 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 definite proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ̈



As of July 6, 2004, the aggregate market value of the registrants voting stock held by non-affiliates of the registrant (without admitting that
any person whose shares are not included in such calculation is an affiliate) was $25,706,033, as computed by reference to the price at which the common stock was last sold on June 30, 2004.



The number of shares outstanding of the registrants common stock, as
of March 24, 2005, was 50,981,572 shares of Common Stock, $.001 par value.



Check whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x



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##### Table of Contents

PART I



ITEM 1. BUSINESS



Overview



We deploy,
own and operate fiber-optic networks designed to provide comprehensive broadband connectivity for data, voice and video transmission to other telecommunications service providers in major metropolitan areas. These networks provide an advanced,
high-bandwidth, fiber-optic solution to support the demand for network capacity in the local loop and enable the interconnection of multiple carriers networks. Our primary business is to provide optical and electrical broadband circuits within
and between carrier hotels, which are industrial buildings where service providers exchange and route communications traffic. We also provide colocation in these facilities for our customers to house their communications equipment. Our networks
support multiple domestic and international transmission protocols including synchronous optical network, or SONET, SDH, Ethernet, Frame Relay, asynchronous transfer mode, or ATM and Internet Protocol, or IP. We have lit multiple strands of fiber on
a redundant and diversely routed architecture throughout the New York City metropolitan area, as well as in Los Angeles, to deliver optical wavelengths and broadband connections with bandwidth ranging from 1.5 megabits per second to 10.0 gigabits
per second.



Industry Background



Over the past decade, there has been significant growth in communications
services, due in large part to the advent of the Internet and the deregulation of the telecommunications industry. This increase in bandwidth intensive data applications and services has resulted in additional demand for transmission capacity on
national and international communications networks. More businesses are relying on communications services to conduct mission critical operations, increasing the need for greater network reliability, security and speed.



The deployment of communications network infrastructure consists of two
separate segments:



Long-Haul Networks. Demand for
transmission capacity was initially focused between metropolitan areas. As a result, long-haul fiber-optic networks were built to function as transport links for vast amounts of traffic between 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. These long-haul networks typically terminate at carrier hotels in metropolitan locations, where traffic
is routed onto local loop networks.



Local Loop Networks. The
role of networks in metropolitan areas is to transport large volumes of traffic delivered by long-haul networks, as well as traffic generated in the local loop, between carrier interconnection points and end-user locations. Existing metropolitan
networks mainly consist of copper infrastructure installed by incumbent local exchange carriers, or ILECs, and regional Bell operating companies, or RBOCs. These legacy networks were built for voice traffic and cannot support the volumes of data
intensive traffic being generated in the local loop. In contrast to this legacy infrastructure, many sophisticated end-users of communications services, like tenants within commercial offices, have deployed high-capacity local area networks, or
LANs, which have abundant network capacity.



There are numerous
technically complex issues involved in building out local loop networks to increase capacity and extend connectivity in metropolitan areas:



Diverse traffic. Data on local loop networks is generated by a large number of end-users served by a variety of service providers.
As a result, metropolitan traffic is transmitted in multiple protocols using different technology platforms.



Complex architecture. The infrastructure of local loop networks must reach a multitude of locations to access end-users in dense
urban areas and to interconnect the networks of their service providers so that they may exchange communications traffic.



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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 office buildings to install vertical infrastructure between floors is particularly
difficult.



These complexities have impeded the deployment of
additional bandwidth capacity in the local loop. As a result, an opportunity arose in many major metropolitan areas to provide sufficient network capacity starting at the carrier interconnection point, which is the entry point to the local loop, and
extending all the way to the tenants LANs in office buildings.



Needs
of Telecommunications Service Providers in Major Metropolitan Areas



Service providers are seeking a local loop network that allows them to rapidly and cost-effectively interconnect their networks with each other and to provide their communications services to end-users. 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. In addition, service providers
need to connect directly to the end-users of their communications services.



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, in order 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 need a network provider that has deployed an
extensive, ubiquitous network and the necessary advanced network management systems to rapidly provision circuits. One alternative for connectivity in metropolitan areas is dark fiber, which is inoperative until lit by installing optical networking
equipment. Lighting dark fiber can be expensive and time consuming. Service providers can significantly decrease the time and cost to provision interconnections and services to end-users by obtaining capacity from a network provider that offers lit
network capacity.



Our Solution



We are focused on owning and operating advanced broadband networks that
provide superior capacity to service providers in metropolitan areas. We design, install and operate local loop networks to provide wholesale end-to-end broadband connectivity that is scalable, reliable and secure. We also enter into strategic
agreements with building owners and managers pursuant to which we manage the communications access and infrastructure in their buildings. The following are key elements of our solution:



Full Range of Services. In our markets, our carrier point facilities, metropolitan transport networks and FiberNet
in-building networks, or FINs, offer service providers cost-effective access to complete optical and electrical local loop networks. Our carrier-to-carrier transport services provide fiber-optic connectivity to carriers between and within carrier
hotels. Our carrier-to-customer transport services provide fiber-optic transport between carrier points and on-net buildings in which we have deployed our FINs. By offering both of these transport services, we believe that we can meet a service
providers end-to-end connectivity needs.



We also offer
colocation services at certain of our carrier point facilities and on-net and off-net buildings. Colocation refers to the ability of a carrier to locate its networking equipment in another carriers facilities. These colocation facilities
provide service providers with a network interconnection point where they can terminate their traffic and transfer it onto our high-capacity networks.



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In addition, we provide access management services to certain property owners and managers of buildings
that are not on our metropolitan transport network, which we refer to as our off-net buildings. In these buildings we deploy network infrastructure and coordinate service providers access to that infrastructure.



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 carrier customers are able to interconnect with many other carriers networks through a single interconnection with our network.



Network Architecture. In order to provide high quality local loop
network services to our customers, we have deployed what we believe to be an advanced optical and electrical local loop 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 gigabits per second 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, Frame Relay, ATM and
IP, 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 local loop 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 Strategy



Our goal is to be the preferred
facilities-based provider of network capacity in our markets. We intend to serve select, commercial office properties and major carrier hotels in our markets with end-to-end optical connectivity that enables our customers to provide next generation
services and applications to end-users and to rapidly interconnect their own networks. Our strategy for achieving these goals includes the following key elements:



Establish our position as a leading provider of connectivity to 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 addressable market. 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 local loop end-to-end fiber-optic 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 connectivity to multiple broadband carriers;
| | - |  | -------------------------------------------------------------------



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



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



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



We believe that our wholesale strategy provides for a broad customer base. Our potential customers include ILECs, RBOCs, competitive local exchange
carriers, or CLECs, inter-exchange carriers, or IXCs, Internet service providers, or ISPs, application service providers, or ASPs, post telephone & telegraph administrators, or PTTs, and integrated communications providers, or ICPs. We intend to
strengthen our relationships with our existing customers and actively market our service offerings to this broad range of customers. As of December 31, 2004, we had 213 customers, including AT&T, Bell Nexxia, BellSouth, British Telecom, China
Telecom, China Netcom, Entel Chile, Equant, FLAG Telecom, France Telecom, NTT America, Qwest, SBC Communications, Sprint, SwissCom, T-Systems (formerly Deutsche Telekom), Verizon and WilTel Communications.



Develop the platforms that enable our customers to offer new services to
their end-users. We believe that as technology continues to develop, there will be potential opportunities for our customers to provide new services. 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
networks in order to improve performance and decrease the cost of operating our network.



Our Services



Our
services include the following:



Transport



Our transport services consist of optical wavelengths and broadband circuits
with capacity ranging from 1.5 megabits per second to 10.0 gigabits per second. We offer transport services utilizing different transmission protocols, including the SONET protocol used primarily in North America and the international protocol, SDH.
We also provide Ethernet connections from 10.0 megabits per second to one gigabit per second. In certain of our carrier hotel facilities and our on-net and off-net buildings, we provide vertical connectivity, as well.



Carrier-to-Carrier Transport. We provide carrier-to-carrier transport by
building optical transport facilities within and between carrier hotels. We offer carrier-to-carrier connectivity ranging from transport between floors of a carrier hotel, to comprehensive connectivity between carrier hotels within a metropolitan
area.



Carrier-to-Customer Transport. Our carrier-to-customer
transport services provide our customers with connectivity from the carrier hotels where their communications traffic is aggregated to their end-user customers in our on-net commercial buildings. We transport their data from carrier hotels, via our
metropolitan transport networks, to the central equipment rooms that we establish in the basements of our on-net buildings. Once in the central equipment room, the data is transferred from our metropolitan transport network onto our FIN and routed
to the appropriate floor of the on-net building, where the end-user is located.



Meet-Me-Room Cross Connections. At 60 Hudson Street in New York City, one of the premier carrier hotels in the world, we operate the meet-me-room, a centralized, carrier-class cross connection facility. This facility
enables us to offer our customers a single facility within the carrier hotel where they can cross connect with one another in a secure, rapid and cost-effective manner.



Network Solutions Transport. We provide our customers with circuits on networks that we do not own. We sell this
connectivity to our customers and purchase the underlying circuits from other wholesale, telecommunications carriers. We offer network solutions 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.



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Colocation



In select carrier hotels and buildings, we offer our customers racks, cabinets or cages where they can locate their networking equipment. We also offer
additional services, including AC/DC power, fire protection, security, network maintenance and heating, ventilation and air conditioning, or HVAC.



Communications Access Management



In certain on-net and off-net buildings, we obtain the exclusive right to manage the communications access and infrastructure for the buildings. We then
enter into agreements with service providers giving them non-exclusive rights to provide services to tenants in the buildings.



Network Design and Architecture



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



Carrier Point Facilities



Carrier point facilities are environmentally controlled, secure sites within a carrier hotel, 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 local
loop networks and provide transport services to them. In addition to utilizing our carrier point facilities to interconnect with service providers, we also offer colocation and other ancillary services at certain of these facilities.



Our primary carrier point 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 point 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 point facility in Los Angeles is located at 707 Wilshire Boulevard. We have four secondary carrier point 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. Although we
currently have no plans to add additional carrier point facilities, 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 point facilities, we have colocated in other carriers facilities.



Meet-Me-Room



Our meet-me-room at 60 Hudson Street offers standardized colocation cabinets and customized cages for carriers to house
their mission critical telecommunications equipment in a secure, environmentally controlled environment. All of the colocation units are connected to a central cross connection area within the 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 meet-me-room have access to our vertical in-building network within 60 Hudson Street and to our metropolitan transport networks, which
connects them with other carrier hotels and our on-net buildings.



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Metropolitan Transport Networks



We acquire dark fiber rights, install our own optical transmission equipment to light the fiber and then provide lit
circuits to carriers for the transport of traffic in the out-of-building local loop. We light the dark fiber in ring configurations with optical networking gear, establishing connectivity between carrier point facilities and our on-net buildings.



Our networks typically transmit data at 2.5 gigabits per
second, or 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 FIN is an advanced central distribution network that we deploy in our on-net buildings and certain carrier hotels in which we have facilities to
provide communications transport within the building. The standard design specifications for our FINs are tailored to each building. 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. To date, we have constructed our FINs in 20 commercial office properties in New York and Chicago. We are not
currently considering the deployment of additional FINs in office properties.



Our in-building fiber-optic network infrastructure consists of:



Direct and diverse routing to our metropolitan transport network. Our metropolitan transport network enters an on-net building at one or
two discrete points and interconnects with the FIN in our central equipment room or fiber vault in the basement of the building. Diverse routing and interconnection in the building basement enables the seamless transfer of traffic between the FIN
and our high-bandwidth metropolitan transport network. We offer dedicated bandwidth without over-subscription directly between the tenants or customers premises and our carrier point facilities, so that our customers avoid congestion or
a bottleneck, as traffic is transmitted from our FINs to our out-of-building metropolitan transport networks.



Central equipment room. We usually lease approximately 100 to 1,500 square feet in the basement of our on-net buildings to establish a
central equipment room, where we install and manage communications networking equipment. Here we connect the FIN to our metropolitan transport network, linking the on-net building to all of our other points of presence. The equipment in this
facility aggregates and disseminates traffic to and from the building. The central equipment rooms are built to our carrier point specifications with power supplies and HVAC systems for environment control.



Redundant, vertical riser system. We configure, install, own
and manage a fiber-optic network in the buildings vertical riser system. We believe our FINs are designed to ensure reliability and scalability. By deploying over one hundred strands of fiber in dual risers, our FINs allow for redundant fiber
paths in a ring architecture. Our FINs generally extend from the central equipment room in the basement of the building throughout the building.



Network Operations Center



We monitor and manage traffic on our networks from our NOC located in Newark, New Jersey. Our NOC enables us to provision circuits 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, 7 days a week.



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Real Estate



On-net buildings. In buildings that we have identified as on-net buildings, we sign a license agreement with the building owner or manager for the
installation of a FIN. Our typical on-net license agreement has an initial term of 15 years, with renewal options of up to 10 years. We have installed FINs in 20 on-net buildings, and we do not presently plan on installing any additional FINs.



Off-net buildings.In buildings that we select as
off-net buildings, we enter into license agreements with the owners or managers typically for an initial term of five years, with renewal options of up to 15 years. Once the license agreement has been executed, we enter into agreements with
communications service providers, giving them non-exclusive access to provide services in the building. We currently have contracts to manage the communications infrastructure in approximately 60 off-net buildings.



Sales and Marketing Strategy



Sales. We sell network access to other service providers through our
direct sales force. Our sales team is comprised of representatives that have significant expertise in, and knowledge of, the wholesale 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 and our real estate partners. We believe that all
segments of our customer base benefit from targeted advertising, 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 that includes ILECs, RBOCs, CLECs, IXCs, ISPs, ASPs, PTTs and ICPs. Our technologically
advanced fiber-optic infrastructure meets the needs not just of small- and medium-sized business end-users, but also large corporate end-users and the global carriers that service them. The flexibility of our network also allows us to interconnect
with internationally based customers as well, and we have made significant progress in growing the international segment of our customer base. We enter into contracts with our customers with terms ranging from one month to fifteen years.



In the past few years, general economic weakness and oversupply have
severely impacted the telecommunications industry, and a large number of our customers have experienced significant financial distress. Many companies made sizable investments building new communications networks, multiplying the amount of available
transmission capacity. However, the expected demand for broadband connectivity has not been realized in many segments of the market. Although applications for telecommunications network capacity have been developed, the actual demand for capacity
from those applications has not met industry expectations. As a result, this unrealized demand for bandwidth has created significant excess capacity, depressing the market for communications services. There has been an industry-wide slowdown in
capital spending and a large number of industry-related bankruptcy filings and business failures, which have contributed to the financial distress that many companies in the telecommunications industry are currently experiencing. Customers that have
filed for bankruptcy in the past year include Callipso Networks and Universal Access. The number of bankruptcies have declined over the past year, however, we believe that other customers may file for bankruptcy in the future.



Transport and Colocation Customers



We target service providers seeking cost-effective, flexible, reliable,
broadband network connectivity in the local loop. The increase in communications traffic and data intensive applications and the deregulation of the



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telecommunications industry has resulted an increased number of service providers operating in the local loop market. Many of these providers do not have
their own metropolitan networks and rely on us for transport in the local loop. Our customer base also includes providers that have their own local networks, but do not have sufficient bandwidth to meet their customers needs or are seeking
shorter installation intervals and will benefit from our faster provisioning times. We also generate transport traffic through agreements with our colocation customers.



Our transport and colocation customers are typically:



| |  |  | service providers that have significant bandwidth demands between carrier points for the aggregation of their network traffic. These customers need to interconnect high-capacity
circuits with other service providers networks. These carriers typically include national and international long-haul carriers;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | service providers requiring connectivity to their retail customers in our on-net buildings; and
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | service providers requiring a secure technical operating environment in which to locate their communications and networking equipment.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



As of December 31, 2004, our transport and colocation customers included
AT&T, Bell Nexxia, BellSouth, British Telecom, China Telecom, China Netcom, Entel Chile, Equant, FLAG Telecom, France Telecom, NTT America, PPL Telecom, Qwest, SBC Communications, Sprint, SwissCom, T-Systems (formerly Deutsche Telekom), Verizon
and WilTel Communications.



Access Management Customers



Our access management customers include service providers that want access
to our on-net and off-net buildings to provide communications services to tenants in the building. As of December 31, 2004, our access customers included Cogent Communications, Con Edison Communications, XO Communications, IntelliSpace, Yipes and
QwestLink.



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 that currently dominate local communications markets, and CLECs, which are increasing their market penetration for local
communications services. ILECs, including Verizon Communications, 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 in the
local loop, which competes with our local loop transport services. Various other competitive communications providers also own communications infrastructure in the local loop. Some of these carriers currently compete with us in the market for
providing broadband transmission capacity in the local loop, and such competition may increase in the future.



Other In-Building Communications Providers. Certain integrated communications providers are deploying their own network infrastructure in
commercial office properties in our markets to provide communications services to tenants. These include, but are not limited to, AT&T, MCI and XO Communications. These companies build networks on which they offer retail and wholesale services.
Consequently, they directly compete with us. We have competed and will continue to compete with some of these companies for in-building communications services and license agreements.



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Metropolitan Network Providers. Many of the leading communications companies, including AT&T,
MCI, Sprint, Level 3, Qwest and Time Warner Telecom, have constructed or are constructing fiber-optic networks within metropolitan areas. These companies utilize their networks for their own transmission requirements and provide excess network
capacity to other carriers. Other communications companies, such as Con Edison Communications, AboveNet, Looking Glass Networks and OnFiber Communications, build metropolitan fiber networks that are leased or sold to other carriers and large
corporate users. In addition, these companies could begin to build their own in-building networks. We compete directly and indirectly with these companies in New York City and Los Angeles.



Fixed Wireless Service Providers. We may lose potential customers to
fixed wireless service providers. Fixed wireless service providers can provide high-speed inter-building communications services using microwave or other facilities or satellite earth stations on building rooftops. Some of these providers have
targeted small- and medium-sized business customers and have business strategies that are similar to ours. These providers include Sprint, MCI and XO Communications.



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. FiberNet Telecom, Inc. owns all of the outstanding membership interests in Local Fiber,
LLC and FiberNet Equal Access, LLC, both New York limited liability companies. We conduct our primary business operations through our operating subsidiaries, Local Fiber, FiberNet Equal Access 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 nine years
as the result of the enactment of the Telecommunications Act of 1996, which amended the Communications Act of 1934 (Act).



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Our services are provided through our operating subsidiaries, Local Fiber, Equal Access 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 RBOCs.



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 regulation that may impose substantial administrative and other
burdens on our operations.



As a competitive provider of local
and long distance telecommunications services, Local Fiber is subject to federal telecommunications regulation, including, but not limited to the 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 10.7% of gross interstate end-user telecommunications revenues for the first quarter of 2005, 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 interstate end-user telecommunications revenues. Our contribution obligations historically have been minimal because our customer base has been predominately carriers rather
than end users and the services local or intrastate. 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, Illinois, 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 currently is considering wholesale 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 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 collocation to requesting carriers.



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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 requires ILECs to offer access to certain portions of their communications networks (known as network elements) to CLECs at cost-based rates. The FCCs decision
implementing the interconnection and local competition provisions of the Act has been appealed, reconsidered, and modified several times. In January 1999, the United States Supreme Court upheld the FCCs authority to require ILECs to offer
portions of their network to CLECs at cost-based rates. Similarly, in May 2002, the Supreme Court upheld the FCCs pricing methodology for developing cost-based rates.



In August 2003, the FCC modified the list of network elements to reduce the number of elements ILECs must offer to
competitors. The FCC also initiated a comprehensive review of its pricing regime for network elements in 2003. In March 2004, the DC Circuit vacated much of the FCCs August 2003 decision and remanded the case back to the FCC for further
consideration. In response to the remand, the FCC issued new rules in February 2005 regarding the network elements ILECs are required to make available. Those rules currently are being challenged before the same federal court of appeals. Although
Local Fiber does not rely solely on network elements purchased from ILECs, the outcome of any appeal or any subsequent FCC action could adversely affect Local Fibers ability to obtain the elements of the ILECs networks it requires to
provide service to its customers. In addition, any changes to the pricing scheme for network elements may affect Local Fibers revenues. To the extent our customers buy unbundled network elements from the ILEC, further revisions of the
interconnection and local competition provisions of the Act, including access to unbundled network elements or pricing, could affect the growth opportunities for some of our customers and thus demand for 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.



As part of its ongoing
examination of the competitive marketplace, the FCC is currently examining several other competition-related issues. First, the FCC is considering whether to adopt a set of performance measures and standards that could improve enforcement of
ILECs wholesale obligations under the Act. Second, the FCC is considering how to regulate broadband services provisioned by ILECs. Finally, the FCC is looking at the appropriate regulatory treatment under the Act for a wireline carriers
offering of broadband telecommunications services bundled with information services. 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.



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.



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.



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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, Illinois, 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 RBOCs 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.



Non-Telecommunications Services



Our subsidiaries, Equal Access 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 public generally for a fee. Moreover, Equal Access and Devnet do not use public rights-of-way that may trigger local regulation. Equal Access and Devnet generally enter 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. However, certain proposals have been made before Congress and the FCC that
could have an adverse impact on Equal Access and Devnets exclusive contractual rights, in certain buildings, to provide such capacity.



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.



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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. 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.



As of December 31, 2004, there was no federal legal requirement that owners or managers of privately owned commercial office buildings give access to
competitive providers of telecommunications services. However, the FCC is currently considering such a requirement and these types of requirements have 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. 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.



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



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



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



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



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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 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.



Many parties have petitioned the FCC for reconsideration of its building access order and the FCC is currently considering those requests. In addition, the FCC has also issued a further notice requesting comments on, among other things,
whether:



| |  |  | the prohibition on exclusive access contracts in commercial buildings should be extended to residential buildings;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | to apply retroactively the bar on exclusive contracts in commercial or residential buildings;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | to prevent carriers from obtaining other preferential benefits from building owners, such as exclusive marketing; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | the FCC has authority to prevent a local exchange carrier from providing service to a building, if the owner of the building unreasonably prevents competing carriers from gaining
access to potential customers located in the building.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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.



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 2004.



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



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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 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, 2004, we had 75 employees, including 44 in engineering and network operations, 16 in sales and marketing
and 15 in finance and administration. We have not experienced any work stoppages and consider our relations with our employees to be good.



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 2008. We also lease additional office space in Garden City, New York consisting of 3,800 square feet under a lease that expires in 2005. In addition, we have
office space in Rochester, New York, our former headquarters, which we are subleasing. Such lease, which consists of 15,000 square feet, expires in 2005. 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 at 111 Eighth Avenue. At 60 Hudson Street we have two leases covering an aggregate
of 30,039 square feet, both of which expire 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 consisting of 6,588 square feet under a lease that expires in 2015, and at 707 Wilshire Boulevard in Los Angeles 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 our on-net buildings for our central equipment rooms. We currently do not intend to lease additional space in the next
12 months. However, 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



None.



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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 SmallCap Market System.



The following table sets forth the high and low sales prices for each quarter for our common stock as reported on the Nadsdaq SmallCap Market System from January 1, 2003 through December 31, 2004:



|                            |  |      |      |      |   |      |  |     |      |  |   |     
|--------------------------- |  | ---- | ---- | ---- | - | ---- |  | --- | ---- |  | - | ----
|                            |  | 2004 |      | 2003
|                            |  | High |      | Low  |   | High |  | Low
|Quarter ending March 31     |  | $    | 1.84 |      | $ | 1.20 |  | $   | 3.90 |  | $ | 1.50
|Quarter ending June 30      |  | $    | 1.50 |      | $ | 0.89 |  | $   | 1.80 |  | $ | 1.00
|Quarter ending September 30 |  | $    | 1.06 |      | $ | 0.72 |  | $   | 1.74 |  | $ | 1.03
|Quarter ending December 31  |  | $    | 0.92 |      | $ | 0.60 |  | $   | 1.69 |  | $ | 1.12



As of March 24, 2005,
there were 137 holders of record of our common stock and, according to our estimates, approximately 5,500 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, 2004



|                                                           |  |                                                                                              |  |                                                                             |       |                                                                                                                                            |          
|---------------------------------------------------------- |  | -------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- | ----- | ------------------------------------------------------------------------------------------------------------------------------------------ | ---------
|Plan Category                                              |  | Number of Securities to beIssued 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     |  | 736,490                                                                                      |  | $                                                                           | 31.72 |                                                                                                                                            | 1,421,390
|Equity compensation plans not approved by security holders |  | 2,748,116                                                                                    |  | $                                                                           | 0.45  |                                                                                                                                            |         



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 a director, to purchase 8,333
shares at $56.25 per share, with an expiration date of March 22, 2009.



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Credit Facility Warrants: On April 11, 2000, we issued common stock warrants to the
lenders under our credit facility to purchase an aggregate of 50,461 shares of our common stock, and on July 31, 2000, we issued warrants to purchase 14,166 shares of our common stock, both with an exercise price of $541.86 per share, in connection
with our $75.0 million credit facility. On December 18, 2000, we issued an additional 16,820 warrants with an exercise price of $511.86 and re-priced the warrants issued on April 11, 2000 and July 31, 2000 from $541.86 to an exercise price of
$511.86, per the terms of our credit facility. On February 9, 2001, we amended this credit facility, increasing it to $105.0 million, and issued warrants to purchase an additional 19,159 shares of our common stock at an exercise price of $240.00 per
share. In addition, as part of the amendment of our credit facility all warrants previously issued to our lenders were replaced with warrants to purchase an equivalent number of shares of our common stock at an exercise price of $240.00 per share.
On April 27, 2001, we repriced 16,666 warrants to an exercise price of $0.30 per share. On December 7, 2001, in connection with our sale of series J preferred stock, we replaced all warrants previously issued to our lenders to purchase shares of our
common stock at an exercise price of $240.00 per share with warrants to purchase an equivalent number of shares of our common stock at an exercise price of $15.00 per share. All warrants issued to our lenders have an expiration date that is five
years from their original date of issuance.



Preferred Conversion Warrants, dated December 6, 2001: provided common stock purchase warrants to holders of certain series of our preferred stock in connection with the conversion of those series of preferred stock, to purchase an
aggregate of 32,833 shares of our common stock at a purchase price of $16.50 per share, with an expiration date of December 6, 2006.



Settlement Warrants, dated December 20, 2002: provided common stock purchase warrants to a stockholder in settlement of certain litigation
matters, to purchase an aggregate of 19,207 shares of our common stock at a purchase price of $0.03 per share, with an expiration date of December 20, 2007.



Settlement Warrants, dated February 28, 2003: provided common stock purchase warrants to a stockholder in settlement of certain litigation
matters, to purchase an aggregate of 166,666 shares of our common stock at a purchase price of $3.60 per share, with an expiration date of February 28, 2008.



Lease Amendment Warrants, dated October 29, 2004: provided common stock purchase warrants to Westport Communications, LLC in connection
with the amendment of our leases at 60 Hudson Street, to purchase an aggregate of 2,549,858 shares of our common stock at a purchase price of $.01 per share, with an expiration date of September 1, 2009.



Sales of Unregistered Securities



None.



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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, 2004, 2003 and 2002 and the balance sheet data as of December 31, 2004 and 2003 have been derived from our audited consolidated financial statements included elsewhere herein, and should be read in conjunction with those financial statements
(including notes thereto). The selected financial data as of December 31, 2002, 2001 and 2000 and for the years ended December 31, 2001 and 2000 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.



The consolidated financial statements as of and for the years ended December 31, 2004, 2003 and 2002 have been audited by
Deloitte & Touche LLP, independent registered public accounting firm. The previous periods referred to above were audited by Arthur Andersen LLP, independent public accountants.



CONSOLIDATED FINANCIAL DATA

(in thousands, except per share amounts)



|                                                                        |  |                         |         |   |      |   |          |      |  |   |         |   |  |      |         |   |  |   |         |  
|----------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | -------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                                        |  | Year Ended December 31, |        
|                                                                        |  | 2000                    |         |   | 2001 |   |          | 2002 |  |   | 2003    |   |  | 2004 |        
|Statement of Operations Data:                                           |  |                         |         |   |      |   |          |      |  |   |         |   |  |      |         |   |  |   |         |  
|Revenues                                                                |  | $                       | 13,117  |   |      | $ | 31,195   |      |  | $ | 25,334  |   |  | $    | 26,604  |   |  | $ | 34,579  |  
|Operating expenses:                                                     |  |                         |         |   |      |   |          |      |  |   |         |   |  |      |         |   |  |   |         |  
|Cost of services (exclusive of items shown separately below)            |  |                         | 5,388   |   |      |   | 13,801   |      |  |   | 7,537   |   |  |      | 8,806   |   |  |   | 13,776  |  
|Selling, general and administrative expenses                            |  |                         | 27,072  |   |      |   | 32,917   |      |  |   | 16,053  |   |  |      | 16,409  |   |  |   | 15,986  |  
|Stock related expense for selling, general and administrative matters   |  |                         | 8,468   |   |      |   | (1,172   | )    |  |   | 225     |   |  |      | 222     |   |  |   | 518     |  
|Impairment of property, plant and equipment                             |  |                         |        |   |      |   | 51,848   |      |  |   | 13,175  |   |  |      | 1,346   |   |  |   | 9,468   |  
|Impairment of goodwill                                                  |  |                         |        |   |      |   | 56,467   |      |  |   |        |   |  |      | 7,509   |   |  |   | 2,309   |  
|Depreciation and amortization                                           |  |                         | 7,652   |   |      |   | 15,319   |      |  |   | 10,346  |   |  |      | 8,840   |   |  |   | 9,013   |  
|                                                                        |  |                         |         |   |      |   |          |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total operating expenses                                                |  |                         | 48,580  |   |      |   | 169,180  |      |  |   | 47,336  |   |  |      | 43,132  |   |  |   | 51,070  |  
|                                                                        |  |                         |         |   |      |   |          |      |  |   |         |   |  |      |         |   |  |   |         |  
|Loss from operations                                                    |  |                         | (35,463 | ) |      |   | (137,985 | )    |  |   | (22,002 | ) |  |      | (16,528 | ) |  |   | (16,491 | )
|Loss on early extinguishments of debt                                   |  |                         |        |   |      |   | (7,398   | )    |  |   | (7,859  | ) |  |      | (8,951  | ) |  |   |        |  
|Interest income                                                         |  |                         | 470     |   |      |   | 182      |      |  |   | 28      |   |  |      | 46      |   |  |   | 60      |  
|Interest expense                                                        |  |                         | (6,127  | ) |      |   | (8,776   | )    |  |   | (7,571  | ) |  |      | (2,342  | ) |  |   | (1,963  | )
|                                                                        |  |                         |         |   |      |   |          |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net loss                                                                |  |                         | (41,120 | ) |      |   | (153,977 | )    |  |   | (37,404 | ) |  |      | (27,775 | ) |  |   | (18,394 | )
|Preferred stock dividends                                               |  |                         | (8,113  | ) |      |   | (1,080   | )    |  |   | (44     | ) |  |      |        |   |  |   |        |  
|Preferred stockbeneficial conversion                                   |  |                         | (27,766 | ) |      |   | (23,109  | )    |  |   |        |   |  |      |        |   |  |   |        |  
|                                                                        |  |                         |         |   |      |   |          |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net loss applicable to common stockholders                              |  | $                       | (76,999 | ) |      | $ | (178,166 | )    |  | $ | (37,448 | ) |  | $    | (27,775 | ) |  | $ | (18,394 | )
|                                                                        |  |                         |         |   |      |   |          |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net loss applicable to common stockholders per share: basic and diluted |  | $                       | (77.93  | ) |      | $ | (130.14  | )    |  | $ | (6.09   | ) |  | $    | (0.75   | ) |  | $ | (0.37   | )
|Weighted average common shares outstanding: basic and diluted           |  |                         | 988     |   |      |   | 1,369    |      |  |   | 6,148   |   |  |      | 37,192  |   |  |   | 50,179  |  



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 the reverse stock split.



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|                                   |  |                    |         |      |   |         |  |      |         |      |   |        |  |   |       
|---------------------------------- |  | ------------------ | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | ------ |  | - | ------
|                                   |  | As of December 31,
|                                   |  | 2000               |         | 2001 |   | 2002    |  | 2003 |         | 2004
|Balance Sheet Data:                |  |                    |         |      |   |         |  |      |         |      |   |        |  |   |       
|Cash and cash equivalents          |  | $                  | 1,582   |      | $ | 3,338   |  | $    | 3,788   |      | $ | 3,488  |  | $ | 2,909 
|Other current assets               |  |                    | 14,990  |      |   | 3,359   |  |      | 3,505   |      |   | 6,876  |  |   | 6,832 
|Property, plant and equipment, net |  |                    | 126,114 |      |   | 109,837 |  |      | 95,122  |      |   | 86,958 |  |   | 74,123
|Total assets                       |  |                    | 227,165 |      |   | 136,587 |  |      | 113,795 |      |   | 99,618 |  |   | 87,725
|Long-term liabilities              |  |                    | 46,559  |      |   | 89,403  |  |      | 31,080  |      |   | 19,769 |  |   | 10,666
|Total stockholders equity         |  |                    | 144,283 |      |   | 24,348  |  |      | 68,598  |      |   | 64,734 |  |   | 59,236



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



Overview



We deploy, own and operate fiber-optic networks designed to provide comprehensive broadband connectivity for data, voice and video transmission to other
telecommunications service providers in major metropolitan areas. We have experienced significant operating losses, net losses and negative cash flows from operating activities. We expect to continue to experience such losses as we continue to
operate our business. We also have a limited operating history. Consequently, prospective investors have limited operating history and financial data upon which to evaluate our performance.



The telecommunications industry continues to experience a period of
uncertainty and rationalization. Many companies in our industry are in financial distress, and some of our largest customers have filed for bankruptcy. We have been negatively impacted by the general economic environment and by the difficulties that
are impacting our industry. Expectations for growth in demand for broadband services have not materialized, resulting in significant excess capacity in existing communications networks. This excess supply of bandwidth and the intense competition
among industry participants has produced substantial pressure on the pricing of our services with decreases of up to 50% in recurring monthly charges. In addition, customer contracts and services have been cancelled, resulting in a loss of recurring
revenues to us. We are unable to determine the extent to which additional contracts or services that we provide to our customers will be cancelled, and we cannot forecast our ability to replace those cancelled contracts with new contracts. As a
result, our revenues, business operations and liquidity may continue to be negatively affected by the market environment.



Factors Affecting Future Operations



Revenues. We generate revenues from selling network capacity and related services to other communications service providers. Revenues are derived
from three 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 point facilities to another carrier point 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 point facility or an on-net building.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Off-net transport services. We provide our customers with circuits on networks that we do not own. We sell this connectivity to our customers by purchasing the underlying
circuits from other wholesale telecommunications carriers.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Colocation services. Our colocation services include providing customers with the ability to locate their communications and networking equipment at our carrier point
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 on-net and off-net buildings. Typically, if a customer colocates its equipment at our
facilities, our agreement with them also permits them to use our transport services.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Communications access management services.Our access management services include providing our customers with the non-exclusive right to market and provide their retail
services to tenants in our on-net and off-net buildings. Customers typically enter into an agreement with us to gain access to all or a significant number of our properties. For certain of our on-net and off-net buildings, we have the exclusive
right to manage communications access. Once a customer has entered into an agreement with us for access services, we typically require that customer to utilize our in-building networking infrastructure for connectivity to its retail customers, if
such networking infrastructure is available.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our
revenues are generated on a non-recurring and monthly recurring basis under contracts with our customers. The terms of these contracts can range from month-to-month to fifteen years in length. Throughout 2004, we continued to experience a trend of
entering into shorter term contracts with our customers. Our customers typically elect to purchase services on a month-to-month basis or for a contracted period of one year. Our revenues are generated in the United States of America.



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. The pricing of all of our services have declined over the past year, with transport services experiencing the greatest decreases. We expect our operating results to
continue to be impacted by decreases in the prices of our services.



The growth of our revenues is dependent upon our ability to provide additional services in our existing facilities. We also believe that the majority of the growth in our revenues will come from our existing customers. Consequently, our
growth in revenues is dependent on the underlying growth of our customers businesses and their need for our services within the facilities that we already operate. We continue to add additional customers, particularly domestic subsidiaries of
internationally based carriers. However, we believe the number of companies that are potential customers is decreasing, due to the industry rationalization. In addition, we currently do not anticipate expanding our network infrastructure to other
carrier point facilities or on-net buildings and off-net buildings. Within each of our existing facilities, 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 operating specifications and commercial standards that are required of us by the customer. Customers can order a specific circuit or colocation space, or, alternatively, they can purchase general availability on
our networks or in our facilities on a recurring basis.



During
the past year, customers have primarily purchased services from us only on an as-needed basis, when their networks requirements mandate an immediate need for additional services. They have not elected to purchase general availability on our
networks, nor have they purchased services on a speculative basis. We have also experienced significant disconnections of services, as customers groom their networks to eliminate excess capacity. This loss of revenues has had a significantly
negative impact on our financial results and may continue.



Currently our colocation and access services produce less than one-third of our revenues. In the future we anticipate generating significantly more of our revenues from transport services than from colocation or access management services.
The scalability of our network architecture allows us to increase transport capacity to a greater degree than is possible with our colocation and access services.



Our transport services have been negatively impacted by customers disconnecting higher-bandwidth circuits they are
purchasing from us and replacing them with lower-bandwidth circuits to more efficiently manage the



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access costs of their networks. The new transport services that we are providing typically are for lower-bandwidth circuits, as our customers expand their
network connections on a more limited basis. The growth in transport revenues that we have experienced on a quarterly basis in 2003 and 2004 is a result of an increase in the number of circuits we have provisioned, offsetting our disconnections and
price declines.



Our network solutions services provides our
customers with circuits on networks that we do not own. We purchase circuits from other wholesale telecommunications carriers and sell this connectivity to our customers. We offer network solutions services 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.



Our colocation services have not experienced the same level of disconnections and price declines as our transport services. The physical constraints of
available colocation space in our facilities and our competitors facilities have limited the supply imbalance that has developed in the connectivity market. In addition, unlike the fluctuations in demand for bandwidth based upon end-user
usage, demand for colocation space is more stable because of the consistent need for a location to locate networking equipment. As a result, prices for colocation have not decreased as much as those of bandwidth, and carriers are less likely to
terminate colocation contracts. Contrarily, the growth prospects of our colocation services are not as great as those of our transport services, as we are limited in the amount of colocation space that we can sell without making a significant
investment in an additional colocation facility. Our ability to expand the capacity of our transport networks is much greater due to technological advancements in more efficient usage of fiber optics, such as dense wave division multiplexing or
DWDM.



Our access management services business has been
steadily declining, and we expect it to continue to decline. 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 2008.



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 point facilities, on-net buildings and off-net buildings. These occupancy expenses primarily represent rent expense 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. Other specific cost of services include maintenance and repair costs, utility costs and license fees. Our license agreements for our
on-net and off-net buildings require us to pay license fees to the owners of these properties. In addition, our leases at 60 Hudson Street in New York City also 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. Our cost of services also include the charges that we incur by purchasing connectivity from other wholesale telecommunications carriers to provide our customers with transport
services that are not on our networks. As we provide additional, off-net transport services, we will purchase more connectivity from other carriers. Other than our license fees and off-net connectivity charges, our cost of services is generally
fixed in nature. With the exception of off-net transport, we do not anticipate that cost of services will change commensurately with any change in our revenues.



Selling, General and Administrative Expenses. Selling, general and administrative expenses generally include all of our personnel 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. All of our personnel costs are included in selling, general and administrative expenses. We do not allocate any personnel cost relating to networks operations or sales activities to cost of services. We have 75
employees as of December 31, 2004 compared to 66 as of December 31, 2003. Prospectively, we believe that our personnel costs will increase moderately. Professional fees, including legal and accounting expenses, represent the second largest component
of our selling, general and administrative expenses. These fees, which primarily are attributed to our



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required activities as a publicly traded company, such as SEC filings and financial statement audits, 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, may increase due to changes in the economic environment and telecommunications
industry.



Stock Related Expense. Stock related expense
relates 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.



Depreciation and Amortization. Depreciation and amortization expense includes the depreciation of our network equipment and infrastructure, computer hardware and software, furniture and fixtures, 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. The preparation of the 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. On an on-going basis, we evaluate the estimates that we have made. 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 including goodwill 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 not been recognized as revenue. Deferred revenue is
recorded for the full value of the contract at contract inception, only if we are contractually entitled to invoice the customer for the full value of the contract and the customer had paid such invoice.



We have one reciprocal agreement, whereby we purchase services from one of
our customers under a single agreement. At the beginning of 2002, we had two such reciprocal agreements, but one was terminated during 2002. The services provided and obtained through these agreements were priced at fair value as of the date of the
agreement. We recognized the transport and colocation revenues from these agreements in accordance with our stated revenue recognition policy, and we concurrently recorded the expenses for colocation services as cost of services in our statements of
operations. None of the expenses associated with our reciprocal agreements are capitalized. All of the costs are expensed as incurred. Reciprocal agreements accounted for $0.8 million, or 3%, of revenues in 2002 and $0.8 million of our cost of
services. For the year ended December 31, 2003, we had one reciprocal agreement which accounted for $0.5 million, or 2%, of revenues and $0.5 million of our cost of services. For the year ended December 31, 2004, we had one reciprocal agreement
which accounted for $0.5 million, or 1%, of revenues and $0.5 million of our cost of services.



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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 significant number of our customers have filed for bankruptcy or are otherwise in significant financial distress. 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 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 defer the revenue and recognize it at the time 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.



During 2003, the
economic environment and the telecommunications industry, in particular, did not rebound as expected. The dramatic change in the operating environment for our industry over the past few years resulted in significantly less demand and lower prices
for our services than we had expected, and we also determined that the recovery in demand and pricing that we anticipated would not occur in the near term. Although we concluded that the prospects for the industry, and our business in particular,
were not worse than we had forecasted in 2002, we once again revised our forecasts for revenues at certain facilities, as we concluded that they would not be achieved. In conjunction with our reassessment of certain revenue forecasts, we revised our
business plan and conducted reviews of our assets and operations. The revisions to the business plan primarily included further reductions in forecasts of revenues and capital expenditures. The projected amounts of certain cost of services and
overhead expenses were reduced as well to reflect the decrease in our expected business activity, although not commensurately with revenues and capital expenditures.



We used an undiscounted forecasted cash flow model to determine if there was an impairment based on the cash flows expected
to be generated from the assets related to these facilities, and used a discounted cash flow model to measure the impairment. As a result of this analysis, we recorded an asset impairment of approximately $1.5 million in the fourth quarter of 2003,
based on the amount by which the carrying amount of these assets exceeded their fair value.



During 2004, we settled a dispute with a dark fiber provider that had filed for bankruptcy, which resulted in the impairment of previously purchased dark fiber miles. We agreed to concede our claim to 364 unutilized
dark fiber miles, or 36.4% of the total dark fiber acquired from this provider in December 1999 for $34.8 million. We also agreed to pay $750,000 to settle a trade payable dispute with this provider, for which we had accrued $1.1 million as a
liability. As a result, we recorded an impairment of $9.5 million due to the write-off of $12.7 million of dark fiber included in network infrastructure, $2.8 million of related accumulated depreciation and a $0.4 million reduction in accrued
liabilities from this settlement for charges for network infrastructure that were previously capitalized and impaired.



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During 2004, we did not renew two of our off-net property leases. As a result, we abandoned the assets
associated with these two properties. As a result, we recorded an impairment of $0.1 million due to the write-off of $0.2 million of network infrastructure and $0.1 million of related accumulated depreciation.



During 2004 and 2003, we recovered approximately $0.1 million and $0.2
million, respectively, from the sale of assets previously written off as impaired. The proceeds were recorded as a recovery of impairments previously recorded.



Impairment of Goodwill



In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 142,
Goodwill and Other Intangible Assets (SFAS No. 142), applicable for fiscal years beginning after December 15, 2001. SFAS No. 142, which we adopted effective January 1, 2002, requires that goodwill and certain intangible
assets resulting from business combinations entered into prior to June 30, 2001 no longer be amortized, but instead be reviewed for recoverability. Any write-down of goodwill would be charged as a cumulative change in accounting principle upon
adoption of the new accounting standard if the recorded value of goodwill and certain intangibles exceeds its fair value. During the fourth quarter of 2002, we considered then current information, including an analysis of our market value as a
result of our recapitalization, and determined that there is no additional impairment of goodwill. During the fourth quarter of 2003, we performed our annual impairment test and determined that we did have an impairment of goodwill. Accordingly, we
recorded a charge of $7.5 million to eliminate our remaining goodwill.



On January 30, 2004, we completed the acquisition of the operating assets of gateway.realty.new jersey.llc, also known as Gateway Colocation, and we recorded $2.3 million in goodwill as a result of this transaction. In June 2004, our
settlement agreement with a dark fiber provider required us to record an impairment to property, plant and equipment. Per SFAS No. 144, Impairment and Disposal of Long Lived Assets, this asset impairment required us to perform a test for
impairment of goodwill under SFAS No. 142. As such, we performed our test for recoverability of goodwill from the acquisition of Gateway Colocation, and determined that $2.3 million of goodwill was impaired. We recorded a charge to eliminate all of
our goodwill.



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.



Results of Operations



Fiscal Year Ended December 31, 2004 Compared to Fiscal Year Ended December 31, 2003



Revenues. Revenues for the fiscal year ended December 31, 2004 were
$34.6 million as compared to $26.6 million for the fiscal year ended December 31, 2003. We increased the number of our customers from 152 at the end of 2003 to 213 at the end of 2004, with the addition of many domestic subsidiaries of
internationally based carriers to our customer base. 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.



During the year ended December 31, 2004, we recognized $2.7
million in revenues due to an award from an arbitration proceeding, in which we were the prevailing claimant. Revenues recognized in connection with this award accounted for 7.9% of revenue for 2004. Upon confirmation of the award, we recognized
this amount as revenue during the year ended December 31, 2004 for services previously provided and earned. Of the total award payment, $2.4 million related to payment for services previously provided and earned, and we recognized



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this amount as revenues during the year. The remaining $0.3 million was for the reimbursement of expenses incurred in connection with the proceeding. We have
recorded this reimbursement as a reversal of previously accrued expenses included in selling, general and administrative expenses in 2003. Also in connection with this arbitration award, we recognized an additional $0.3 million in revenues that were
previously deferred. We did not recognize revenues related to this arbitration proceeding or the disputed contract in prior periods as the collectibility of amounts due under the contract was in doubt.



Revenues were generated by providing transport, colocation and communications
access management services to our customers. We recognized $19.4 million in on-net transport service revenues in 2004, up from $17.6 million in 2003. Off-net transport service revenues for 2004 were $3.7 million, up from $0.5 million in 2003.
Revenues from colocation and other services increased to $9.1 million in 2004 from $6.0 million in 2003, and revenues from communications access management services declined to $2.4 million in 2004 from $2.5 million in 2003.



The vast majority of our transport and colocation services are provided
within and between our carrier point facilities in the New York City market. Transport revenues increased as we provided a greater number of lower-bandwidth circuits to our customers, offsetting the disconnections and price decreases that we have
been experiencing. We benefited from growth in transport services from our existing customer base, as well as through the addition of new customers. Prospectively, we expect that the current trends in our transport services will continue. Colocation
revenues were generated as we leased additional caged space, cabinets and racks in our facilities to our customers. Since we are approaching capacity at some of our colocation facilities, we may have to invest in expanding these facilities to offer
additional space to our customers. To this end, we have expanded our Meet-Me-Room facility at 60 Hudson Street in New York City, and this project was substantially completed at the end of 2004. We expect transport services to grow at a faster rate
than colocation. Our network infrastructure has significant capacity to provide additional broadband transport connectivity, and our colocation facilities are approaching more stabilized utilization rates. The decrease in access revenues was due to
the severe decline in the market for building-centric services and the resulting bankruptcies of many building-centric service providers, many of which were our customers. We do not expect to sell any additional access services, and we believe our
existing contracts for access services will not be renewed when they expire.



For fiscal years 2004 and 2003, there were no individual customers that accounted for over 10.0% of our revenues. Reciprocal agreements accounted for $0.5 million, or 1.4%, of revenues in 2004, consistent with $0.5
million, or 1.8%, of revenues in 2003.



Cost of
Services. Cost of services, associated with the operation of our networks and facilities, were $13.8 million in 2004, compared to $8.8 million in 2003. The majority of our cost of services is occupancy expenses, consisting of rent and utility
costs, for our carrier hotel facilities, on-net buildings and off-net buildings. Other cost of services includes license fees, maintenance and repair costs and off-net connectivity charges.



Occupancy expenses represented 63.7% of cost of services or $8.8 million in
2004, as compared to 72.8% or $6.4 million in 2003. License fees were 13.7% of cost of services in 2004, or $1.9 million, compared to 17.6% of cost of services in 2003, or $1.5 million. 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, and they are expensed in cost of services as the corresponding services are provided. On September 1, 2004, we amended our lease agreements for our
facilities at 60 Hudson Street in New York City. The amendments include a reduction in the license fee, and an increase in the total annual rent amount from $2.1 million to $3.3 million. We expect the effect of these amendments will be a reduction
in future rent expense at these facilities, as the reduction in the license fee percentage should offset the increase in base rent.



Maintenance and repair costs were 3.0% of cost of services in 2004, compared to 4.7% of cost of services in 2003, and they will continue to represent a
relatively small and fixed component of cost of services. Off-net connectivity charges were 19.2% of cost of services in 2004 or $2.6 million, versus 4.8% of cost of services in 2003 or $0.4 million. These charges will increase commensurately with
our growth in off-net transport services.



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Selling, General and Administrative Expenses. Selling, general and administrative expenses for
2004 were $16.0 million compared to $16.4 million for 2003. Personnel costs represented 68% of selling, general and administrative expenses in 2004 and 60% in 2003. Professional fees were 9% of selling, general and administrative expenses in 2004,
compared to 16% in 2003. We anticipate selling, general and administrative expenses to increase modestly in 2005.



Stock Related Expense. Stock related expense for 2004 was $0.5 million, compared to $0.2 million for 2003. This non-cash expense relates to the
amortization of restricted stock granted to our employees.



Impairment of property, plant and equipment. In 2004, we settled a dispute with a dark fiber provider that had filed for bankruptcy, which resulted in the impairment of previously purchased dark fiber miles. We agreed to concede our
claim to 364 unutilized dark fiber miles, or 36.4% of the total dark fiber acquired from this provider in December 1999 for $34.8 million. We also agreed to pay $750,000 to settle a trade payable dispute with this provider, for which we had accrued
$1.1 million as a liability. As a result, we recorded an impairment of $9.5 million due to the write-off of $12.7 million of dark fiber included in network infrastructure, $2.8 million of related accumulated depreciation and a $0.4 million reduction
in accrued liabilities from this settlement for charges for network infrastructure that were previously capitalized and impaired.



Also during the year ended December 31, 2004, we did not renew two of our off-net property leases. As a result, we abandoned the assets associated with
these two properties. As a result, we recorded an impairment of $0.1 million due to the write-off of $0.2 million of network infrastructure and $0.1 million of related accumulated depreciation. Also during 2004, we recovered $0.1 million due to the
disposition of equipment that was previously impaired.



In
2003, we recorded an asset impairment of $1.3 million as a result of our revised business plan and forecast of revenues reflecting the continued adverse business environment and industry conditions. Included in this charge in 2003 is a recovery of
$0.2 million due to the disposition of equipment that was previously impaired. We recorded no other reserves, accruals or other liabilities related to these write-offs.



Impairment of goodwill. During 2004, our settlement agreement with a dark fiber provider required us to record an
impairment to property, plant and equipment. Per SFAS No. 144, Impairment and Disposal of Long Lived Assets, this asset impairment required us to perform a test for impairment of goodwill under FASB Statement No. 142, Goodwill and
Other Intangible Assets. As such, we performed our test for the recoverability of goodwill from the acquisition of Gateway Colocation, and determined that goodwill was impaired and recorded a $2.3 million impairment for the year ended December
31, 2004.



In 2003, we recorded a charge for the impairment of
goodwill of $7.5 million. This goodwill was originally recorded in connection with our acquisition in 1999 of a minority interest in Local Fiber, LLC held by a third party. SFAS No. 142, which we adopted effective January 1, 2002, requires that
goodwill and certain intangible assets resulting from business combinations entered into prior to December 31, 2001 no longer be amortized, but instead be reviewed for recoverability at least on an annual basis. We recorded this impairment of
goodwill in accordance with SFAS No. 142.



Depreciation and
Amortization. Depreciation and amortization expense for 2004 was $9.0 million, compared to $8.8 million for 2003. This slight increase is due to the acquisition of Gateway Colocation and customer specific capital expenses incurred throughout the
year.



Loss on early extinguishment of debt. We recorded
a non-cash charge of $9.7 million related to the partial extinguishment of our credit facility on January 10, 2003. We recorded a loss for the fair value given in excess of the amount of debt extinguished and related pro-rata write-off of original
issue discount and deferred financing charges. The fair value given in exchange for $13.4 million in indebtedness was 4.6 million shares of common stock, the issuance of 2.2 million warrants with an exercise price of $3.60 per share and the
re-pricing of the



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exercise price of 3.0 million existing warrants from $3.60 to $0.03 per share. Also included in this loss is $1.0 million in fees associated with the
consummation of the recapitalization. As this extinguishment of debt represented approximately 38.1% of our outstanding balance, we wrote off the same percentage of deferred financing charges and original issue discount of $0.9 million and $1.8
million, respectively, which is also included in our calculation of loss on early extinguishment of debt. On March 17, 2003, we entered into an agreement to terminate all of our capital lease obligations for a payment of $85,000. This termination of
our capital lease obligations resulted in a gain on early extinguishments of debt of approximately $0.8 million, partially offsetting our earlier loss.



We did not have any early extinguishment of debt for the year ended December 31, 2004.



Interest Income. Interest income for the year ended December 31, 2004 was approximately $60,000 compared to
approximately $46,000 for 2003. Interest income is generated on our cash and restricted cash balances which are at variable rates of interest and are invested in short-term, highly liquid investments.



Interest Expense. Interest expense for the year ended December 31,
2004 was $2.0 million, compared to $2.3 million for the year ended December 31, 2003. Interest expense decreased primarily due to the repayment of $7.2 million of principal on our outstanding debt during the year ended December 31, 2004. All of our
indebtedness bears interest at a floating rate, so we are subject to fluctuations in interest rates. We anticipate that interest expense will remain consistent with prior periods, as higher interest rates will be off-set by our rate reduction from
LIBOR +450 basis points to LIBOR +300 basis points on May 18, 2004.



Net Loss Applicable to Common Stockholders. We reported a net loss applicable to common stockholders of $18.4 million in 2004 compared to a loss of $27.8 million in 2003. The decrease in the net loss applicable to common stockholders
is a result of the aforementioned changes in our operations.



Fiscal Year
Ended December 31, 2003 Compared to Fiscal Year Ended December 31, 2002



Revenues. Revenues for the fiscal year ended December 31, 2003 were $26.6 million as compared to $25.3 million for the fiscal year ended December 31, 2002. We increased the number of our customers from 104 at
the end of 2002 to 152 at the end of 2003, with the addition of many international carriers to our customer base. 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. We recognized $18.1 million in transport service revenues in 2003, up from $15.8 million in 2002. Revenues from
colocation and other services increased to $6.0 million in 2003 from $5.9 million in 2002, and revenues from communications access management services declined to $2.5 million in 2003 from $3.6 million in 2002.



The vast majority of our transport and colocation services are provided
within and between our carrier point facilities in the New York City market. Transport revenues increased as we provided a greater number of lower-bandwidth circuits to our customers, offsetting the disconnections and price decreases that we have
been experiencing. We benefited from growth in transport services from within our existing customer base, as well as through the addition of new customers. Prospectively, we expect that the current trends in our transport services will continue.
Colocation revenues grew as we leased additional caged space, cabinets and racks in our facilities. Since we are approaching capacity at some of our colocation facilities, we may have to invest in expanding these facilities to offer additional space
to our customers. We expect transport services to grow at a faster rate than colocation. Our network infrastructure has significant capacity to provide additional broadband transport connectivity, and our colocation facilities are approaching more
stabilized utilization rates. The decrease in access revenues was due to the severe decline in the market for building-centric services and the resulting bankruptcies of many building-centric service providers, many of whom were our customers. 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.



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For fiscal year 2003, there were no individual customers that accounted for over 10.0% of our revenues.
During 2002, two customers accounted for approximately 24.0% of our revenues. Reciprocal agreements accounted for $0.5 million, or 1.8%, of revenues in 2003, down from $0.8 million, or 3.1%, of revenues in 2002. In 2002, we terminated one of our
reciprocal agreements leaving only one agreement in place during 2003.



In July 2002 we negotiated a revised pricing structure with a significant customer for the services that we provided to it, although we previously were not obligated to do so. In addition, this customer subsequently terminated certain
services that we were providing. The impact to revenues attributable to these two events was approximately a $2.3 and a $1.4 million reduction in revenues for the years ended December 31, 2003 and 2002, respectively. The impact of these events does
not put us in a loss position with respect to the remaining services with this customer.



Cost of Services. Cost of services, associated with the operation of our networks and facilities, were $8.8 million in 2003, compared to $7.5 million in 2002. The majority of our cost of services is occupancy
expenses, consisting of rent and utility costs, for our carrier hotel facilities, on-net buildings and off-net buildings. Other cost of services includes license fees, maintenance and repair costs and off-net connectivity charges.



Occupancy expenses represented 73% of cost of services in 2003 and increased
by only 1% over 2002. License fees, which were 17% of cost of services in 2003, increased by over 200% from 2002 because a greater proportion of our revenues were generated in facilities in which our agreements with the building owners mandate these
license fees. 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, and they are expensed in cost of services as the corresponding services are
provided. We expect license fees to represent an equivalent percentage of cost of services, prospectively.



Maintenance and repair costs were 5% of cost of services in 2003, and although these costs decreased by 41% from 2002, they will continue to represent a
relatively small and fixed component of cost of services. Off-net connectivity charges also were 5% of cost of services in 2003. We did not incur these expenses in 2002, as we did not provide this type of transport service. Going forward, these
charges will increase commensurately with our growth in off-net transport services.



We negotiated certain non-recurring concessions from vendors in the amount of $0.7 million, which reduced cost of services for the year ended December 31, 2002. These items were expensed in prior periods and included
in our cost of services. Reciprocal agreements accounted for $0.5 million of our cost of services for the year ended December 31, 2003 and $0.8 million for the same period in 2002.



Selling, General and Administrative Expenses. Selling, general and administrative expenses for 2003 were $16.4
million compared to $16.1 million for 2002. Personnel costs represented 60% of selling, general and administrative expenses in 2003 and were unchanged from 2002. Professional fees, which were 16% of selling, general and administrative expenses in
2003, increased by $0.4 million over 2002 due primarily to the legal costs of an arbitration proceeding in which we were the claimant. Also included in selling, general and administrative expenses for 2003 and 2002 were legal settlement expenses of
approximately $0.5 million and $0.6 million, respectively, unrelated to the arbitration proceeding. Also included in 2002 was a charge of $2.1 million incurred for professional fees related to our recapitalization in October 2002.



Stock Related Expense. Stock related expense for 2003 was $0.2
million, compared to $0.2 million for 2002. This non-cash expense relates to the amortization of stock options granted below fair market value and restricted stock granted to our employees.



Impairment of property, plant and equipment. In 2003, we recorded an
asset impairment of $1.3 million as a result of our revised business plan and forecast of revenues reflecting the continued adverse business environment and industry conditions. Included in this charge in 2003 is a recovery of $0.2 million due to
the



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disposition of equipment that was previously impaired. In 2002, we also recorded an asset impairment of $13.2 million to reflect our business plan and
forecast of revenues at that time. Included in this charge in 2002 is a recovery of $0.3 million due to the disposition of equipment that was previously impaired. We also recorded a write-off of property, plant and equipment of $0.7 million in April
2002. We recorded this write-off of capital assets due to the termination of several property leases and license agreements for network facilities. There was no cost to us to abandon these assets, nor do we expect to receive any proceeds or other
consideration from the abandonment of these assets. We recorded no other reserves, accruals or other liabilities related to these write-offs.



Impairment of goodwill. In 2003, we recorded a charge for the impairment of goodwill of $7.5 million. This goodwill was originally recorded in
connection with our acquisition in 1999 of a minority interest in Local Fiber, LLC held by a third party. SFAS No. 142, which we adopted effective January 1, 2002, requires that goodwill and certain intangible assets resulting from business
combinations entered into prior to December 31, 2001 no longer be amortized, but instead be reviewed for recoverability at least on an annual basis. We recorded this impairment of goodwill in accordance with SFAS No. 142. No impairment of goodwill
was recorded in 2002.



Depreciation and Amortization.
Depreciation and amortization expense for 2003 was $8.8 million, compared to $10.3 million for 2002. This decrease resulted from the impairments of property, plant and equipment that were previously recorded in 2002.



Loss on early extinguishment of debt. We recorded a non-cash charge of
$9.7 million related to the partial extinguishment of our credit facility on January 10, 2003. We recorded a loss for the fair value given in excess of the amount of debt extinguished and related pro-rata write-off of original issue discount and
deferred financing charges. The fair value given in exchange for $13.4 million in indebtedness was 4.6 million shares of common stock, the issuance of 2.2 million warrants with an exercise price of $3.60 per share and the re-pricing of the exercise
price of 3.0 million existing warrants from $3.60 to $0.03 per share. Also included in this loss is $1.0 million in fees associated with the consummation of the recapitalization. As this extinguishment of debt represented approximately 38.1% of our
outstanding balance, we wrote-off the same percentage of deferred financing charges and original issue discount of $0.9 million and $1.8 million, respectively, which is also included in our calculation of loss on early extinguishment of debt. On
March 17, 2003, we entered into an agreement to terminate all of our capital lease obligations for a payment of $85,000. This termination of our capital lease obligations resulted in a gain on early extinguishments of debt of approximately $0.8
million, partially offsetting our earlier loss.



In 2002, we
recorded a non-cash charge of $7.9 million related to the extinguishment of our subordinated note payable on October 30, 2002, as part of our recapitalization.



Interest Income.Interest income for the year ended December 31, 2003 was approximately $46,000 compared to approximately $28,000 for the year
ended December 31, 2002. Interest income is generated on our cash and restricted cash balances which are at variable rates of interest and are invested in short-term, highly liquid investments.



Interest Expense.Interest expense for the year ended December 31,
2003 was $2.3 million, compared to $7.6 million for the year ended December 31, 2002. Interest expense decreased primarily due to the conversion of debt into equity as part of our recapitalization that occurred in October 2002 and January 2003, as
well as due to lower effective interest rates on the remaining indebtedness under our credit facility. All of our indebtedness bears interest at a floating rate, so we are subject to fluctuations in interest rates.



Preferred Stock Dividends. For the year ended December 31, 2002, we
paid approximately $44,000 in non-cash dividends on our series H preferred stock in the form of additional shares of series H preferred stock, which were convertible into shares of common stock. All outstanding preferred stock was converted into
common stock as part of our recapitalization during the fourth quarter of 2002, and as a result there were no preferred stock dividends recorded for the year ended December 31, 2003.



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Net Loss Applicable to Common Stockholders. We reported a net loss applicable to common
stockholders of $27.8 million in 2003 compared to a loss of $37.4 million in 2002. The decrease in the net loss applicable to common stockholders is a result of the aforementioned changes in our operations.



Liquidity and Capital Resources



To date, we have financed our operations through revenues collected from our
customers, direct equity investments from our stockholders, the issuance of additional debt and equity securities in private transactions and by arranging a credit facility with a group of lenders. We incurred a loss from operations and a net loss
applicable to common stockholders for 2004 of $16.5 million and $18.4 million, respectively, compared to a loss from operations and a net loss applicable to common stockholders of $16.5 million and $27.8 million, respectively, for 2003. During 2004,
cash provided by operating activities was $3.3 million, and cash purchases of property, plant and equipment were $3.5 million, compared to cash provided by operating activities of $2.1 million and $2.4 million of cash purchases of property, plant
and equipment for 2003.



For the year ended December 31, 2004
we used $0.6 million in net cash for financing activities primarily for our repayment of notes payable of $7.2 million, which was offset by our private placement of equity securities in January 2004. For the year ended December 31, 2003 we received
$2.2 million in net cash proceeds from financing activities. We received these proceeds from financing activities primarily in connection with our recapitalization transactions, which occurred in October 2002 and January 2003.



On January 10, 2003, we completed a series of transactions with the lenders
under our credit facility. Pursuant to the terms of three debt exchange agreements between us and each of Bank One, N.A., Nortel Networks Inc. and TD Securities (USA) Inc., we issued 4,617,151 shares of our common stock to these lenders at a price
of $3.00 per share, in satisfaction of approximately $13.4 million of indebtedness, representing all of the outstanding principal indebtedness and accrued interest owing to these lenders under our credit facility.



We also entered into a common stock purchase agreement, dated as of January
10, 2003, with certain investors, pursuant to which we issued to the investors in a private offering an aggregate of 972,222 shares of common stock at a price of $3.60 per share, for an aggregate cash consideration of $3.5 million. Pursuant to the
terms of the purchase agreement, we also issued warrants to purchase an additional 1,895,652 shares of common stock at an exercise price of $3.60 per share with a term of five years. Concurrently with the other transactions occurring on January 10,
2003, the investors also purchased 9,820,061 shares of common stock from the three lenders departing from the credit facility in a privately negotiated transaction for an aggregate cash consideration of $9.0 million.



In connection with the purchase agreement with the investors, we entered into
a registration rights agreement, dated as of January 10, 2003, with the investors, which required us to file a resale registration statement with the Securities and Exchange Commission with respect to the registration of all of the shares of common
stock issued under the purchase agreement and the shares that the investors purchased from the departing lenders. These shares were included in a registration statement that was declared effective on February 20, 2003.



In connection with the transactions contemplated by the debt exchange
agreements, we executed a ninth amendment to our credit agreement, pursuant to which, among other things, the rights and obligations of the departing lenders under the credit facility terminated, subject to standard reinstatement and survival
provisions. As a condition to the lenders entering into this amendment, we agreed to reduce the exercise price of certain warrants previously issued to and held by the lenders to purchase approximately 2,544,974 shares of common stock from $3.60 per
share to $0.03 per share. All of the repriced warrants were immediately exercised by the lenders. In addition pursuant to a security agreement and a securities account control agreement, we agreed to deposit approximately $2.3 million in a
restricted account as cash collateral to secure the assumption by Deutsche Bank AG New York Branch of the departing lenders funding obligations for our outstanding letters of credit, which totaled approximately $6.1 million.



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On March 17, 2003, we entered into an agreement to terminate all of our capital lease obligations for a
payment of $85,000. This termination of our capital lease obligations resulted in a gain on early extinguishments of debt of approximately $0.8 million, recorded in 2003.



On May 12, 2003, we completed our 1-for-30 reverse stock split previously approved by stockholders. The share information
discussed above and below has been adjusted to reflect the reverse stock split.



On June 13, 2003, we executed the loan documentation necessary to establish a subordinated credit facility to provide the funding for the purchase of up to $3.0 million of our common stock, under a stock repurchase
program. Repurchases could have been made from time to time until December 31, 2003 through open market purchases, privately negotiated transactions, block trades or otherwise. Repurchases were subject to the availability of stock, prevailing market
conditions, trading price of the stock and our financial performance. The repurchase program did not obligate us to acquire any specific number of shares and could have been discontinued or suspended at any time. Any shares repurchased in the
program would have been treated as shares of common stock held in treasury. As of December 31, 2003, there were no outstanding amounts under this subordinated credit facility and no repurchases of common stock had been made. On December 31, 2003,
this subordinated credit facility expired and was not renewed.



On June 27, 2003, we commenced our previously approved exchange offer for certain of our outstanding warrants. Holders of certain of our outstanding warrants were given the opportunity to exchange their currently outstanding warrants for
shares of our common stock as if the exercise price of their warrants was $0.001 per share if such warrants were exercised in full on a cashless basis. The offer was implemented to, among other things, satisfy certain of our obligations undertaken
with respect to our recapitalization transactions, which occurred in October 2002 and January 2003. The offer expired on August 29, 2003. The warrants issued in connection with the recapitalization transactions that we completed in October 2002 and
January 2003 did not participate in the offer to exchange. In connection with this offer we exchanged 695,828 warrants for 695,147 shares of common stock.



On January 30, 2004, we completed the acquisition of the operating assets of gateway.realty.new jersey.llc, also known as Gateway Colocation. Gateway
Colocation operates a 49,000 square foot communications hub and colocation facility located at 165 Halsey Street in Newark, New Jersey. The transaction was structured as an acquisition of assets, and the purchase price paid at closing consisted of
2.9 million shares of our common stock with a fair value of $4.8 million on the closing date and approximately $170,000 in cash. The purchase agreement also includes an earn-out payment based upon the achievement of certain financial
objectives with respect to the revenues generated by the facility. More specifically, the earn-out payment will be based on the gross revenues, on an annualized basis, for a particular month designated by Gateway Colocation during the
twenty-four month period immediately subsequent to closing. The earn-out payment, if payable, will be paid in shares of our common stock. However, the issuance of such additional shares, in the aggregate with the shares of common stock
issued on January 30, 2004, will not exceed 19.9% of the issued and outstanding shares of our common stock as of the closing date without first receiving stockholder approval. We have agreed to file with the Securities and Exchange Commission a
registration statement covering the resale of the shares issued at closing, and have also agreed to file a registration statement with respect to the resale of shares issued, if any, pursuant to the terms of the earn-out provision. As of
December 31, 2004, there were no additional shares required under the earn-out provision.



Subsequently, in June 2004, we performed a test for recoverability of goodwill from the acquisition of Gateway Colocation, and determined that goodwill
was impaired and recorded a $2.3 million impairment.



Also on
January 30, 2004, in an unrelated transaction, we entered into a common stock purchase agreement with certain investors, pursuant to which we issued to the investors, in a private offering, an aggregate of 6.4 million shares of common stock at a
price of $1.25 per share, for gross proceeds of $8.0 million. Pursuant to the terms of the purchase agreements, we also issued to such investors warrants to purchase an aggregate of 1.9 million shares of common stock at an exercise price of $1.75
per share with a term of three and one-half years. In



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connection with the purchase agreements, we entered into a registration rights agreement with the investors, which required us 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 and (ii) the shares of common stock underlying the warrants issued to the investors. These shares were
included in a registration statement that was declared effective on April 14, 2004.



We utilized a portion of the gross proceeds to repay $2.1 million of term loan indebtedness underlying the credit facility and to cancel $1.1 million of letters of credit by providing cash securing deposits in lieu
thereof. We also permanently reduced our availability to issue letters of credit by $0.9 million. In doing so, we satisfied the mandatory automatic reductions of commitments of the credit facility for 2004, as discussed below. By canceling the
letters of credit, $0.5 million of restricted cash previously held as cash collateral was made available for general corporate purposes. Furthermore, we repaid $3.5 million of outstanding revolving loan indebtedness, which is available to be redrawn
in the future subject to compliance with the terms of the credit agreement.



In connection with the consummation of both the Gateway Colocation acquisition and equity financing on January 30, 2004, we entered into certain transactions with the lenders under our credit facility. We executed an
eleventh amendment to the credit agreement, pursuant to which, among other things, the lenders consented to the above-referenced transactions. The eleventh amendment also revised the automatic reductions of the commitments underlying the credit
facility that are required on a quarterly basis beginning on March 31, 2004. Expressed as a percentage of the aggregate outstanding commitments, the automatic reductions were revised to a total of 8% in 2004, 40% in 2005, 48% in 2006 and 4% at
maturity on March 31, 2007. In addition, the eleventh amendment also incorporated adjustments to the financial covenants of the credit facility. As a condition to the lenders entering into the eleventh amendment, we agreed to reduce the exercise
price of certain previously issued outstanding warrants held by the lenders to purchase approximately 379,230 shares of common stock from $3.60 per share to $0.001 per share, which were immediately exercised by the lenders. We compared the value of
the warrants prior to repricing with the value of the warrants after the repricing using the Black-Sholes option pricing model and determined that there was no difference in value. Therefore the repricing of warrants had no impact on our
consolidated financial statements.



On February 12, 2004, we
issued 200,000 shares of common stock and paid $0.3 million in cash to a customer in settlement of certain litigation matters. The price on the date of the issuance was $1.61 per share. This settlement was accrued for as of December 31, 2003.



On March 10, 2004, we were notified that we prevailed as the
claimant in an arbitration proceeding regarding a breach of contract. We were awarded approximately $2.7 million in cash, payment of which was received on April 9, 2004. Of the total award payment, $2.4 million related to payment for services
previously provided and earned, and we recognized this amount as revenues in 2004. The remaining $0.3 million was for the reimbursement of expenses incurred in connection with the proceeding. We recorded this reimbursement as a reversal of
previously accrued expenses included in selling, general and administrative expenses in 2003. Also in connection with this arbitration award, we recognized an additional $0.3 million in revenues that were previously deferred. We did not recognize
revenues related to this arbitration proceeding or the disputed contract in prior periods as the collectability of amounts due under the contract was in doubt.



On April 13, 2004, we repaid $1.6 million of outstanding revolving loan indebtedness, which is available to be redrawn in the future subject to
compliance with the terms of the credit agreement.



On
September 1, 2004, we amended our lease agreements for our facilities at 60 Hudson Street in New York City. The amendments include a reduction in the license fee to 12.0% of revenues, and an increase in the total annual rent amount from $2.1 million
to $3.3 million. In conjunction with the amendment, we issued 2,549,858 warrants with an exercise price of $0.01 and a term of five years. The fair value of the warrants as of September 1, 2004 was approximately $2.0 million, using the Black-Scholes
option pricing model with the following assumptions used as of September 1, 2004: risk-free interest rates of 3.32%, expected dividend yields of 0%,



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expected life of five years to expiration and expected volatility of 357%. In accordance with Emerging Issues Task Force Issue (EITF) 00-18
Accounting Recognition for Certain Transactions involving Equity Instruments Granted to Other Than Employees the fair value of the warrants was recorded as deferred rent (a contra-equity) to be amortized into cost of services over the
life of the leases.



On December 10, 2004, we 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, for $37.0 million. The Con Ed Agreement is subject to certain purchase price adjustments, certain closing conditions, including the receipt of third party and governmental consents, and contains customary representations, warranties and
covenants by each of the parties. CEC provides managed network services in the New York metropolitan area.



In order to finance the acquisition of CEC described above, on December 10, 2004, we entered into a securities purchase agreement (as amended, the
Investor Purchase Agreement), with certain investors for the sale of up to $37.0 million in shares of a newly issued series K convertible preferred stock (the Series K Preferred), and common stock warrants (the
Warrants). The Series K Preferred and the Warrants are convertible and exercisable at a price of $1.00 per share of common stock, and may be subject to adjustment in certain circumstances. The Warrants have a term of seven years.



The Series K Preferred stock will not have voting rights, and
will pay dividends beginning on the first anniversary of the closing date at a rate equal to 4% per annum, increasing to 8% per annum after the third anniversary of the closing date until the Series K Preferred are fully converted. The Series K
Preferred ranks senior to all of our outstanding equity securities, in the event of a liquidation, dissolution or our winding up, but is subject to the prior satisfaction of our existing credit facilities if any cash payments are required. Subject
to the satisfaction of certain conditions, including specific operating criteria or the failure to maintain stock listing criteria, the Series K Preferred may become subject to mandatory conversion or redemption, with alternative settlement options
including cash payments, issuance of new securities or common stock, as defined by the Investor Purchase Agreement.



Contemporaneously with the execution of the Investor Purchase Agreement, we amended 833,517 common stock warrants currently owned by the lead investor in
the equity financing, SDS Capital Partners, LLC (SDS), to reduce the exercise price thereof from $3.60 to $0.01. We compared the value of the warrants prior to repricing with the value of the warrants after the repricing using the
Black-Sholes option pricing model and determined that there was no difference in value. Therefore the repricing of warrants had no impact on our consolidated financial statements. Furthermore, SDS is entitled to certain rights to designate a new
member to the Board of Directors and to designate an observer at Board meetings.



In connection with the Investor Purchase Agreement, we entered into a Registration Rights Agreement with the investors, dated as of December 10, 2004, which requires a registration statement to be filed with the
Securities and Exchange Commission within 45 days after the closing of the Investor Purchase Agreement, and to have such registration statement declared effective within 120 days following such closing. We could be subject to cash penalties if,
among other things, it is late in meeting such deadlines or if its common stock was not listed for quotation on the NASDAQ Small Cap Market at any time after the 90thday following the closing.



In connection with the execution of both the acquisition and equity financing transactions described above, we entered into certain transactions with Deutsche Bank AG New York Branch, Wachovia Investors, Inc. and IBM
Credit LLC, the lenders under its senior secured credit facility (the Lenders). We, together with our wholly-owned subsidiaries, FiberNet Operations, Inc. and Devnet L.L.C., executed with the Lenders a thirteenth amendment to the Amended
and Restated Credit Agreement, dated as of February 9, 2001, as amended, pursuant to which, among other things, the Lenders consented to the above-referenced transactions.



The closings of the Con Ed Agreement and the Investor Purchase Agreement will occur simultaneously and we anticipate that
such closings will occur during the first six months of 2005.



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As of December 31, 2004, we had $15.1 million of indebtedness outstanding under our credit facility and
$4.8 million of outstanding letters of credit. In addition, as of December 31, 2004, we had $4.7 million of available borrowing capacity and $0.8 million of availability to issue letters of credit under its credit facility, subject to compliance
with the terms of the credit agreement., The weighted average interest rate on our outstanding borrowings under the facility was 5.21% at an applicable borrowing rate of LIBOR+300 basis points. We were in full compliance with all of the covenants
contained in the credit agreement underlying the facility as of December 31, 2004. We must comply with financial covenants that include minimum consolidated revenue, minimum consolidated EBITDA (as defined in the credit agreement underlying the
credit facility), maximum cumulative capital expenditures, a maximum consolidated leverage ratio, a minimum consolidated interest coverage ratio and a minimum consolidated fixed charge coverage ratio. The compliance levels and calculation of such
levels with respect to those covenants are as defined in the credit agreement underlying our credit facility, as amended, 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 approximately $3.5 million and $2.4 million in capital expenditures during 2004 and 2003, respectively, primarily
for the implementation of customer orders. We have substantially completed the deployment of our FINs, carrier hotel facilities and metropolitan transport networks. This includes purchasing networking equipment to provision connectivity and
constructing extensions of our network to increase capacity and to interconnect with new customers. We also intend to upgrade certain information technology systems and key operating systems at our carrier point facilities. 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, 2004, holders of warrants exercised warrants for 0.6 million shares of common stock with an exercise price ranging from
$0.001 to $0.03 per share. During the year ended December 31, 2004, we granted options to purchase an aggregate of 13,640 shares of common stock to employees with a weighted average exercise price of $1.42 per share.



On March 22, 2005, we, together with our wholly-owned subsidiaries, FiberNet
Operations, Inc. and Devnet L.L.C., executed with our Lenders a fourteenth amendment to the Amended and Restated Credit Agreement, dated as of February 9, 2001, as amended, pursuant to which, the amortization payments for 2005 were deferred until
2006, and covenant levels were changed. This amendment requires us to raise additional capital in the first half of 2005.



As of March 24, 2005, we had approximately 51.0 million shares of common stock outstanding, or approximately 60.5 million shares of common stock
outstanding on a fully diluted basis, assuming the exercise of all outstanding options and warrants but not including any of the Series K Preferred stock or warrants as these securities have not yet been issued.



We believe that the completion of the transactions in 2003 that constituted
our recapitalization and our recent equity financing significantly enhanced our liquidity and improved our financial position. Under our current operating plan, we do not anticipate requiring any external sources of capital to fund our operations in
the coming year. However, 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, although there can be no assurance that we would be able to successfully consummate any such financing on acceptable terms, if at all. For additional disclosure and risks regarding future financings and funding
our ongoing operations, please see the subsection entitled, We may require additional capital to fund the further development of our networks and operation of our business, and an inability to obtain such capital could harm our
business. in the section entitled Factors Affecting our Business Condition. We do not have any off-balance sheet financing arrangements, nor do we anticipate entering into any.



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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, 2004.



|                                                    |  |                                       |        |      |   |        |  |      |        |      |   |       |  |            |       |  |   |       |  |   |       
|--------------------------------------------------- |  | ------------------------------------- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ----- |  | ---------- | ----- |  | - | ----- |  | - | ------
|                                                    |  | Payments Due by Period (in thousands)
|Contractual Obligation                              |  | Total                                 |        | 2005 |   | 2006   |  | 2007 |        | 2008 |   | 2009  |  | Thereafter
|Mandatory Repayments and Reductions of Indebtedness |  | $                                     | 15,136 |      | $ | 6,182  |  | $    | 8,265  |      | $ | 689   |  | $          |      |  | $ |      |  | $ |      
|Operating Leases(1)                                 |  |                                       | 76,728 |      |   | 9,672  |  |      | 7,674  |      |   | 7,229 |  |            | 7,012 |  |   | 6,915 |  |   | 38,226
|                                                    |  |                                       |        |      |   |        |  |      |        |      |   |       |  |            |       |  |   |       |  |   |       
|Total Contractual Obligations                       |  | $                                     | 91,864 |      | $ | 15,854 |  | $    | 15,939 |      | $ | 7,918 |  | $          | 7,012 |  | $ | 6,915 |  | $ | 38,226
|                                                    |  |                                       |        |      |   |        |  |      |        |      |   |       |  |            |       |  |   |       |  |   |       

---

|(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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Recent Accounting Pronouncements



In
January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, (FIN 46), an interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements. FIN 46
establishes accounting guidance for consolidation of variable interest entities that function to support the activities of the primary beneficiary. In December 2003, the FASB revised FIN 46 and issued FIN 46 (revised December 2003) (FIN
46R). In addition to conforming to previously issued FASB Staff Positions, FIN 46R deferred the implementation date for certain variable interest entities. This revised interpretation is effective for all entities no later than the end of the
first reporting period that ends after March 15, 2004. We do not have any investments in, or contractual relationship or other business relationship with a variable interest entity and therefore the adoption of this interpretation did not have any
impact on our consolidated financial position or results of operations.



In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, which eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. SFAS No. 153 will be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We do not believe the adoption of SFAS No. 153 will have a material
impact on our consolidated financial statements.



In December
2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which establishes standards for transactions in which an entity exchanges its equity instruments for goods or services. This standard requires a public entity to measure the
cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. This eliminates the exception to account for such awards using the intrinsic method previously allowable under APB
Opinion No. 25. SFAS No. 123(R) will be effective for interim or annual reporting periods beginning on or after June 15, 2005. The Company is currently evaluating the impact of the adoption of SFAS No. 123(R) will have on its consolidated financial
statements.



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



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statements as a result of various factors, including, but not limited to, those discussed below. As a result, our future operations involve a high degree of
risk. 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.



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 are an early-stage
company, and we expect to encounter risks and difficulties frequently experienced by early-stage companies in new and rapidly evolving markets.



We did not begin to engage in our current business until 1999 and did not begin to offer our services until the first quarter of 2000. Our limited
operating history makes the evaluation of our future prospects very difficult. We will encounter risks and difficulties frequently experienced by early stage companies in new and rapidly evolving markets. As an early-stage organization, we are at a
competitive disadvantage to larger, more established competitors. We anticipate that this competitive disadvantage may persist for the foreseeable future. If we do not successfully address these risks, our business may suffer.



We have and may continue to experience operating losses, net losses and a cash flow
deficit.



We may not achieve or sustain operating income,
net income or positive cash flow from operations in the future. Since our inception we have incurred operating losses and net losses both on an annual and quarterly basis. We have not achieved profitability and expect to continue to incur operating
losses and net losses in 2005, and we may not for the foreseeable future. In 2002, we had an operating loss of $22.0 million and a net loss applicable to common stockholders of $37.4 million. In 2003, we had an operating loss of $16.5 million and a
net loss applicable to common stockholders of $27.8 million. In 2004, we had an operating loss of $16.5 million and a net loss applicable to common stockholders of $18.4 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;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | any operating difficulties, 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 alternative services to our services or making our services and networks obsolete;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | any 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, and we may not be able to compete effectively.



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 mobile and fixed 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 market expose us to severe price competition for our services. We expect competition to intensify in the future. If additional competitors focus
on our market opportunity, 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.



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



In
2004, we continued to experience decreases in the prices of our services of up to 50% in recurring monthly charges. We anticipate that prices for broadband network services, in general, and for our services, in particular, will continue to decline
dramatically over the next several years due primarily to the following:



| |  |  | price competition as various service providers continue to sell services at greatly reduced process 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 fiber; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



The recent general
economic weakness has severely impacted the telecommunications industry. The expected demand for broadband connectivity has not been realized in many segments of the market. As a result, there has been an industry-wide slowdown in capital spending
and a large number of industry-related bankruptcy filings. Many of our customers and vendors are currently experiencing financial distress, and some of them have 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 a significant doubt that some of our customers or vendors will perform their
obligations under our contracts with them. In bankruptcy proceedings, the debtor, or trustee, as the case may be, has the right to, among other things, 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 be terminated.



We may require additional capital to fund the further development of our networks and operation of our business, and an inability to obtain such capital could harm our
business.



Although we have substantially completed the
build-out of our networks, we may selectively expand our networks in the future as market conditions and customer demand dictate. In addition, we may have to expand or adapt our networks to respond to the following:



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



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



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



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



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



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



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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 common stock, and the terms of this indebtedness could impose restrictions on our ability to incur additional indebtedness and on our operations, which could impede the
successful completion of our business plan.



If our actual
results vary from the anticipated results of our operating plan, we may not be able to fund operating and investing activities with internally generated cash flows, and we may require external sources of capital. 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 finance the continued operations of our business or for other strategic purposes. 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 upon our ability to lease space in carrier hotels to establish carrier point facilities where we can locate our networking equipment and interconnect with our customers. At a minimum, to provide
our services in a particular metropolitan area, we must obtain space in the major carrier hotels in that area. In addition, we need adequate space at our carrier point facilities in order to continue offering colocation services. 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 and the volume of
traffic on our networks or our business may suffer.



Our
revenues continue to be negatively impacted by the general economic environment and by the difficulties that are affecting our industry. We have experienced significant disconnections of services by our customers and decreases in the prices of our
services. As a result, we should increase the current volume of traffic on our networks in order to realize anticipated revenues and cash flows. To do so, we must obtain long-term commitments from new large-volume 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; otherwise our business will suffer.



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



Because of the limited deployment of our services, our ability to manage a substantial amount of traffic on our networks while maintaining superior
service is unknown at this time. There is no assurance that our network will be able to maintain current levels of service as the number of our customers and amount of traffic grows. Our failure to maintain such levels 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



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other remedies to them, which would reduce our revenues or increase our expenses and 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 signal delivery may cause
significant losses to a customer using our networks. Our networks may also contain undetected design faults and software bugs that, despite our testing, may be discovered only after our networks have been completed and 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 Chicago and Los Angeles. In particular, our facilities located at 60 Hudson Street and 111 Eighth Avenue in New York
City 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.



Our failure to manage the growth of our operations could harm our business.



We have rapidly and significantly expanded our
operations. We anticipate that further expansion will be required to grow our customer base if we are to be successful in implementing 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 or planned personnel, systems, procedures and controls may not be adequate to support our future operations. If we are
unable to manage our growth effectively, our business will suffer.



Our
business will 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. If we are unable to obtain such
software on commercially acceptable terms, our business could be adversely affected.



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 MetaSolv TBS. 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 affect on our business.



We depend on our key personnel, and the loss of their services may adversely affect our business.



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.



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We may become the subject of litigation by our stockholders, which could adversely affect our business.



In addition to claims that may arise in the normal course
of our business and financing activities, certain of our stockholders may sue us in an attempt to recover their losses as a result of the decline in our stock price, which has been significant since 2000. The resolution of such a claim would likely
be costly and time-consuming. If any or all of such claims cannot be resolved through a negotiated settlement, we could become a party to the resulting litigation. 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.



We may face competition from various service providers in buildings for which we have exclusive license agreements.



We generally have exclusive license agreements for both our on-net and
off-net buildings. Even though our competitors cannot install a central distribution system in any of our buildings covered by an exclusive agreement, they may still compete with us by installing infrastructure designed to directly service one or
more specific tenants in the building as requested by such tenants. Consequently, they could indirectly compete against us by not utilizing our in-building networks to gain connectivity to tenants. In addition, incumbent local exchange carriers, or
ILECs, and the regional bell operating companies, or RBOCs, currently own pre-existing, copper-based networks in many of our on-net and off-net buildings. These ILECs and RBOCs may be able to upgrade their existing networks to provide advanced
broadband services which would place them in direct competition with us. Furthermore, service providers may have pre-existing license agreements in our buildings, which allow these providers to install, and possibly expand, their network
infrastructure in our buildings. As a result, we may face competition in some of the buildings for which we have exclusive license agreements.



Alternative technologies pose competitive threats.



In addition to fiber-optic technology, there are other technologies that provide more capacity and speed than traditional copper wire transmission
technology, such as digital subscriber lines, or DSL, and wireless technologies, and can be used instead of our networks. Furthermore, these technologies may be improved and 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, and we may not be able to meet our debt obligations.



As of March 24, 2005, we had total outstanding debt of $16.2 million, with
the availability to borrow an additional $3.2 million. 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 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:



| |  |  | as the interest rate on our debt is variable, if interest rates rise, our debt service payments will increase;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | principal amortization payments are required to be made quarterly and extend through maturity in 2007;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | 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. We cannot assure you



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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, or
that we will be successful in obtaining alternative financing. 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 the completion or expansion of our networks, 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 certain
covenants, 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 regulations that affect our services, competition, the taxation of our services
and other aspects of our operations. The regulation of the communications industry is changing rapidly, and varies from state to state. Changes in the regulatory environment could affect our operating results by increasing competition, decreasing
revenue, increasing costs or impairing our ability to offer services. Certain communications services are subject to significant regulation at the federal and state 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 regulation, which includes the payment of all applicable regulatory assessments.



Many of our competitors and vendors, 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.



Regulation of access to office buildings could negatively affect our business. Some states have adopted laws that require that commercial building owners
provide non-discriminatory access to communications providers. The FCC has released its decision relating to access to commercial multiple tenant buildings, and legislation was enacted that increases telecommunications access to buildings owned or
used by the federal government. Among other decisions, the FCC prohibited telecommunications carriers from entering into exclusive agreements with commercial building owners on a prospective basis, and required utilities, including local exchange
carriers, to provide access to other telecommunications carriers and cable service providers. Other building access issues remain to be addressed by the FCC. Depending on how these rules are interpreted, these requirements may facilitate our
competitors entry into buildings in which we offer our services, which in turn will diminish the value of our access rights and adversely affect our competitive position.



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 unsettled. 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.



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



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liability, which may require the expenditure of substantial resources or the discontinuation of certain products or services 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, including our operating expenses and our liquidity.



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 46% 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. 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 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 is highly volatile. Failure to meet market expectations because of quarterly fluctuations 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 9.5 million shares of common stock subject issuance
upon exercise of outstanding to stock options and warrants. We cannot predict the effect, if any, that future sales of shares of 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.



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ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Our exposure to financial market risk, including changes in interest rates,
relates primarily to our credit facility and 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 24, 2005, we had borrowed $16.1 million under our credit facility, with a current weighted
average interest rate of 5.58%.



We generally place our
marketable security investments in high credit quality instruments, primarily U.S. government obligations and corporate obligations with contractual maturities of less than one year. 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.



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ITEM 8. FINANCIAL STATEMENTS



CONSOLIDATED FINANCIAL STATEMENTS



TABLE OF CONTENTS



|                                                        |  |     
|------------------------------------------------------- |  | ----
|                                                        |  | Page
|Report of Independent Registered Public Accounting Firm |  | 46  
|Consolidated Balance Sheets                             |  | 47  
|Consolidated Statements of Operations                   |  | 48  
|Consolidated Statements of Stockholders Equity         |  | 49  
|Consolidated Statements of Cash Flows                   |  | 50  
|Notes to Consolidated Financial Statements              |  | 51  



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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, 2004 and 2003, and the related consolidated statements of operations,
stockholders equity and cash flows for each of the three years in the period ended December 31, 2004. 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, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of
America.



/s/    DELOITTE & TOUCHE
LLPNew York, New YorkMarch 30, 2005




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FIBERNET TELECOM GROUP, INC.



CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)



|                                                                                                                                                                       |  |                   |          |   |                   |   |          |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ----------------- | - | -------- | -
|                                                                                                                                                                       |  | December 31, 2004 |          |   | December 31, 2003 |  
|ASSETS                                                                                                                                                                 |  |                   |          |   |                   |   |          |  
|Current Assets:                                                                                                                                                        |  |                   |          |   |                   |   |          |  
|Cash and cash equivalents                                                                                                                                              |  | $                 | 2,909    |   |                   | $ | 3,488    |  
|Restricted cash                                                                                                                                                        |  |                   | 1,881    |   |                   |   | 2,337    |  
|Accounts receivable, net of allowance of $749 and $721 at December 31, 2004 and 2003, respectively                                                                     |  |                   | 4,275    |   |                   |   | 3,785    |  
|Prepaid expenses and other                                                                                                                                             |  |                   | 676      |   |                   |   | 754      |  
|                                                                                                                                                                       |  |                   |          |   |                   |   |          |  
|Total current assets                                                                                                                                                   |  |                   | 9,741    |   |                   |   | 10,364   |  
|Property, plant and equipment, net                                                                                                                                     |  |                   | 74,123   |   |                   |   | 86,958   |  
|Other Assets:                                                                                                                                                          |  |                   |          |   |                   |   |          |  
|Deferred charges, net of accumulated amortization of $1,860 and $1,402 at December 31, 2004 and 2003, respectively                                                     |  |                   | 2,292    |   |                   |   | 2,035    |  
|Other assets                                                                                                                                                           |  |                   | 1,569    |   |                   |   | 261      |  
|                                                                                                                                                                       |  |                   |          |   |                   |   |          |  
|Total other assets                                                                                                                                                     |  |                   | 3,861    |   |                   |   | 2,296    |  
|                                                                                                                                                                       |  |                   |          |   |                   |   |          |  
|TOTAL ASSETS                                                                                                                                                           |  | $                 | 87,725   |   |                   | $ | 99,618   |  
|                                                                                                                                                                       |  |                   |          |   |                   |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                   |  |                   |          |   |                   |   |          |  
|Current Liabilities:                                                                                                                                                   |  |                   |          |   |                   |   |          |  
|Accounts payable                                                                                                                                                       |  | $                 | 4,409    |   |                   | $ | 3,598    |  
|Accrued expenses                                                                                                                                                       |  |                   | 3,805    |   |                   |   | 5,138    |  
|Deferred revenuescurrent portion                                                                                                                                      |  |                   | 3,427    |   |                   |   | 4,584    |  
|Notes payablecurrent portion                                                                                                                                          |  |                   | 6,182    |   |                   |   | 1,795    |  
|                                                                                                                                                                       |  |                   |          |   |                   |   |          |  
|Total current liabilities                                                                                                                                              |  |                   | 17,823   |   |                   |   | 15,115   |  
|Long-Term Liabilities:                                                                                                                                                 |  |                   |          |   |                   |   |          |  
|Notes payable, less original issue discount of $1,598 and $2,308 at December 31, 2004 and 2003, respectively                                                           |  |                   | 7,405    |   |                   |   | 18,330   |  
|Deferred revenue, long term                                                                                                                                            |  |                   | 3,261    |   |                   |   | 1,439    |  
|                                                                                                                                                                       |  |                   |          |   |                   |   |          |  
|Total Long Term Liabilities                                                                                                                                            |  |                   | 10,666   |   |                   |   | 19,769   |  
|                                                                                                                                                                       |  |                   |          |   |                   |   |          |  
|Total liabilities                                                                                                                                                      |  |                   | 28,489   |   |                   |   | 34,884   |  
|Commitments and contingent liabilities (Note 8)                                                                                                                        |  |                   |          |   |                   |   |          |  
|Stockholders Equity:                                                                                                                                                  |  |                   |          |   |                   |   |          |  
|Common stock, $.001 par value, 2,000,000,000 shares authorized and 50,989,572 and 40,540,334 shares issued and outstanding at December 31,
2004 and 2003, respectively |  |                   | 51       |   |                   |   | 41       |  
|Additional paid-in-capital and other                                                                                                                                   |  |                   | 444,429  |   |                   |   | 429,991  |  
|Deferred compensation                                                                                                                                                  |  |                   | (4,443   | ) |                   |   | (4,797   | )
|Deferred rent (warrants)                                                                                                                                               |  |                   | (1,906   | ) |                   |   |         |  
|Accumulated deficit                                                                                                                                                    |  |                   | (378,895 | ) |                   |   | (360,501 | )
|                                                                                                                                                                       |  |                   |          |   |                   |   |          |  
|Total stockholders equity                                                                                                                                             |  |                   | 59,236   |   |                   |   | 64,734   |  
|                                                                                                                                                                       |  |                   |          |   |                   |   |          |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                             |  | $                 | 87,725   |   |                   | $ | 99,618   |  
|                                                                                                                                                                       |  |                   |          |   |                   |   |          |  



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



47



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##### Table of Contents

FIBERNET TELECOM GROUP, INC.



CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)



|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|--------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                            |  | Year Ended December 31, |        
|                                                                            |  | 2004                    |         |   | 2003 |   |         | 2002 | 
|Revenues                                                                    |  | $                       | 34,579  |   |      | $ | 26,604  |      |  | $ | 25,334  |  
|Operating expenses:                                                         |  |                         |         |   |      |   |         |      |  |   |         |  
|Cost of services (exclusive of items shown separately below)                |  |                         | 13,776  |   |      |   | 8,806   |      |  |   | 7,537   |  
|Selling, general and administrative expense excluding stock related expense |  |                         | 15,986  |   |      |   | 16,409  |      |  |   | 16,053  |  
|Stock related expense for selling, general and administrative matters       |  |                         | 518     |   |      |   | 222     |      |  |   | 225     |  
|Impairment of property, plant and equipment                                 |  |                         | 9,468   |   |      |   | 1,346   |      |  |   | 13,175  |  
|Impairment of goodwill                                                      |  |                         | 2,309   |   |      |   | 7,509   |      |  |   |        |  
|Depreciation and amortization                                               |  |                         | 9,013   |   |      |   | 8,840   |      |  |   | 10,346  |  
|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|Total operating expenses                                                    |  |                         | 51,070  |   |      |   | 43,132  |      |  |   | 47,336  |  
|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|Loss from operations                                                        |  |                         | (16,491 | ) |      |   | (16,528 | )    |  |   | (22,002 | )
|Loss on early extinguishments of debt                                       |  |                         |        |   |      |   | (8,951  | )    |  |   | (7,859  | )
|Interest income                                                             |  |                         | 60      |   |      |   | 46      |      |  |   | 28      |  
|Interest expense                                                            |  |                         | (1,963  | ) |      |   | (2,342  | )    |  |   | (7,571  | )
|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|Net loss                                                                    |  |                         | (18,394 | ) |      |   | (27,775 | )    |  |   | (37,404 | )
|Preferred stock dividends                                                   |  |                         |        |   |      |   |        |      |  |   | (44     | )
|Net loss applicable to common stockholders                                  |  | $                       | (18,394 | ) |      | $ | (27,775 | )    |  | $ | (37,448 | )
|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|Net loss applicable to common stockholders per sharebasic and diluted      |  | $                       | (0.37   | ) |      | $ | (0.75   | )    |  | $ | (6.09   | )
|Weighted average common shares outstandingbasic and diluted                |  |                         | 50,179  |   |      |   | 37,192  |      |  |   | 6,148   |  





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



48



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##### Table of Contents

FIBERNET TELECOM GROUP, INC.



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(in thousands, except per share amounts)



|                                                                 |  |                 |   |  |              |         |   |                                   |            |   |                      |   |    |              |  |   |                    |   |  |       |        |   |  |   |        |   |  |   |          |   |  |   |         |  
|---------------------------------------------------------------- |  | --------------- | - |  | ------------ | ------- | - | --------------------------------- | ---------- | - | -------------------- | - | -- | ------------ |  | - | ------------------ | - |  | ----- | ------ | - |  | - | ------ | - |  | - | -------- | - |  | - | ------- | -
|                                                                 |  | Preferred Stock |   |  | Common Stock |         |   | AdditionalPaid inCapitaland Other |            |   | DeferredCompensation |   |    | DeferredRent |  |   | AccumulatedDeficit |   |  | Total |       
|                                                                 |  | Shares          |   |  | Amount       |         |   | Shares                            |            |   | Amount               |   |    |              |  |   |                   
|Balance at December 31, 2001                                     |  | 100,912         |   |  | $            | 18,459  |   |                                   | 2,052,421  |   |                      | $ | 2  |              |  | $ | 295,709            |   |  | $     |       |   |  | $ |       |   |  | $ | (289,824 | ) |  | $ | 24,346  |  
|                                                                 |  |                 |   |  |              |         |   |                                   |           
|Issuance of common stock                                         |  |                |   |  |              |        |   |                                   | 1,275,071  |   |                      |   | 1  |              |  |   | 3,217              |   |  |       |       |   |  |   |       |   |  |   |         |   |  |   | 3,218   |  
|Issuance of warrants                                             |  |                |   |  |              |        |   |                                   |           |   |                      |   |   |              |  |   | 2,165              |   |  |       |       |   |  |   |       |   |  |   |         |   |  |   | 2,165   |  
|Series H preferred stock dividends                               |  | 4,022           |   |  |              | 31      |   |                                   |           |   |                      |   |   |              |  |   |                   |   |  |       |       |   |  |   |       |   |  |   |         |   |  |   | 31      |  
|Conversion of series H preferred stock                           |  | (104,575        | ) |  |              | (17,127 | ) |                                   | 3,486,048  |   |                      |   | 3  |              |  |   | 17,124             |   |  |       |       |   |  |   |       |   |  |   |         |   |  |   |        |  
|Conversion of series J preferred stock                           |  | (359            | ) |  |              | (1,363  | ) |                                   | 2,103,566  |   |                      |   | 2  |              |  |   | 1,311              |   |  |       |       |   |  |   |       |   |  |   |         |   |  |   | (50     | )
|Deemed dividend charge on conversion of series J preferred stock |  |                |   |  |              |        |   |                                   |           |   |                      |   |   |              |  |   | 5,454              |   |  |       |       |   |  |   |       |   |  |   | (5,454   | ) |  |   |        |  
|Exercise of options and warrants to purchase common stock        |  |                |   |  |              |        |   |                                   | 102,595    |   |                      |   |   |              |  |   |                   |   |  |       |       |   |  |   |       |   |  |   |         |   |  |   |        |  
|Stock compensation to employees                                  |  |                |   |  |              |        |   |                                   |           |   |                      |   |   |              |  |   | 225                |   |  |       |       |   |  |   |       |   |  |   |         |   |  |   | 225     |  
|Conversion of note payableaffiliate to common stock             |  |                |   |  |              |        |   |                                   | 300,068    |   |                      |   |   |              |  |   | 1,080              |   |  |       |       |   |  |   |       |   |  |   |         |   |  |   | 1,080   |  
|Forgiveness of note payableaffiliate                            |  |                |   |  |              |        |   |                                   |           |   |                      |   |   |              |  |   | 893                |   |  |       |       |   |  |   |       |   |  |   |         |   |  |   | 893     |  
|Conversion of notes payable to common stock                      |  |                |   |  |              |        |   |                                   | 14,666,666 |   |                      |   | 15 |              |  |   | 52,785             |   |  |       |       |   |  |   |       |   |  |   |         |   |  |   | 52,800  |  
|Conversion of notes payable to warrants                          |  |                |   |  |              |        |   |                                   |           |   |                      |   |   |              |  |   | 10,691             |   |  |       |       |   |  |   |       |   |  |   |         |   |  |   | 10,691  |  
|Conversion of subordinated note payable                          |  |                |   |  |              |        |   |                                   | 1,733,333  |   |                      |   | 2  |              |  |   | 6,238              |   |  |       |       |   |  |   |       |   |  |   |         |   |  |   | 6,240   |  
|Conversion of accrued interest to common stock                   |  |                |   |  |              |        |   |                                   | 666,667    |   |                      |   | 1  |              |  |   | 2,399              |   |  |       |       |   |  |   |       |   |  |   |         |   |  |   | 2,400   |  
|Conversion of accrued interest to warrants                       |  |                |   |  |              |        |   |                                   |           |   |                      |   |   |              |  |   | 1,944              |   |  |       |       |   |  |   |       |   |  |   |         |   |  |   | 1,944   |  
|Legal settlement                                                 |  |                |   |  |              |        |   |                                   | 19,047     |   |                      |   |   |              |  |   | 63                 |   |  |       |       |   |  |   |       |   |  |   |         |   |  |   | 63      |  
|Net loss applicable to common stockholders                       |  |                |   |  |              |        |   |                                   |           |   |                      |   |   |              |  |   |                   |   |  |       |       |   |  |   |       |   |  |   | (37,448  | ) |  |   | (37,448 | )
|                                                                 |  |                 |   |  |              |         |   |                                   |            |   |                      |   |    |              |  |   |                    |   |  |       |        |   |  |   |        |   |  |   |          |   |  |   |         |  
|Balance at December 31, 2002                                     |  |                |   |  |              |        |   |                                   | 26,405,482 |   |                      |   | 26 |              |  |   | 401,298            |   |  |       |       |   |  |   |       |   |  |   | (332,726 | ) |  |   | 68,598  |  
|                                                                 |  |                 |   |  |              |         |   |                                   |           
|Issuance of common stock                                         |  |                |   |  |              |        |   |                                   | 972,222    |   |                      |   | 1  |              |  |   | 1,190              |   |  |       |       |   |  |   |       |   |  |   |         |   |  |   | 1,191   |  
|Issuance of warrants                                             |  |                |   |  |              |        |   |                                   |           |   |                      |   |   |              |  |   | 3,465              |   |  |       |       |   |  |   |       |   |  |   |         |   |  |   | 3,465   |  
|Reprice of warrants                                              |  |                |   |  |              |        |   |                                   |           |   |                      |   |   |              |  |   | 1,963              |   |  |       |       |   |  |   |       |   |  |   |         |   |  |   | 1,963   |  
|Exercise of warrants to purchase common stock                    |  |                |   |  |              |        |   |                                   | 3,798,652  |   |                      |   | 4  |              |  |   | (4                 | ) |  |       |       |   |  |   |       |   |  |   |         |   |  |   |        |  
|Conversion of notes payable to common stock                      |  |                |   |  |              |        |   |                                   | 4,617,010  |   |                      |   | 5  |              |  |   | 16,616             |   |  |       |       |   |  |   |       |   |  |   |         |   |  |   | 16,621  |  
|Common stock issuance cost                                       |  |                |   |  |              |        |   |                                   |           |   |                      |   |   |              |  |   | (684               | ) |  |       |       |   |  |   |       |   |  |   |         |   |  |   | (684    | )
|Restricted stock grants                                          |  |                |   |  |              |        |   |                                   | 4,710,500  |   |                      |   | 5  |              |  |   | 5,318              |   |  |       | (5,318 | ) |  |   |       |   |  |   |         |   |  |   | 5       |  
|Legal settlement                                                 |  |                |   |  |              |        |   |                                   | 301,568    |   |                      |   |   |              |  |   | 1,128              |   |  |       |       |   |  |   |       |   |  |   |         |   |  |   | 1,128   |  
|Restricted stock surrendered                                     |  |                |   |  |              |        |   |                                   | (265,100   | ) |                      |   |   |              |  |   | (299               | ) |  |       | 299    |   |  |   |       |   |  |   |         |   |  |   |        |  
|Deferred compensation amortization                               |  |                |   |  |              |        |   |                                   |           |   |                      |   |   |              |  |   |                   |   |  |       | 222    |   |  |   |       |   |  |   |         |   |  |   | 222     |  
|Net loss                                                         |  |                |   |  |              |        |   |                                   |           |   |                      |   |   |              |  |   |                   |   |  |       |       |   |  |   |       |   |  |   | (27,775  | ) |  |   | (27,775 | )
|                                                                 |  |                 |   |  |              |         |   |                                   |            |   |                      |   |    |              |  |   |                    |   |  |       |        |   |  |   |        |   |  |   |          |   |  |   |         |  
|Balance at December 31, 2003                                     |  |                |   |  |              |        |   |                                   | 40,540,334 |   |                      |   | 41 |              |  |   | 429,991            |   |  |       | (4,797 | ) |  |   |       |   |  |   | (360,501 | ) |  |   | 64,734  |  
|                                                                 |  |                 |   |  |              |         |   |                                   |           
|Issuance of common stock                                         |  |                |   |  |              |        |   |                                   | 6,656,000  |   |                      |   | 7  |              |  |   | 5,716              |   |  |       |       |   |  |   |       |   |  |   |         |   |  |   | 5,723   |  
|Issuance of warrants                                             |  |                |   |  |              |        |   |                                   |           |   |                      |   |   |              |  |   | 1,711              |   |  |       |       |   |  |   |       |   |  |   |         |   |  |   | 1,711   |  
|Issuance of common stock for acquisition of Gateway Colocation   |  |                |   |  |              |        |   |                                   | 2,908,000  |   |                      |   | 3  |              |  |   | 4,563              |   |  |       |       |   |  |   |       |   |  |   |         |   |  |   | 4,566   |  
|Exercise of options and warrants to purchase common stock        |  |                |   |  |              |        |   |                                   | 627,878    |   |                      |   | 1  |              |  |   | (1                 | ) |  |       |       |   |  |   |       |   |  |   |         |   |  |   |        |  
|Issuance of common stock                                         |  |                |   |  |              |        |   |                                   |           |   |                      |   |   |              |  |   |                   |   |  |       |       |   |  |   |       |   |  |   |         |   |  |   |        |  
|Restricted stock grants                                          |  |                |   |  |              |        |   |                                   | 146,760    |   |                      |   |   |              |  |   | 244                |   |  |       | (244   | ) |  |   |       |   |  |   |         |   |  |   |        |  
|Legal settlement                                                 |  |                |   |  |              |        |   |                                   | 200,000    |   |                      |   |   |              |  |   | 322                |   |  |       |       |   |  |   |       |   |  |   |         |   |  |   | 322     |  
|Restricted stock surrendered                                     |  |                |   |  |              |        |   |                                   | (89,400    | ) |                      |   | (1 | )            |  |   | (80                | ) |  |       | 80     |   |  |   |       |   |  |   |         |   |  |   | (1      | )
|Deferred compensation amortization                               |  |                |   |  |              |        |   |                                   |           |   |                      |   |   |              |  |   |                   |   |  |       | 518    |   |  |   |       |   |  |   |         |   |  |   | 518     |  
|Warrants issued for deferred rent                                |  |                |   |  |              |        |   |                                   |           |   |                      |   |   |              |  |   | 1,963              |   |  |       |       |   |  |   | (1,963 | ) |  |   |         |   |  |   |        |  
|Deferred rent amortization                                       |  |                |   |  |              |        |   |                                   |           |   |                      |   |   |              |  |   |                   |   |  |       |       |   |  |   | 57     |   |  |   |         |   |  |   | 57      |  
|Net loss                                                         |  |                |   |  |              |        |   |                                   |           |   |                      |   |   |              |  |   |                   |   |  |       |       |   |  |   |       |   |  |   | (18,394  | ) |  |   | (18,394 | )
|                                                                 |  |                 |   |  |              |         |   |                                   |            |   |                      |   |    |              |  |   |                    |   |  |       |        |   |  |   |        |   |  |   |          |   |  |   |         |  
|Balance at December 31, 2004                                     |  |                |   |  | $            |        |   |                                   | 50,989,572 |   |                      | $ | 51 |              |  | $ | 444,429            |   |  | $     | (4,443 | ) |  | $ | (1,906 | ) |  | $ | (378,895 | ) |  | $ | 59,236  |  
|                                                                 |  |                 |   |  |              |         |   |                                   |            |   |                      |   |    |              |  |   |                    |   |  |       |        |   |  |   |        |   |  |   |          |   |  |   |         |  



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



49



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##### Table of Contents

FIBERNET TELECOM GROUP, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|----------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                          |  | Year Ended December 31, |        
|                                                                                          |  | 2004                    |         |   | 2003 |   |         | 2002 | 
|Cash flows from operating activities:                                                     |  |                         |         |   |      |   |         |      |  |   |         |  
|Net loss                                                                                  |  | $                       | (18,394 | ) |      | $ | (27,775 | )    |  | $ | (37,448 | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                         |         |   |      |   |         |      |  |   |         |  
|Depreciation and amortization                                                             |  |                         | 9,013   |   |      |   | 8,840   |      |  |   | 10,346  |  
|Preferred stock dividends                                                                 |  |                         |        |   |      |   |        |      |  |   | 44      |  
|Stock related expense for selling, general and administrative matters                     |  |                         | 518     |   |      |   | 222     |      |  |   | 225     |  
|Impairment of property, plant and equipment                                               |  |                         | 9,468   |   |      |   | 1,346   |      |  |   | 13,175  |  
|Impairment of goodwill                                                                    |  |                         | 2,309   |   |      |   | 7,509   |      |  |   |        |  
|Loss on early extinguishments of debt                                                     |  |                         |        |   |      |   | 8,951   |      |  |   | 7,859   |  
|Non-cash interest expense capitalized on notes payable                                    |  |                         |        |   |      |   | 663     |      |  |   | 5,421   |  
|Other non-cash expenses                                                                   |  |                         | 1,098   |   |      |   | 977     |      |  |   | 1,418   |  
|Change in assets and liabilities:                                                         |  |                         |         |   |      |   |         |      |  |   |         |  
|Increase in accounts receivable                                                           |  |                         | (589    | ) |      |   | (1,020  | )    |  |   | (556    | )
|Decrease (increase) in prepaid expenses                                                   |  |                         | 78      |   |      |   | 217     |      |  |   | (270    | )
|(Increase) decrease in other assets                                                       |  |                         | (939    | ) |      |   | (4      | )    |  |   | 37      |  
|Increase (decrease) in accounts payable                                                   |  |                         | 1,071   |   |      |   | (353    | )    |  |   | (2,882  | )
|(Decrease) increase in accrued expenses                                                   |  |                         | (1,010  | ) |      |   | 1,067   |      |  |   | (416    | )
|Increase (decrease) in deferred revenue                                                   |  |                         | 665     |   |      |   | 1,410   |      |  |   | (1,459  | )
|                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Cash provided by (used in) operating activities                                           |  |                         | 3,288   |   |      |   | 2,050   |      |  |   | (4,506  | )
|Cash flows from investing activities:                                                     |  |                         |         |   |      |   |         |      |  |   |         |  
|Acquisition of Gateway Colocation                                                         |  |                         | (382    | ) |      |   |        |      |  |   |        |  
|Recovery on sale of impaired assets                                                       |  |                         | 135     |   |      |   | 198     |      |  |   |        |  
|Decrease (increase) in restricted cash                                                    |  |                         | 456     |   |      |   | (2,337  | )    |  |   |        |  
|Capital expenditures                                                                      |  |                         | (3,524  | ) |      |   | (2,388  | )    |  |   | (2,453  | )
|                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Cash used in investing activities                                                         |  |                         | (3,315  | ) |      |   | (4,527  | )    |  |   | (2,453  | )
|Cash flows from financing activities:                                                     |  |                         |         |   |      |   |         |      |  |   |         |  
|Payment of financing costs of debt financings                                             |  |                         | (807    | ) |      |   | (428    | )    |  |   | (70     | )
|Repayment of notes payable                                                                |  |                         | (7,225  | ) |      |   |        |      |  |   |        |  
|Proceeds from debt financing                                                              |  |                         |        |   |      |   |        |      |  |   | 2,307   |  
|Payment of financing costs of equity financings                                           |  |                         | (520    | ) |      |   | (810    | )    |  |   | (378    | )
|Proceeds from subordinated note payable                                                   |  |                         |        |   |      |   |        |      |  |   | 2,000   |  
|Proceeds from issuance of equity securities                                               |  |                         | 8,000   |   |      |   | 3,500   |      |  |   | 3,800   |  
|Repayment of capital lease obligation                                                     |  |                         |        |   |      |   | (85     | )    |  |   | (250    | )
|                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Cash (used in) provided from financing activities                                         |  |                         | (552    | ) |      |   | 2,177   |      |  |   | 7,409   |  
|                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Net (decrease) increase in cash and cash equivalents                                      |  |                         | (579    | ) |      |   | (300    | )    |  |   | 450     |  
|Cash and cash equivalents at beginning of year                                            |  |                         | 3,488   |   |      |   | 3,788   |      |  |   | 3,338   |  
|                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents at end of year                                                  |  | $                       | 2,909   |   |      | $ | 3,488   |      |  | $ | 3,788   |  
|                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Supplemental disclosures of cash flow information:                                        |  |                         |         |   |      |   |         |      |  |   |         |  
|Interest paid                                                                             |  | $                       | 863     |   |      | $ | 563     |      |  | $ | 35      |  
|Non-cash financing activities:                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|Conversion of accrued interest into common stock                                          |  |                         |        |   |      |   |        |      |  |   | 2,000   |  
|Conversion of accrued interest into notes payable                                         |  |                         |        |   |      |   |        |      |  |   | 3,522   |  
|Conversion of notes payable into common stock                                             |  |                         |        |   |      |   | 13,382  |      |  |   | 66,000  |  
|Conversion of subordinated note payable into common stock                                 |  |                         |        |   |      |   |        |      |  |   | 2,080   |  
|Conversion of note payableaffiliate into common stock                                    |  |                         |        |   |      |   |        |      |  |   | 450     |  
|Conversion of series H preferred stock into common stock                                  |  |                         |        |   |      |   |        |      |  |   | 17,127  |  
|Conversion of series J preferred stock into common stock                                  |  |                         |        |   |      |   |        |      |  |   | 1,363   |  



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



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##### Table of Contents

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 wholesale broadband connectivity for data, voice and video transmission on its fiber optic networks in major metropolitan
areas. The Company offers an advanced high-bandwidth, fiber-optic solution to support the demand for network capacity in the intra-city market, or local loop. The Company has established its primary operations in the New York and Los Angeles
metropolitan areas.



FiberNet is a holding company that owns
all of the outstanding common stock of FiberNet Operations, Inc., 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. FiberNet Operations, Inc. owns all of the outstanding common stock of FiberNet Telecom, Inc., a Delaware corporation, and the remaining 4% of Devnet. FiberNet Telecom, Inc. owns all of the outstanding membership interests of Local Fiber,
LLC (Local Fiber), a New York limited liability company, and all of the outstanding membership interests of FiberNet Equal Access, LLC (Equal Access), also a New York limited liability company. The Company conducts its
primary business operations through its operating subsidiaries, Devnet, 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. These contracts and agreements are critical to
the Companys ability to execute its business strategy and operating plan.



The Companys operations and ability to grow may be affected by numerous factors, including the state of the telecommunications industry, the difficulty inherent in operating an early-stage company in a new and
rapidly evolving market; its history of operating losses and cash flow deficits; its limited financial resources and uncertainty as to the availability of additional capital to fund its operations on acceptable terms, if at all; its success in
maintaining carrier hotel lease agreements and license agreements with building owners and in obtaining additional agreements; the financial difficulties and instability that its customers and vendors are experiencing; the lack of growth in demand
for its services or the failure to manage the growth of its operations; the frequency of service interruptions on its networks and the scalability and reliability of its networks; the potential occurrence of a natural disaster or act of terrorism
that could impact its networks; the potential loss of key personnel, information support systems or key software licenses; the potential for litigation from stockholders, customers, vendors or other third parties; continued pricing pressure and
price competition for its services; the potential development by competitors of competing products and technologies; restrictions imposed on it as a result of its debt; and changes in the regulatory environment.



The Company believes that the completion of the transactions that constituted
its recapitalization, as discussed in Note 7, significantly enhanced its liquidity and improved its financial position. Under FiberNets current operating plan, it does not anticipate requiring any additional external sources of capital to fund
its operations in the coming year. The Company does not have any off-balance sheet financing arrangements, 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, FiberNet Operations, Inc., Devnet, FiberNet
Telecom, Inc., Equal Access 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.



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FIBERNET TELECOM GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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.



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.



Restricted Cash



Restricted cash is invested in 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. The Company has a restricted cash account used as collateral to secure the funding obligations for its outstanding letters of credit, which are in lieu of a cash security
deposit for its facilities.



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
|Network equipment             |  | 10 Years                           
|Network infrastructure        |  | 20 Years                           



Maintenance and
repairs are expensed as incurred. Long-term 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 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.



On January 1, 2002, the Company adopted Statement of Financial Accounting Standard (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144).
SFAS No. 144 replaced SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of (SFAS No. 121), and establishes accounting and reporting standards for long-lived assets to be
disposed of by sale. SFAS No. 144 requires that long-lived assets be measured at the lower of carrying amount or



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FIBERNET TELECOM GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



fair value less cost to sell. SFAS No. 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that
can be distinguished from the rest of the entity that will be eliminated from the ongoing operations of the entity in a disposal transaction. In 2003 and 2004, the Company reviewed its long-lived assets for impairment in accordance with SFAS No. 144
and determined that changes in circumstances have indicated that asset carrying values were no longer recoverable and that impairment charges were necessary. See Note 4.



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 contract 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 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.



As of December 31, 2004, 2003 and 2002 the Company
had one reciprocal agreement. The services provided and obtained through this agreement were priced at fair market value as of the date of the agreement and are included in revenues and cost of services in the accompanying consolidated statements of
operations. The Company recorded revenues from this reciprocal agreement for transport services and colocation services in the amount of approximately $0.5 million, $0.5 million and $0.8 million for the years ended December 31, 2004, 2003 and 2002,
respectively. The Company leased colocation facilities under this agreement. The total amount expensed for services rendered under the reciprocal agreement for the years ended December 31, 2004, 2003 and 2002 were approximately $0.5 million, $0.5
million and $0.8 million, respectively.



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. The Company estimates that the carrying value of its notes payable approximates fair value because they bear
interest at a variable rate.



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) and requires that goodwill and certain intangible assets resulting from business combinations no longer be amortized, but instead be
reviewed for recoverability. The Company performs its annual impairment test in December. The Company determined that there was an impairment as a result of this annual test for the years ended December, 31, 2004 and 2003. See Notes 5 and 16.



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FIBERNET TELECOM GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following summarizes the changes in goodwill for the years ended December 31, 2004 and 2003:



|                                    |  |   |        |  
|----------------------------------- |  | - | ------ | -
|Net balance as of December 31, 2002 |  | $ | 7,509  |  
|                                    |  |   |        |  
|Amortization                        |  |   |       |  
|Impairment charges (see Note 5)     |  |   | (7,509 | )
|                                    |  |   |        |  
|Net balance as of December 31, 2003 |  | $ |       |  
|                                    |  |   |        |  
|Goodwill recorded (see Note 16)     |  |   | 2,309  |  
|Amortization                        |  |   |       |  
|Impairment charges (see Note 16)    |  |   | (2,309 | )
|                                    |  |   |        |  
|Net balance as of December 31, 2004 |  | $ |       |  
|                                    |  |   |        |  



Deferred Charges



Deferred charges include the cost to access buildings and deferred financing
costs. Costs to access buildings are amortized over 15 years, which is the term of the related contracts. 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, 2004, 2003 and 2002, as they were anti-dilutive due to the fact that the Company was in a loss position for the respective periods.



On May 12, 2003, the Company completed its 1-for-30 reverse stock split
previously approved by stockholders. The earnings per share information and all share amounts as presented in the financial statements have been adjusted to reflect the reverse stock split.



Concentration of Credit Risk



The Company may have concentration of credit risk among its customer base.
The Company performs ongoing credit evaluations of its customers financial condition. As of December 31, 2004, no customer accounted over 10% of the Companys total accounts receivable, and as of December 31, 2003 one customer accounted
for 12.2% of the Companys total accounts receivable.



For
the years ended December 31, 2004 and 2003, there was no individual customer that accounted for more than 10.0% of revenue. For the year ended December 31, 2002, two customers in the aggregate accounted for 24.0% of the Companys total revenue.



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 number of the Companys customers have filed for bankruptcy or are otherwise in
financial distress. A significant change in the liquidity or financial position of any one of these customers or a further deterioration in the



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FIBERNET TELECOM GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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.



As of December 31, 2004, the Company had an allowance for doubtful accounts of $0.7 million. During the year ended December
31, 2004, the Company recorded bad debt expense of $0.1 million. During the years ended December 31, 2003 and 2002 FiberNet did not recorded bad debt expense as its evaluation of its outstanding receivables and the credit quality of its customers
indicated that recording such expense was not warranted. During the years ended December 31, 2004, 2003 and 2002, FiberNet wrote off $0.1 million, $0.3 million, and $1.7 million of this allowance, respectively.



Equity Incentive Plan



The Company accounts for stock-based employee compensation arrangements in accordance with provisions of Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25) and complies with the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation
(SFAS No. 123) as amended by SFAS No. 148. Under APB No. 25, compensation expense is based on the difference, if any, on the date of grant, between the fair value of the Companys stock and the exercise price. The Company accounts
for stock options issued to non-employees in accordance with the provisions of SFAS No. 123. The resulting expense is charged against operations ratably over the vesting period of the options.



In December 2002, the Financial Accounting Standards Board (FASB)
issued SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosurean Amendment of FASB Statement No. 123, to provide alternative methods of transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on reported results.



The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation:



|                                                                                                                             |  |                         |         |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                                             |  | Year Ended December 31, |        
|(Amounts in thousands)                                                                                                       |  | 2004                    |         |   | 2003 |   |         | 2002 | 
|Net loss applicable to common stockholders, as reported                                                                      |  | $                       | (18,394 | ) |      | $ | (27,775 | )    |  | $ | (37,448 | )
|Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects                     |  |                         |        |   |      |   |        |      |  |   | 225     |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method, net of related tax effects |  |                         | (537    | ) |      |   | (2,306  | )    |  |   | (5,826  | )
|Pro forma net loss                                                                                                           |  | $                       | (18,931 | ) |      | $ | (30,081 | )    |  | $ | (43,049 | )
|Net loss per share applicable to common stockholders:                                                                        |  |                         |         |   |      |   |         |      |  |   |         |  
|As reported: Basic and diluted                                                                                               |  | $                       | (0.37   | ) |      | $ | (0.75   | )    |  | $ | (6.09   | )
|Pro forma: Basic and diluted                                                                                                 |  | $                       | (0.38   | ) |      | $ | (0.81   | )    |  | $ | (7.00   | )



The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants in December 31, 2004, 2003 and 2002: risk-free interest rates of 4.29%, 4.18% and 3.375% respectively,
expected dividend yields of 0%, expected life of six years to expiration and expected volatility of 295%, 357% and 113% respectively.



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FIBERNET TELECOM GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



During 2004 and 2003, 0.1 million shares and 0.3 million shares of restricted stock were returned to
the Company respectively as the result of employee terminations prior to vesting. All shares of restricted stock vest on the tenth anniversary of the grant date, and the stock options vest in three equal annual installments, commencing on grant
date, subject to the terms and conditions of the Equity Incentive Plan. In accordance with FASB Interpretation (FIN) No. 44, Accounting for Certain Transactions Involving Stock Compensation (FIN No. 44), the deferred
compensation is being amortized ratably over the vesting period.



For the year ended December 31, 2004, the Company granted 0.1 million shares of restricted stock to employees with a weighted average price of $1.66 per share and 13,640 stock options with a weighted average exercise price of $1.42 per
share.



Accounting for Income Taxes



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



Accounting for Derivative Instruments



The Company accounts for derivative instruments in
accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No.133), as amended. SFAS No. 133 establishes standards of accounting and reporting for derivative instruments and hedging
activities, and requires that all derivatives be recognized on the balance sheet at fair value. Changes in the fair value of derivatives that do not meet the hedge accounting criteria are reported in earnings. As of December 31, 2004 and 2003, the
Company did not have any derivative instruments.



Reclassifications



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



Segment Reporting



The Company is a single
segment operating company providing telecommunications services.



Revenues were generated by providing on-net transport and off-net transport, colocation and communications access management services to its customers. The Company recognized $19.4 million, $17.6 million and $15.8 million in on-net
transport service revenues in 2004, 2003 and 2002, respectively. Off-net transport service revenues were $3.7 million, $0.5 million, and none in 2004, 2003 and 2002, respectively. Revenues from colocation and other services were $9.1 million, $6.0
million and $5.9 million in 2004, 2003 and 2002, respectively, and revenues from communications access management services were $2.4 million, $2.5 million and $3.6 million in 2004, 2003 and 2002, respectively.



Recent Accounting Pronouncements



In January 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, (FIN 46), an interpretation of Accounting Research Bulletin No. 51, Consolidated Financial



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FIBERNET TELECOM GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Statements. FIN 46 establishes accounting guidance for consolidation of variable interest entities that function to support the activities of the
primary beneficiary. In December 2003, the FASB revised FIN 46 and issued FIN 46 (revised December 2003) (FIN 46R). In addition to conforming to previously issued FASB Staff Positions, FIN 46R deferred the implementation date for certain
variable interest entities. This revised interpretation is effective for all entities no later than the end of the first reporting period that ends after March 15, 2004. The Company does not have any investments in, or contractual relationship or
other business relationship with a variable interest entity and therefore the adoption of this interpretation did not have any impact on its consolidated financial position or results of operations.



In December 2004, the FASB issued SFAS No. 153, Exchanges of
Nonmonetary Assets, which eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153 will be
effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not believe the adoption of SFAS No. 153 will have a material impact on its consolidated financial statements.



In December 2004, the FASB issued SFAS No. 123(R), Share-Based
Payment, which establishes standards for transactions in which an entity exchanges its equity instruments for goods or services. This standard requires a public entity to measure the cost of employee services received in exchange for an award
of equity instruments based on the grant-date fair value of the award. This eliminates the exception to account for such awards using the intrinsic method previously allowable under APB Opinion No. 25. SFAS No. 123(R) will be effective for interim
or annual reporting periods beginning on or after June 15, 2005. The Company is currently evaluating the impact of the adoption of SFAS No. 123(R) will have on its consolidated financial statements.



3. PROPERTY, PLANT AND EQUIPMENT



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



|                                     |  |                  |         |   |                  |   |         |  
|------------------------------------ |  | ---------------- | ------- | - | ---------------- | - | ------- | -
|                                     |  | December 31,2004 |         |   | December 31,2003 |  
|Computer software                    |  | $                | 229     |   |                  | $ | 200     |  
|Computer equipment                   |  |                  | 418     |   |                  |   | 256     |  
|Leasehold improvements               |  |                  | 30      |   |                  |   | 30      |  
|Office equipment and furniture       |  |                  | 146     |   |                  |   | 146     |  
|Network equipment and infrastructure |  |                  | 106,675 |   |                  |   | 113,858 |  
|                                     |  |                  |         |   |                  |   |         |  
|Total                                |  |                  | 107,498 |   |                  |   | 114,490 |  
|Accumulated depreciation             |  |                  | (33,375 | ) |                  |   | (27,532 | )
|                                     |  |                  |         |   |                  |   |         |  
|Property, plant and equipment, net   |  | $                | 74,123  |   |                  | $ | 86,958  |  
|                                     |  |                  |         |   |                  |   |         |  



Depreciation expense
on property, plant and equipment was $8.9 million, $8.8 million and $9.6 million for the years ended December 31, 2004, 2003 and 2002, respectively.



4. 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 2002, and 2003, the Company determined that its forecasts for revenues for certain of its facilities would not be achieved due to significant
adverse changes in the business climate. The Company further determined



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FIBERNET TELECOM GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



that the dramatic change in the operating environment for the telecommunications industry resulted in a significantly less demand and in reduced pricing for
its services due to the highly competitive marketplace. The Company believes that the decrease in demand was a result of the significant number of business failures of telecommunications companies that were existing or potential customers, the
failure of certain bandwidth-intensive networking applications to develop, and the overall economic recession. The Company also determined that a rebound in demand for its services would not occur in the near term. As a result, the Company revised
its business plan and conducted extensive reviews of its assets and operations. The revisions to the business plan primarily included reductions in forecasts of revenues and capital expenditures. The projected amounts of certain cost of services and
overhead expenses were reduced as well to reflect the decrease in its expected business activity.



As a result of the update of its forecast and cash flow analysis performed during 2002 as mentioned above, the Company recorded an asset impairment of
approximately $12.7 million, based on the amount by which the carrying amount of these assets exceeded their fair value. Also during 2002, the Company recorded a write-off of property, plant and equipment of $0.7 million, due to the termination of
several property leases and license agreements for network facilities. There was no cost to abandon these assets, nor did the Company expect to receive any proceeds or other consideration from the abandonment of these assets.



During 2003 the Company determined that the negative trends of lower demand
and reduced pricing still impacted the industry and the Companys business in particular. As a result, the Company updated its forecasts and recorded an asset impairment of approximately $1.5 million, based on the amount by which the carrying
amount of these assets exceeded their fair value.



During 2004
the Company settled a dispute with a dark fiber provider that had filed for bankruptcy, which resulted in the impairment of previously purchased dark fiber miles. The Company agreed to concede its claim to 364 unutilized dark fiber miles, or 36.4%
of the total dark fiber acquired from this provider in December 1999 for $34.8 million. The Company also agreed to pay $750,000 to settle a trade payable dispute with this provider, for which the Company had accrued $1.1 million as a liability. As a
result, the Company recorded an impairment of $9.5 million due to the write-off of $12.7 million of dark fiber included in network infrastructure, $2.8 million of related accumulated depreciation and a $0.4 million reduction in accrued liabilities
from this settlement for charges for network infrastructure that were previously capitalized and impaired.



In addition during 2004 the company did not renew two of its off-net property leases. As a result, the Company abandoned the assets associated with these
two properties and recorded an impairment of $0.1 million due to the write-off of $0.2 million of network infrastructure and $0.1 million of related accumulated depreciation.



The Company has recovered approximately $0.1 million, $0.2 million, and $0.3 million from the sale of assets previously
written off as impaired during the years ended December 31, 2004, 2003 and 2002, respectively. The proceeds were recorded as a recovery of the impairment previously recorded.



5. IMPAIRMENT OF GOODWILL



During the fourth quarter of 2003, the Company performed its annual goodwill impairment test and determined that there was an impairment of goodwill. The
Company determined its net assets as of December 31, 2003 were in excess of the fair value of equity based on the Companys market capitalization, which indicated there was an impairment. As such, the Company recorded a charge of $7.5 million
as a result of this impairment.



During 2004, the
Companys settlement agreement with a dark fiber provider required the Company to record an impairment to property, plant and equipment, as noted in Note 4. Per SFAS No. 144, Impairment and



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FIBERNET TELECOM GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Disposal of Long Lived Assets, this asset impairment required the Company to perform a test for impairment of goodwill under FASB Statement No. 142,
Goodwill and Other Intangible Assets. The Company performed the test for recoverability of goodwill, and determined that the goodwill from the acquisition of Gateway Colocation discussed in Note 16 was impaired and recorded a $2.3
million impairment.



6. CREDIT FACILITY



As of January 1, 2002, the Company maintained a $105.0 million senior
secured credit facility (the Credit Facility) with Deutsche Bank AG New York Branch, Deutsche Bank Securities Inc., Toronto Dominion (Texas), Inc. and Nortel Networks Inc. In addition to the initial lenders, First Union National Bank,
Bank One Capital Corporation and IBM Credit Corporation were lenders under the Credit Facility. The Credit Facility is due on April 11, 2007, and is secured by the Companys assets, except for the assets pledged in connection with its capital
lease obligations, which were terminated in 2003, and contains certain restrictive covenants customary for a financing of this type. In connection with the initial placement of the Credit Facility and subsequent amendments, the lenders owned
approximately 94,000 warrants to purchase common stock as of January 1, 2002. The warrants expire on April 11, 2005 and have an exercise price of $15.00.



As of December 31, 2004 and 2003, the outstanding balances under the Credit Facility were $15.1 million and $22.4 million, respectively. These amounts are
included in notes payable in the accompanying consolidated balance sheets net of an original issue discount of $1.6 million and $2.3 million at December 31, 2004 and 2003, respectively. These discounts represent the fair value of the warrants issued
to the lenders in connection with the Credit Facility. In addition, as of December 31, 2004, the Company had $4.7 million of available borrowing capacity and $0.8 million of availability to issue letters of credit under its credit facility, again
subject to compliance with the terms of the credit agreement.



As of December 31, 2004, the weighted average interest rate on its outstanding borrowings under the facility was 5.21%. There were no events of default under its credit agreement. As of such date, the three remaining lenders under the
Companys credit facility owned approximately 22% of the outstanding shares of the Companys common stock, assuming the exercise of 972,463 outstanding warrants to purchase common stock at an exercise price of $3.60 per share with an
expiration of October 30, 2007.



7. RECAPITALIZATION TRANSACTIONS



On January 10, 2003, the Company completed certain
transactions with the lenders under its Credit Facility. Pursuant to the terms of three debt exchange agreements between the Company and each of Bank One, N.A., Nortel Networks Inc. and TD Securities (USA) Inc., the Company has issued 4,617,010
shares of its common stock to these three lenders at a price of $3.60 per share, in satisfaction of approximately $13.4 million of indebtedness, representing all of the outstanding principal indebtedness and accrued interest owing to these departing
lenders under the Companys credit agreement.



The Company
also entered into a common stock purchase agreement, dated as of January 10, 2003, with certain investors, pursuant to which the Company issued to the investors in a private offering an aggregate of 972,222 shares of common stock for a price of
$3.60 per share, for an aggregate cash consideration of $3.5 million. Pursuant to the terms of the investor purchase agreement, the Company also issued to such investors warrants to purchase an additional 1,895,659 shares of common stock at an
exercise price of $3.60 per share with a term of five years. The Company recorded a $0.7 million charge to additional paid-in-capital which represented the costs incurred to complete this offering. Concurrently with the transactions described above,
the investors also purchased 9,820,061 shares of common stock from the departing lenders in a privately negotiated transaction for an aggregate cash consideration of $9.0 million.



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FIBERNET TELECOM GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In connection with the investor purchase agreement, the Company entered into a registration rights
agreement, dated as of January 10, 2003, with the investors which required the Company to file a resale registration statement with the Securities and Exchange Commission with respect to the registration of all of the shares of common stock issued
under the investor purchase agreement and the shares that the investors purchased from the departing lenders. This registration statement was declared effective on February 20, 2003.



In connection with the transactions contemplated by the debt exchange agreements, the Company and the lenders executed a
ninth amendment to the credit agreement, pursuant to which, among other things, the rights and obligations of the departing lenders under the Credit Facility terminated, subject to standard reinstatement and survival provisions. As a condition to
the lenders entering into this amendment, the Company agreed to reduce the exercise price of certain warrants previously issued to and held by the lenders to purchase approximately 2,544,974 shares of common stock from $3.60 per share to $0.03 per
share. All of the repriced warrants were immediately exercised by the lenders. In addition pursuant to a security agreement and a securities account control agreement, the Company agreed to deposit approximately $2.3 million in a restricted account
as cash collateral to secure the assumption by Deutsche Bank AG New York Branch of the departing lenders funding obligations for the Companys outstanding letters of credit, which totaled approximately $6.1 million.



The Company evaluated the above transactions under the guidance of FTB No.
80-1, Early Extinguishment of Debt through Exchange for Common or Preferred Stock. During January 2003, the Company recorded a charge of $9.7 million related to the early extinguishment of debt for the difference between the net carrying
amount of debt that was extinguished and the reacquisition price represented by the total fair market value of the common stock issued and the fair market value of the warrants that were repriced and exercised. The fair value given in exchange for
$13.4 million in long term debt was 4.6 million shares of common stock with a fair market value of $3.60 per share on the date of issuance, the issuance of 1.9 million warrants with an exercise price of $3.60 per share with terms between one and
five years, which $2.3 million of proceeds were allocated to them. In addition, the Company repriced 3.0 million existing warrants from $3.60 to $0.03 valued at $2.0 million using the Black-Scholes option pricing model on the date of issuance. Also
included in this loss is $1.0 million in fees associated with the consummation of the recapitalization. As this portion of principal extinguished represented approximately 38.1% of the outstanding balance, the Company wrote-off the same percentage
of deferred financing charges and original issue discount of $0.9 million and $1.8 million, respectively, which is also included in its calculation of loss on early extinguishment of debt. The Company also recorded certain non-recurring expenses
incurred in connection with the recapitalization transactions. These expenses included compensation to financial advisors in the form of a cash fee of approximately $0.8 million and the issuance of 0.3 million warrants with an exercise price of
$0.03 and with a term of five years valued at $1.2 million using the Black-Scholes option pricing model on the date of issuance.



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, 2004, 2003 and 2002 was approximately $8.8 million, $7.2 million, and $7.9 million, respectively.



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FIBERNET TELECOM GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



|                                                    |  |                                       |        |      |   |        |  |      |        |      |   |       |  |            |       |  |   |       |  |   |       
|--------------------------------------------------- |  | ------------------------------------- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ----- |  | ---------- | ----- |  | - | ----- |  | - | ------
|                                                    |  | Payments Due by Period (in thousands)
|Contractual Obligation                              |  | Total                                 |        | 2005 |   | 2006   |  | 2007 |        | 2008 |   | 2009  |  | Thereafter
|Mandatory Repayments and Reductions of Indebtedness |  | $                                     | 15,136 |      | $ | 6,182  |  | $    | 8,265  |      | $ | 689   |  | $          |      |  | $ |      |  | $ |      
|Operating Leases(1)                                 |  |                                       | 76,728 |      |   | 9,672  |  |      | 7,674  |      |   | 7,229 |  |            | 7,012 |  |   | 6,915 |  |   | 38,226
|                                                    |  |                                       |        |      |   |        |  |      |        |      |   |       |  |            |       |  |   |       |  |   |       
|Total Contractual Obligations                       |  | $                                     | 91,864 |      | $ | 15,854 |  | $    | 15,939 |      | $ | 7,918 |  | $          | 7,012 |  | $ | 6,915 |  | $ | 38,226
|                                                    |  |                                       |        |      |   |        |  |      |        |      |   |       |  |            |       |  |   |       |  |   |       

---

|(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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company has $4.8 million and $6.1 million in outstanding letters of credit as of December 31, 2004 and December 31, 2003 respectively.



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.



On March 17, 2003, the Company entered into an agreement to terminate all of its capital lease obligations for a payment of $85,000. This termination of
its capital lease obligations resulted in a gain on early extinguishment of debt of approximately $0.8 million, recorded in the three months ended March 31, 2003. This amount partially offset the loss on early extinguishments of debt, discussed in
Note 7.



9. STOCK OPTIONS



In December 1999, the Company adopted an employee equity participation
program (the 1999 Stock Option Plan) covering 150,000 shares of common stock of the Company to advance the growth and success of FiberNet by enabling employees, directors and consultants to acquire a proprietary interest in the Company.
The Board of Directors administered the 1999 Stock Option Plan. All employees were eligible to receive awards under the 1999 Stock Option Plan, at the Boards discretion. Options granted pursuant to the 1999 Stock Option Plan (i) are either
nonqualified options and/or incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, (ii) have a term of ten years and (iii) typically vest on an annual basis over three years. The Companys
previous Employee Equity Participation Program was terminated during 1999.



On May 23, 2000, FiberNets board of directors approved, and on July 27, 2000 the Companys stockholders ratified, the adoption of an equity incentive plan (the Equity Incentive Plan), which
amends and restates the Companys 1999 Stock Option Plan, covering 333,333 shares of common stock of the Company. On June 5, 2001, the Companys stockholders ratified an increase in the number of shares available under the Equity Incentive
Plan to 421,467. The Equity Incentive Plan provides for the grant of incentive stock options, non-qualified stock options and other performance and non-performance based equity awards, including restricted stock, performance awards, stock
appreciation rights, or SARs, and other types of awards based on the Companys common stock. During the fiscal year ended December 31, 2004, the Company granted approximately 13,640 options under the Equity Incentive Plan, at an average
exercise price of approximately $1.42 per share, and the stock options vest in three equal annual installments upon grant date.



In a definitive Information Statement filed on April 17, 2003, a majority of the Companys stockholders approved the amendment and restatement of the
Companys Equity Incentive Plan (the Plan) to, among other



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FIBERNET TELECOM GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



things (i) increase the number of shares available for awards under the Plan to 5,500,000, (ii) eliminate a provision that limited awards of restricted stock
to 10% of the shares available for issuance under the Plan, and (iii) increase to 3,333,333 the maximum number of shares of common stock subject to awards that may be granted to an individual in any given fiscal year. The Information Statement
became effective on May 7, 2003.



Transactions during the years
ended December 31, 2004, 2003 and 2002 involving stock options are summarized as follows:



|                                                   |  |                 |   |      |                             |       |                 |          |   |                             |   |                 |  |         |                             |  |   |       
|-------------------------------------------------- |  | --------------- | - | ---- | --------------------------- | ----- | --------------- | -------- | - | --------------------------- | - | --------------- |  | ------- | --------------------------- |  | - | ------
|                                                   |  | 2004            |   | 2003 |                             | 2002 
|                                                   |  | Number ofShares |   |      | AverageOptionPrice PerShare |       | Number ofShares |          |   | AverageOptionPrice PerShare |   | Number ofShares |  |         | AverageOptionPrice PerShare
|Options outstanding at the beginning of the period |  | 721,714         |   |      | $                           | 33.48 |                 | 449,108  |   |                             | $ | 81.30           |  | 505,095 |                             |  | $ | 90.00 
|Granted                                            |  | 13,640          |   |      |                             | 1.42  |                 | 408,500  |   |                             |   | 1.13            |  | 3,699   |                             |  |   | 4.61  
|Exercised                                          |  |                |   |      |                             |      |                 |         |   |                             |   |                |  |        |                             |  |   |      
|Terminated                                         |  | (12,478         | ) |      |                             | 37.02 |                 | (135,894 | ) |                             |   | 92.22           |  | (59,686 | )                           |  |   | 151.20
|                                                   |  |                 |   |      |                             |       |                 |          |   |                             |   |                 |  |         |                             |  |   |       
|Options outstanding at the end of the period       |  | 722,876         |   |      |                             | 32.50 |                 | 721,714  |   |                             |   | 33.48           |  | 449,108 |                             |  |   | 81.30 
|                                                   |  |                 |   |      |                             |       |                 |          |   |                             |   |                 |  |         |                             |  |   |       
|Options exercisable at the end of the period       |  | 460,470         |   |      |                             | 50.36 |                 | 299,943  |   |                             |   | 77.68           |  | 325,468 |                             |  |   | 96.60 
|Weighted average fair value of options granted     |  |                 |   |      | $                           | 1.42  |                 |          |   |                             | $ | 1.13            |  |         |                             |  | $ | 10.80 



The following table
summarizes information about stock options outstanding as of December 31, 2004



|                        |  |                             |  |                                           |  |                                 |        |                            |         |                                |     |                                 |   |       
|----------------------- |  | --------------------------- |  | ----------------------------------------- |  | ------------------------------- | ------ | -------------------------- | ------- | ------------------------------ | --- | ------------------------------- | - | ------
|                        |  | Options Outstanding         |  | Options Exercisable                      
|Range of Exercise Price |  | Outstandingas of 12/31/2004 |  | Weighted-AverageRemainingContractual Life |  | Weighted-Average Exercise Price |        | Exercisableas of12/31/2004 |         | Weighted-AverageRemaining Life |     | Weighted-Average Exercise Price
|$0.00-$1.13             |  | 386,741                     |  | 8.6                                       |  | $                               | 1.14   |                            | 124,628 |                                | 8.6 |                                 | $ | 1.13  
|$1.14-$11.10            |  | 157,111                     |  | 7.9                                       |  | $                               | 9.60   |                            | 156,819 |                                | 7.9 |                                 | $ | 9.60  
|$11.11-$90.00           |  | 88,570                      |  | 4.5                                       |  | $                               | 48.69  |                            | 88,570  |                                | 4.5 |                                 | $ | 48.69 
|$90.01-$605.09          |  | 90,454                      |  | 5.5                                       |  | $                               | 190.49 |                            | 90,453  |                                | 5.4 |                                 | $ | 190.49
|                        |  |                             |  |                                           |  |                                 |        |                            |         |                                |     |                                 |   |       
|Total                   |  | 722,876                     |  | 7.6                                       |  | $                               | 32.50  |                            | 460,470 |                                | 7.0 |                                 | $ | 50.36 
|                        |  |                             |  |                                           |  |                                 |        |                            |         |                                |     |                                 |   |       



During 2004 and 2003,
the Company issued 0.1 million and 4.7 million shares, respectively, of restricted stock to employees and directors under its Equity Incentive Plan. All shares of restricted stock vest on the tenth anniversary of the grant date, subject to the terms
and conditions of the Equity Incentive Plan. The Company records deferred compensation for issuance of restricted stock, which is amortized ratably over the vesting period. As such the Company recorded compensation expense to employees of
approximately $0.5 and $0.2 million for 2004 and 2003, respectively. During 2004 and 2003, 0.1 million and 0.3 million shares, respectively, were returned to the Company as the result of employee terminations prior to vesting.



10. 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, 2004, the Company had outstanding warrants exercisable into approximately 8.8 million shares of common stock at
exercise prices ranging from $0.01 to $16.50 per share.



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FIBERNET TELECOM GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



On June 27, 2003, the Company commenced its previously approved exchange offer for its outstanding
warrants. Holders of certain outstanding warrants were given the opportunity to exchange their currently outstanding warrants for shares of the Companys common stock as if the exercise price of their warrants is $0.001 per share if such
warrants were exercised in full on a cashless basis. The offer was implemented to, among other things, satisfy certain of its obligations undertaken with respect to its recapitalization transactions, which occurred in October 2002 and January 2003.
The offer expired on August 29, 2003. The warrants issued in connection with the recapitalization transactions completed in October 2002 and January 2003 did not participate in the offer to exchange. In connection with this offer, the Company
exchanged 695,828 warrants for 695,147 shares of common stock.



11. RELATED
PARTY TRANSACTIONS



As a result of its restructuring the
Companys lenders, Deutsche Bank AG New York Branch, Wachovia Investors, Inc., and IBM Credit LLC, 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. An affiliate of Wachovia Investors, Inc. provides stock transfer agent services and stock option plan administration services to the Company. The Company pays customary fees for these services.



Pursuant to the terms of a consulting agreement dated June 12, 2003, the
Company paid a total of $0.1 million in consulting fees to Richard Sayers during each year ended December 31, 2004 and 2003. Mr. Sayers has been a member of the Companys board of directors since 1999.



The Company capitalized in property, plant and equipment amounts paid for
services related to building the Companys network from Nortel, a shareholder, of approximately $0.7 million, $0.8 million and $0.1 million during 2004, 2003 and 2002, respectively. As of December 31, 2004, the Company had approximately $0.1 in
accounts payables to Nortel. During 2003, the Company had a trade payable to Nortel for $31,000. During 2002 the Company repaid approximately $1.1 million of the note, and approximately $0.9 million was forgiven and recorded as an additional capital
contribution to the Company. On October 30, 2002, as a result of the recapitalization discussed in Note 7, the remaining portion of this note was converted into common stock.



12. INCOME TAXES



The Company accounts for income taxes in accordance with the provisions of SFAS 109, Accounting For Income Taxes. During 2004, 2003 and 2002
the Company did not record a current or deferred federal income tax provision because the Company had losses for federal income tax purposes and it does not expect to realize the benefits of the net operating tax losses generated in those years.



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, 2004, 2003 and 2002 follows (dollars in thousands):



|                                                       |  |                         |        |   |      |   |        |      |  |   |         |  
|------------------------------------------------------ |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                                       |  | Year Ended December 31, |       
|                                                       |  | 2004                    |        |   | 2003 |   |        | 2002 | 
|Computed tax at federal statutory rate                 |  | $                       | (6,254 | ) |      | $ | (9,444 | )    |  | $ | (11,075 | )
|State and local tax, net of federal income tax benefit |  |                         | (607   | ) |      |   | (917   | )    |  |   | (1,028  | )
|Other                                                  |  |                         | (592   | ) |      |   | 1,205  |      |  |   | 9       |  
|Change in valuation allowance                          |  |                         | 7,453  |   |      |   | 9,156  |      |  |   | 12,094  |  
|                                                       |  |                         |        |   |      |   |        |      |  |   |         |  
|                                                       |  | $                       |       |   |      | $ |       |      |  | $ |        |  
|                                                       |  |                         |        |   |      |   |        |      |  |   |         |  



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FIBERNET TELECOM GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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, 2004 and 2003, consist of the following (dollars in thousands):



|                                                             |  |                         |         |   |      |   |         |  
|------------------------------------------------------------ |  | ----------------------- | ------- | - | ---- | - | ------- | -
|                                                             |  | Year Ended December 31, |        
|                                                             |  | 2004                    |         |   | 2003 |  
|Deferred tax assets/(liabilities):                           |  |                         |         |   |      |   |         |  
|Deferred expenses                                            |  | $                       | 23      |   |      | $ |        |  
|Deferred rent                                                |  |                         | 189     |   |      |   |        |  
|Capital loss                                                 |  |                         | 56      |   |      |   | 56      |  
|Deferred revenue                                             |  |                         | 1,216   |   |      |   |        |  
|Restructuring charges                                        |  |                         | 637     |   |      |   | 637     |  
|Legal expense                                                |  |                         |        |   |      |   | 185     |  
|Stock options                                                |  |                         | 4,425   |   |      |   | 4,231   |  
|Depreciation and impairment of property, plant and equipment |  |                         | (5,210  | ) |      |   | (6,165  | )
|Goodwill                                                     |  |                         | 6,756   |   |      |   | 7,416   |  
|Net operating loss                                           |  |                         | 71,232  |   |      |   | 65,720  |  
|Section 481 adjustment                                       |  |                         |        |   |      |   | (199    | )
|Bad debts                                                    |  |                         | 279     |   |      |   | 269     |  
|Valuation allowance                                          |  |                         | (79,603 | ) |      |   | (72,150 | )
|                                                             |  |                         |         |   |      |   |         |  
|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 year ended December 31, 2004 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 taxable income 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, 2004,
the Company had net operating loss carryforwards for federal income tax purposes of approximately $190 million. These tax loss carryforwards begin expiring in 2012. In addition, the tax net operating losses are subject to limitation on future
utilization under Section 382 of the Internal Revenue Code of 1986. Section 382 imposes limitations on the availability of a Companys net operating losses after a more than 50 percentage point ownership change occurs, generally, with respect
to a companys stock. It was determined that such an ownership change(s) occurred during the year ended December 31, 2002. The amount of the Companys net operating losses incurred prior to the ownership change is limited (the Loss
Limitation) based on the value of the Company on the date of the ownership change. The annual Loss Limitation is uncertain since it is dependent upon the ultimate determination of the value of the Company on the date of ownership change and
the implementation of certain tax strategies. It is estimated that the effect of Section 382 will reduce the amount of net operating loss which is available to offset future taxable income to approximately $500,000 per year.



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



As of December 31, 2003, the net balance of goodwill of $7.5 million related
to the acquisition of an exclusive right of use of dark fiber for 20 years in multiple markets from Metromedia Fiber Network Services, Inc. was written off as impaired according to SFAS No.142. See Note 5.



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FIBERNET TELECOM GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



|                                            |  |                  |        |                 |   |         |                   |  |   |                  |   |  |   |        |  
|------------------------------------------- |  | ---------------- | ------ | --------------- | - | ------- | ----------------- |  | - | ---------------- | - |  | - | ------ | -
|                                            |  | March 31,2004(a) |        | June 30,2004(b) |   |         | September 30,2004 |  |   | December 31,2004 |  
|Revenues                                    |  | $                | 10,290 |                 | $ | 7,940   |                   |  | $ | 8,149            |   |  | $ | 8,200  |  
|Net Income/(Loss from operations)           |  |                  | 1,170  |                 |   | (13,775 | )                 |  |   | (1,849           | ) |  |   | (2,037 | )
|Net Income (loss)                           |  |                  | 652    |                 |   | (14,261 | )                 |  |   | (2,293           | ) |  |   | (2,492 | )
|Net income (loss) per sharebasic           |  | $                | 0.01   |                 | $ | (0.28   | )                 |  | $ | (0.04            | ) |  | $ | (.05   | )
|Weighted average shares outstandingbasic   |  |                  | 47,618 |                 |   | 51,063  |                   |  |   | 51,019           |   |  |   | 50,997 |  
|Net income (loss) per sharediluted         |  | $                | 0.01   |                 | $ | (0.28   | )                 |  | $ | (0.04            | ) |  | $ | (0.05  | )
|Weighted average shares outstandingdiluted |  |                  | 47,644 |                 |   | 51,063  |                   |  |   | 51,019           |   |  |   | 50,997 |  



|                                            |  |                  |         |   |              |   |        |                   |  |   |                     |   |  |   |         |  
|------------------------------------------- |  | ---------------- | ------- | - | ------------ | - | ------ | ----------------- |  | - | ------------------- | - |  | - | ------- | -
|                                            |  | March 31,2003(c) |         |   | June 30,2003 |   |        | September 30,2003 |  |   | December 31,2003(d) |  
|Revenues                                    |  | $                | 6,377   |   |              | $ | 6,451  |                   |  | $ | 6,680               |   |  | $ | 7,097   |  
|Net Income/(Loss from operations)           |  |                  | (1,600  | ) |              |   | (1,447 | )                 |  |   | (1,570              | ) |  |   | (11,911 | )
|Net Income (loss)                           |  |                  | (11,176 | ) |              |   | (1,990 | )                 |  |   | (2,112              | ) |  |   | (12,497 | )
|Net income (loss) per sharebasic           |  | $                | (0.33   | ) |              | $ | (0.06  | )                 |  | $ | (0.05               | ) |  | $ | (0.31   | )
|Weighted average shares outstandingbasic   |  |                  | 34,119  |   |              |   | 35,217 |                   |  |   | 38,663              |   |  |   | 40,680  |  
|Net income (loss) per sharediluted         |  | $                | (0.33   | ) |              | $ | (0.06  | )                 |  | $ | (0.05               | ) |  | $ | (0.31   | )
|Weighted average shares outstandingdiluted |  |                  | 34,119  |   |              |   | 35,217 |                   |  |   | 38,663              |   |  |   | 40,680  |  

---

|(a) | The Company prevailed in an arbitration proceeding regarding a breach of contract. The Company was recorded revenues of approximately $2.7 million, and approximately $0.3 million
for the reimbursement of legal fees. See Note 15.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | The Company recorded an impairment of $9.5 million due to settlement with a dark fiber provider. See Note 4.
|--- | ------------------------------------------------------------------------------------------------------------

|(c) | The Company recorded a charge of $9.0 million related to an early extinguishment of debt related to the restructuring of its Credit Facility. See Note 7.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) | The Company recorded a $7.5 million charge for the impairment of goodwill. The Company recorded a $1.5 million charge for the impairment of certain long-lived assets. See Note 5.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



15. LEGAL SETTLEMENT EXPENSE



In February 2003, the Company settled other certain litigation matters by
issuing approximately 43,267 shares of common stock, 243,400 warrants to purchase common stock with an exercise price of $0.03 per share and a term of five years, which were exercised immediately, and 166,666 warrants to purchase common stock with
an exercise price of $3.60 per share and a term of five years. The Company also repriced 16,667 of existing warrants, which were exercised immediately, to purchase common stock from exercise prices of $15.00 and $20.10 per share to $0.03 per share.
These warrants also have a term of five years. FiberNet recorded a $0.6 million expense in selling, general and administration for the period ending December 31, 2002, as a result of the litigation matters settled in December 2002 and February 2003.



In February 2004, the Company settled a threatened litigation
matter by issuing 200,000 shares of common stock, and a one-time cash payment of $0.3 million. As a result of the settlement of this outstanding litigation matter, FiberNet recorded a $0.5 million expense in selling, general and administration for
the period ending December 31, 2003. A portion of this settlement was covered by insurance, and the Company recorded an outstanding receivable of approximately $0.2 million related to the insurance coverage for this claim.



On March 10, 2004, the Company was notified that it has prevailed in an
arbitration proceeding regarding a breach of contract. The Company was awarded approximately $2.7 million. Of the total award payment, $2.4 million related to payment for services previously provided and earned, and the Company recognized this
amount



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FIBERNET TELECOM GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



as revenues in 2004. The remaining $0.3 million was for the reimbursement of expenses incurred in connection with the proceeding. The Company recorded this
reimbursement as a reversal of previously accrued expenses included in selling, general and administrative expenses in 2003. Also in connection with this arbitration award, the Company recognized an additional $0.3 million in revenues that were
previously deferred. The Company did not recognize revenues related to this arbitration proceeding or the disputed contract in prior periods as the collectability of amounts due under the contract was in doubt.



16. 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. Gateway Colocation operates a 49,000 square foot communications hub and colocation facility located at 165 Halsey Street in Newark, New Jersey. The transaction was structured
as an acquisition of assets, and the purchase price paid at closing consisted of 2.9 million shares of the Companys common stock with a fair value of $4.8 million on the closing date and approximately $432,000 (including acquisition costs of
approximately $262,000) in cash. The purchase agreement includes an earn-out payment based upon the achievement of certain financial objectives with respect to the revenues generated by the facility. More specifically, the
earn-out payment will be based on the gross revenues, on an annualized basis, for a particular month designated by Gateway Colocation during the twenty-four month period immediately subsequent to closing. The earn-out
payment, if payable, will be paid in shares of the Companys common stock. However, the issuance of such additional shares, in the aggregate with the shares of common stock issued at closing, will not exceed 19.9% of the issued and outstanding
shares of common stock of the Company as of the closing date without first receiving stockholder approval. FiberNet has agreed to file with the Securities and Exchange Commission a registration statement covering the resale of the shares issued at
closing, and has also agreed to file a registration statement with respect to the resale of shares issued, if any, pursuant to the terms of the earn-out provision. In connection with the closing of the acquisition, Oskar Brecher, a
founder of Gateway Colocation, has been appointed to the board of directors of the Company.



The acquisition was accounted for under the purchase method of accounting. The assets acquired were recorded at their estimated fair values as determined by the Company based on information currently available and on
current assumptions about future operations. Pro forma financial statements were not presented as the acquisition was not deemed significant.



The Company recorded $2.3 million of goodwill at the time of this acquisition. A summary of the allocation of the total transaction consideration is as follows (in
thousands):



|                                |  |   |      
|------------------------------- |  | - | -----
|Total Transaction Consideration |  | $ | 4,972
|Less assets acquired:           |  |   |      
|Property, plant and equipment   |  |   | 2,370
|Other intangible assets         |  |   | 486  
|Other assets                    |  |   | 334  
|Plus liabilities assumed:       |  |   |      
|Accrued expenses                |  |   | 198  
|Deferred revenues               |  |   | 329  
|                                |  |   |      
|Goodwill                        |  | $ | 2,309
|                                |  |   |      



In June 2004, the Companys
settlement agreement with a dark fiber provider required it to record an impairment to property, plant and equipment. Per SFAS No. 144, Impairment and Disposal of Long Lived Assets, this asset impairment required the Company to perform a
test for impairment of goodwill under FASB Statement No. 142,



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FIBERNET TELECOM GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Goodwill and Other Intangible Assets. As such, the Company performed a test for recoverability of goodwill and determined that the goodwill from
the acquisition of Gateway Colocation was impaired and recorded a $2.3 million impairment.



17. EQUITY TRANSACTION



On January 30, 2004, 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 6.4 million shares of common stock at a price of $1.25 per share, for gross proceeds to the Company of $8.0 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 1.9 million shares of common stock at an exercise price of $1.75 per share. Additionally, the Company issued 256,000 shares of its common stock to the placement agent, and paid
$0.5 million in professional fees.



In connection with the
Stock Purchase Agreement, the Company entered into a Registration Rights Agreement with the investors, dated as of January 30, 2004, which requires 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 and (ii) the shares of common stock underlying the warrants issued to the investors.



In connection with the consummation of both the acquisition and equity financing described above, the Company entered into certain transactions with the
lenders under its Credit Facility. The Company and the lenders executed an eleventh amendment to the credit agreement, pursuant to which, among other things, the lenders consented to the above-referenced transactions. The eleventh amendment, which
was effective as of December 31, 2003, also revised the automatic reductions of the commitments underlying the Credit Facility that are required on a quarterly basis beginning on March 31, 2004. Expressed as a percentage of the aggregate,
outstanding commitments, the automatic reductions were revised to a total of 8% in 2004, 40% in 2005, 48% in 2006 and 4% at maturity on March 31, 2007. As of March 16, 2004 the Company had satisfied the entire 8% of the mandatory reduction of
commitments for 2004. In addition, the eleventh amendment also incorporated adjustments to the financial covenants of the Credit Facility. As a condition to the lenders entering into the eleventh amendment, the Company agreed to reduce the exercise
price of certain previously issued outstanding warrants held by the lenders to purchase approximately 379,230 shares of common stock from $3.60 per share to $0.001 per share which were immediately exercised 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-Sholes 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.



18. ACQUISITION OF
CONSOLIDATED EDISON COMMUNICATIONS



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, for $37.0 million. The Con Ed Agreement is subject to certain purchase price adjustments, certain closing conditions, including the receipt of third party and governmental consents, and contains
customary representations, warranties and covenants by each of the parties. CEC provides managed network services in the New York metropolitan area.



In order to finance the acquisition of CEC described above, on December 10, 2004, the Company entered into a securities purchase agreement (as amended,
the Investor Purchase Agreement), with certain investors for the sale of up to $37.0 million in shares of a newly issued series K convertible preferred stock (the Series K



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FIBERNET TELECOM GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Preferred), and common stock warrants (the Warrants). The Series K Preferred and the Warrants are convertible and exercisable at a price of
$1.00 per share of common stock, and may be subject to adjustment in certain circumstances. The Warrants have a term of seven years.



The Series K Preferred stock will not have voting rights, and will pay dividends beginning on the first anniversary of the closing date at a rate equal to
4% per annum, increasing to 8% per annum after the third anniversary of the closing date until the Series K Preferred are fully converted. The Series K Preferred ranks senior to all of the Companys outstanding equity securities, in the event
of a liquidation, dissolution or winding up of the Company, but is subject to the prior satisfaction of the Companys existing credit facilities if any cash payments are required. Subject to the satisfaction of certain conditions, including
specific operating criteria or the failure to maintain stock listing criteria, the Series K Preferred may become subject to mandatory conversion or redemption, with alternative settlement options including cash payments, issuance of new securities
or common stock, as defined by the Investor Purchase Agreement.



Contemporaneously with the execution of the Investor Purchase Agreement, the Company amended 833,517 common stock warrants currently owned by the lead investor in the equity financing, SDS Capital Partners, LLC (SDS), to reduce
the exercise price thereof from $3.60 to $0.01. The Company compared the value of the warrants prior to repricing with the value of the warrants after the repricing using the Black-Sholes 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. Furthermore, SDS is entitled to certain rights to designate a new member to the Board of Directors and to designate an observer at Board
meetings.



In connection with the Investor Purchase Agreement,
the Company entered into a Registration Rights Agreement with the investors, dated as of December 10, 2004, which requires a registration statement to be filed with the Securities and Exchange Commission within 45 days after the closing of the
Investor Purchase Agreement, and to have such registration statement declared effective within 120 days following such closing. The Company could be subject to cash penalties if, among other things, it is late in meeting such deadlines or if its
common stock was not listed for quotation on the NASDAQ Small Cap Market at any time after the 90thday following
the closing.



In connection with the execution of both the
acquisition and equity financing transactions described above, the Company entered into certain transactions with Deutsche Bank AG New York Branch, Wachovia Investors, Inc. and IBM Credit LLC, the lenders under its senior secured credit facility.
The Company, together with its wholly-owned subsidiaries, FiberNet Operations, Inc. and Devnet L.L.C., executed with the Lenders a thirteenth amendment to the Amended and Restated Credit Agreement, dated as of February 9, 2001, as amended, pursuant
to which, among other things, the lenders consented to the above-referenced transactions.



The closings of the Con Ed Agreement and the Investor Purchase Agreement will occur simultaneously and the Company anticipates that such closings will occur during the first six months of 2005.



19. SUBSEQUENT EVENTS



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 will provide 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. Mr. Liss will receive $200,000 per annum 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 initial term of the consulting agreement is six months, subject to renewal upon mutual agreement of the parties.



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FIBERNET TELECOM GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



On January 31, 2005, Michael S. Liss resigned as President and Chief Executive Officer. Mr. Liss will
continue to serve as the Chairman of the Board of Directors.



On January 31, 2005, Jon A. DeLuca was appointed as President and Chief Executive Officer. In addition, on January 31, 2005, Edward J. Granaghan was appointed as Senior Vice PresidentFinance and Chief Financial Officer.



On February 15, 2005, the Nasdaq Stock Market (Nasdaq) notified
the Company that although the Company has not yet regained compliance for continued inclusion under Marketplace Rule 4310(c)(4), as of February 14, 2005 it had met all initial inclusion criteria for the Nasdaq SmallCap Market set forth in
Marketplace Rule 4310(c) (except for the bid price). Therefore, in accordance with Marketplace Rule 4310(c)(8)(D), Nasdaq provided the Company with an additional 180 calendar day period, or until August 12, 2005, to regain compliance. If, at anytime
before August 12, 2005, the bid price of the its common stock closes at $1.00 or more per share for a minimum of 10 consecutive business days, Nasdaq will provide written notification that the Company is in compliance with the rule. In response to
Nasdaqs notification, the Company intends to carefully monitor its stock price and consider all options to regain compliance.



On March 22, 2005, the Company, together with its wholly-owned subsidiaries, FiberNet Operations, Inc. and Devnet L.L.C., executed with its lenders a
fourteenth amendment to the Amended and Restated Credit Agreement, dated as of February 9, 2001, as amended, pursuant to which, the amortization payments for 2005 were deferred until 2006, and covenant levels were changed. This amendment require the
Company to raise additional capital in the first half of 2005.



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



None.



ITEM 9A. CONTROLS AND PROCEDURES



Evaluation of Disclosure Controls and Procedures.Our principal
executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Annual Report on
Form 10-K, have concluded that, based on such evaluation, our disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company, including its consolidated subsidiaries, was made known to them
by others within those entities, particularly during the period in which this Annual Report on Form 10-K was being prepared.



Changes in Internal Controls.There were no changes in the registrants internal control over financial reporting that occurred during the
registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of annual report) that have materially affected, or are reasonably likely to materially affect, the registrants internal control over
financial reporting.



ITEM 9B. OTHER INFORMATION



On March 24, 2005, Jon A. DeLuca was appointed to our Board of Directors. On
January 31, 2005, Mr. DeLuca was appointed as our President and Chief Executive Officer. Until his appointment as President and Chief Executive Officer, Mr. DeLuca served as our Senior Vice PresidentFinance and Chief Financial Officer and
also as our Vice PresidentFinance from June 14, 1999 to July 3, 2001. From 1997 to 1999, Mr. DeLuca was a Managing Director of Lago Industries, LLC, a private merchant banking firm. From 1992 to 1997, he was employed in the leveraged finance
groups of Lazard Freres & Co. LLC and Bear, Stearns & Co. Inc. Mr. DeLuca has a B.A. from Trinity College.



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PART III



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



The response to this item is incorporated by reference from the discussion responsive thereto under the captions Management and
Compliance with Section 16(a) of the Securities Exchange Act of 1934 in our Proxy Statement for the 2004 Annual Meeting of Stockholders, which we will file with the SEC within 120 days after our December 31, 2004 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 2005 Annual Meeting of Stockholders, which we will file with the SEC within 120 days after our December 31, 2004 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 2004 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, 2004 fiscal year end.



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



The response to this item is incorporated by reference from the discussion responsive thereto under the captions
Certain Relationships and Related Transactions and Executive CompensationEmployment Agreements, Termination of Employment and Change of Control Arrangements in our Proxy Statement for the 2005 Annual Meeting of
Stockholders, which we will file with the SEC within 120 days after our December 31, 2004 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 2005 Annual Meeting of
Stockholders, which we will file with the SEC within 120 days after our December 31, 2004 fiscal year end.



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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).                                                                                                                                                                           
|            | 
|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).                                                                                                                                                                                                       
|            | 
|4.2         |  | Form of Warrant to purchase our Common Stock at a purchase price of $0.67 per share, issued in connection with a private placement on May 7, 1999 (incorporated by reference to Exhibit 4.2 to
our Registration Statement on Form S-1, filed on August 15, 2000).                                                                                              



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|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit Name                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.3         |  | Form of Warrant to purchase our Common Stock at a purchase price of $1.50 per share, issued in connection with a private placement on May 7, 1999 (incorporated by reference to Exhibit 4.3 to
our Registration Statement on Form S-1, filed on August 15, 2000).                                                                                                                                                                                                                      
|            | 
|4.4         |  | Amended and Restated Stockholders Agreement, dated as of January 31, 2001, between us, Signal Equity Partners, L.P. (formerly known as Signal Capital Partners, L.P.), as the Majority in
Interest of the Purchasers, and Nortel Networks Inc., amending and restating the Stockholders Agreement dated as of May 7, 1999, 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 February 2, 2001).
|            | 
|4.5         |  | Registration Rights Agreement, dated as of May 7, 1999 by and among us and the stockholders listed therein (incorporated by reference to Exhibit I of Schedule 13D, filed on May 17, 1999 with
respect to our Common Stock).                                                                                                                                                                                                                                                           
|            | 
|4.6         |  | Registration Rights Agreement, dated as of June 30, 2000, between us and Nortel Networks Inc. (incorporated by reference to Exhibit 4.1 to our Form 8-K filed on July 11,
2000).                                                                                                                                                                                                                                                                                                       
|            | 
|4.7         |  | Third Limited Waiver and Agreement, dated February 9, 2001, between us, Deutsche Banc Alex. Brown Inc., Deutsche Bank Securities Inc. and Toronto Dominion (Texas), Inc. (incorporated by
reference to Exhibit 4.1 to our Current Report on Form 8-K, filed on February 15, 2001).                                                                                                                                                                                                     
|            | 
|4.8         |  | Warrant Agreement, dated February 9, 2001, between us and First Chicago Investment Corporation (incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K, filed on February
15, 2001).                                                                                                                                                                                                                                                                               
|            | 
|4.9         |  | First Limited Waiver and Agreement, dated as of February 9, 2001, between us and First Union Investors, Inc. (incorporated by reference to Exhibit 4.3 to our Current Report on Form 8-K, filed
on February 15, 2001).                                                                                                                                                                                                                                                                 
|            | 
|4.10        |  | Form of Warrant Agreement to purchase our Common Stock at a purchase price of $6.56 per share, issued in connection with a public offering on February 1, 2001 (incorporated by reference to
Exhibit 4.1 to our Current Report on Form 8-K, filed on February 5, 2001).                                                                                                                                                                                                                
|            | 
|4.11        |  | Form of Series A Warrant to purchase our Common Stock at a purchase price of $.30 per share, issued in connection with a public offering on December 7, 2001 (incorporated by reference to
Exhibit 4.2 to our Current Report on Form 8-K, filed on December 7, 2001).                                                                                                                                                                                                                  
|            | 
|4.12        |  | Form of Series B Warrant to purchase our Common Stock at a purchase price of $.30 per share, issued in connection with a public offering on December 7, 2001 (incorporated by reference to
Exhibit 4.3 to our Current Report on Form 8-K, filed on December 7, 2001).                                                                                                                                                                                                                  
|            | 
|4.13        |  | 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).                                                                                                                                                                                                                                                                     
|            | 
|4.14        |  | 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).                                                                                                                                                                                                                                                                   
|            | 
|4.15        |  | 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).                                                                                                                                                                                                                                                              
|            | 
|4.16        |  | Form of Warrant to purchase our Common Stock at a purchase price of $0.12 per share, issued in connection with the Common Stock and Warrant Purchase Agreement, dated as of October 30, 2002
(incorporated by reference to Exhibit 4.4 to our Current Report on Form 8-K, filed on November 1, 2002).                                                                                                                                                                                  



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|            |  |                                                                                                                                                                                                                                                                                                        
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit Name                                                                                                                                                                                                                                                                                           
|4.17        |  | Form of Warrant to purchase our Common Stock at a purchase price of $0.12 per share, issued in connection with the Common Stock Purchase Agreement, dated as of October 30, 2002 (incorporated
by reference to Exhibit 4.5 to our Current Report on Form 8-K, filed on November 1, 2002).              
|            | 
|4.18        |  | 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).                                                        
|            | 
|4.19        |  | 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).                                             
|            | 
|4.20        |  | Form of Warrant to purchase our Common Stock at a purchase price of $0.12 per share, issued in connection with the Common Stock and Warrant Purchase Agreement, dated as of November 11, 2002
(incorporated by reference to Exhibit 4.3 to our Current Report on Form 8-K, filed on November 12, 2002).
|            | 
|4.21        |  | 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).                                                         
|            | 
|4.22        |  | Form of Warrant to purchase our Common Stock at a purchase price of $0.12 per share, issued in connection with the Investor Purchase Agreement, dated as of January 10, 2003 (incorporated by
reference to Exhibit 4.2 to our Current Report on Form 8-K, filed on January 13, 2003).                  
|            | 
|4.23        |  | 2003 Equity Incentive Plan (incorporated by reference to Exhibit 1 to our Definitive Information Statement on Schedule 14C, filed on April 17, 2003).                                                                                                                                                  
|            | 
|4.24        |  | 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).                                                           
|            | 
|4.25        |  | 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).                                                                              
|            | 
|4.26        |  | Form of Warrant to purchase our Common Stock at a purchase price of $1.75 per share, issued in connection with the Common Stock Purchase Agreement, dated as of January 30, 2004 (incorporated
by reference to Exhibit 4.3 to our Current Report on Form 8-K, filed on February 6, 2004).              
|            | 
|4.27        |  | Warrant Agreement by and between Westport Communications LLC and us, dated as of October 29, 2004. **                                                                                                                                                                                                  
|            | 
|4.28        |  | Form of Incentive Stock Option Agreement. **                                                                                                                                                                                                                                                           
|            | 
|4.29        |  | Form of Nonqualified Stock Option Agreement. **                                                                                                                                                                                                                                                        
|            | 
|4.30        |  | Form of Restricted Stock Agreement. **                                                                                                                                                                                                                                                                 
|            | 
|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).                                                                                                   



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|            |  |                                                                                                                                                                                                                                                                              
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit Name                                                                                                                                                                                                                                                                 
|10.3        |  | Securities Purchase Agreement, dated as of May 7, 1999 by and among us and the purchasers listed therein (incorporated by reference to Exhibit A of Schedule 13D, filed on May 17, 1999 with
respect to our Common Stock).                                                   
|            | 
|10.4        |  | Securities Purchase Agreement, dated as of September 28, 1999 by and among us and the purchasers listed therein (incorporated by reference to Exhibit N of Schedule 13D/A, filed on October 14,
1999 with respect to our common stock).                                      
|            | 
|10.5        |  | First Amendment, dated as of September 28, 1999 to the Security Agreement dated as of May 7, 1999 from us and our subsidiaries to the Collateral Agent listed therein (incorporated by
reference to Exhibit 4.5 of our Current Report on Form 8-K, filed on October 5, 1999).
|            | 
|10.6        |  | First Amendment, dated as of September 28, 1999 to the Guaranty Agreement dated as of May 7, 1999 made by us, FiberNet Equal Access, L.L.C. and Local Fiber, LLC (incorporated by reference to
Exhibit 4.6 of our Current Report on Form 8-K, filed on October 5, 1999).     
|            | 
|10.7        |  | First Amendment, dated as of September 28, 1999 to the Pledge Agreement dated as of May 7, 1999 between us and the Collateral Agent listed therein (incorporated by reference to Exhibit 4.7 of
our Current Report on Form 8-K, filed on October 5, 1999).                   
|            | 
|10.8        |  | First Amendment, dated as of September 28, 1999 to the Parent Pledge Agreement dated as of May 7, 1999 between us and the Collateral Agent listed therein (incorporated by reference to Exhibit
4.8 of our Current Report on Form 8-K, filed on October 5, 1999).            
|            | 
|10.9        |  | Conversion and Exchange Agreement, dated as of November 30, 1999 (incorporated by reference to Exhibit S of Schedule 13D, filed on December 2, 1999 with respect to our common
stock).                                                                                       
|            | 
|*10.10      |  | 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).                                                         
|            | 
|10.11       |  | 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).                                                             
|            | 
|10.12       |  | 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).                                                                                          
|            | 
|10.13       |  | Employment Agreement, dated as of January 18, 2000 between us and Lance L. Mickel (incorporated by reference to Exhibit 10.17 to our Registration Statement on Form S-1, filed on September 8,
2000).                                                                        
|            | 
|10.14       |  | Note in favor of Deutsche Bank AG New York Branch, dated as of April 11, 2000 (incorporated by reference to Exhibit 4.15 to our Quarterly Report on Form 10-QSB, filed on May 15,
2000).                                                                                     
|            | 
|10.15       |  | Note in favor of Nortel Networks Inc., dated as of April 11, 2000 (incorporated by reference to Exhibit 4.16 to our Quarterly Report on Form 10-QSB, filed on May 15, 2000).                                                                                                 
|            | 
|10.16       |  | Note in favor of Toronto Dominion (Texas), dated as of April 11, 2000 (incorporated by reference to Exhibit 4.17 to our Quarterly Report on Form 10-QSB, filed on May 15,
2000).                                                                                             
|            | 
|10.17       |  | Note in favor of First Union National Bank, dated as of July 31, 2000 (incorporated by reference to Exhibit 10.23 to our Registration Statement on Form S-1, filed on September 8,
2000).                                                                                    
|            | 
|10.18       |  | Securities Purchase Agreement, dated as of June 30, 2000 between us and Nortel Networks Inc. (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on July 11,
2000).                                                                          



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|            |  |                                                                                                                                                                                                                                                                                                                                                             
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit Name                                                                                                                                                                                                                                                                                                                                                
|10.19       |  | Securities Purchase Agreement, dated as of July 28, 2000 between us and Nortel Networks Inc. (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K, filed on August 4,
2000).                                                                                                                                                        
|            | 
|10.20       |  | Securities Purchase Agreement, dated as of August 11, 2000 between us and Nortel Networks Inc. (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on August
15, 2000).                                                                                                                                                     
|            | 
|10.21       |  | 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).                                                                                                                                   
|            | 
|10.22       |  | 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).                                                                                                                      
|            | 
|10.23       |  | Common Stock and Warrant Purchase Agreement, dated as of February 1, 2001 by and among us and the Purchasers listed therein (incorporated by reference to Exhibit 10.1 to our Current Report on
Form 8-K, filed on February 5, 2001).                                                                                                                       
|            | 
|10.24       |  | Amended and Restated Credit Agreement, dated February 9, 2001 among FiberNet Operations, Inc., Devnet L.L.C., Deutsche Bank AG New York Branch, First Union Investors, Inc., Toronto Dominion
(USA) Securities Inc. and Deutsche Banc Alex. Brown (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on February 15, 2001).
|            | 
|10.25       |  | Amended and Restated FiberNet Security Agreement, dated as of February 9, 2001 between FiberNet Operations, Inc. and Deutsche Bank AG New York Branch (incorporated by reference to Exhibit
10.2 to our Current Report on Form 8-K, filed on February 15, 2001).                                                                                            
|            | 
|10.26       |  | Amended and Restated Devnet Security Agreement, dated as of February 9, 2001 between Devnet L.L.C. and Deutsche Bank AG New York Branch (incorporated by reference to Exhibit 10.3 to our
Current Report on Form 8-K, filed on February 15, 2001).                                                                                                          
|            | 
|10.27       |  | Amended and Restated Parent Security Agreement, dated as of February 9, 2001 between us and Deutsche Bank AG New York Branch (incorporated by reference to Exhibit 10.4 to our Current Report
on Form 8-K, filed on February 15, 2001).                                                                                                                     
|            | 
|10.28       |  | Amended and Restated Subsidiary Security Agreement (FiberNet Telecom), dated as of February 9, 2001 between FiberNet Telecom, Inc. and Deutsche Bank AG New York Branch (incorporated by
reference to Exhibit 10.5 to our Current Report on Form 8-K, filed on February 15, 2001).                                                                          
|            | 
|10.29       |  | Amended and Restated Subsidiary Security Agreement (Equal Access), dated as of February 9, 2001 between FiberNet Equal Access, L.L.C. and Deutsche Bank AG New York Branch (incorporated by
reference to Exhibit 10.6 to our Current Report on Form 8-K, filed on February 15, 2001).                                                                       
|            | 
|10.30       |  | Amended and Restated Subsidiary Security Agreement (Local Fiber), dated as of February 9, 2001 between Local Fiber L.L.C. and Deutsche Bank AG New York Branch (incorporated by reference to
Exhibit 10.7 to our Current Report on Form 8-K, filed on February 15, 2001).                                                                                   
|            | 
|10.31       |  | Amended and Restated Parent Pledge Agreement (Devnet), dated as of February 9, 2001 between us and Deutsche Bank AG New York Branch with respect to 96.386% of the membership interests of
Devnet L.L.C. (incorporated by reference to Exhibit 10.8 to our Current Report on Form 8-K, filed on February 15, 2001).                                         



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|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                   
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit Name                                                                                                                                                                                                                                                                                                                                                                                                      
|10.32       |  | Amended and Restated Parent Pledge Agreement (FiberNet Operations), dated as of February 9, 2001 between us and Deutsche Bank AG New York Branch with respect to all of the capital stock of
FiberNet Operations, Inc. (incorporated by reference to Exhibit 10.9 to our Current Report on Form 8-K, filed on February 15, 2001).                                                                                 
|            | 
|10.33       |  | Amended and Restated Parent Pledge Agreement (FiberNet Telecom/Devnet), dated as of February 9, 2001 between FiberNet Operations, Inc. and Deutsche Bank AG New York Branch with respect to
3.614% of the membership interests of Devnet L.L.C. and all of the capital stock of FiberNet Telecom, Inc. (incorporated by reference to Exhibit 10.10 to our Current Report on Form 8-K, filed on February 15, 2001).
|            | 
|10.34       |  | Amended and Restated FiberNet Telecom Pledge Agreement (Equal Access), dated as of February 9, 2001 between FiberNet Telecom, Inc. and the Administrative Agent with respect to all of the
membership interests of FiberNet Equal Access, L.L.C. (incorporated by reference to Exhibit 10.11 to our Current Report on Form 8-K, filed on February 15, 2001).                                                      
|            | 
|10.35       |  | Amended and Restated FiberNet Telecom Pledge Agreement (Local Fiber), dated as of February 9, 2001 between FiberNet Telecom, Inc. and Deutsche Bank AG New York Branch with respect to all of
the membership interests of Local Fiber L.L.C. (incorporated by reference to Exhibit 10.12 to our Current Report on Form 8-K, filed on February 15, 2001).                                                          
|            | 
|10.36       |  | Amended and Restated Parent Guaranty Agreement, dated as of February 9, 2001 executed and delivered by us to Deutsche Bank AG New York Branch (incorporated by reference to Exhibit 10.13 to
our Current Report on Form 8-K, filed on February 15, 2001).                                                                                                                                                         
|            | 
|10.37       |  | Amended and Restated Subsidiary Guaranty Agreement (FiberNet Telecom), dated as of February 9, 2001 executed and delivered by FiberNet Telecom, Inc. to Deutsche Bank AG New York Branch
(incorporated by reference to Exhibit 10.14 to our Current Report on Form 8-K, filed on February 15, 2001).                                                                                                              
|            | 
|10.38       |  | Amended and Restated Subsidiary Guaranty Agreement (Equal Access), dated as of February 9, 2001 executed and delivered by FiberNet Equal Access, L.L.C. to Deutsche Bank AG New York Branch
(incorporated by reference to Exhibit 10.15 to our Current Report on Form 8-K, filed on February 15, 2001).                                                                                                           
|            | 
|10.39       |  | Amended and Restated Subsidiary Guaranty Agreement (Local Fiber), dated as of February 9, 2001 executed and delivered by Local Fiber L.L.C. to Deutsche Bank AG New York Branch (incorporated
by reference to Exhibit 10.16 to our Current Report on Form 8-K, filed on February 15, 2001).                                                                                                                       
|            | 
|10.40       |  | Stock Purchase Agreement, dated as of December 7, 2001, by and among us and the Purchasers listed therein (incorporated by reference to our Current Report on Form 8-K, filed on December 7,
2001).                                                                                                                                                                                                               
|            | 
|10.41       |  | Third Amendment, dated as of December 10, 2001, among FiberNet Operations, Inc. Devnet L.L.C. and the lenders identified therein, to the Amended and Restated Credit Agreement, dated as of
February 9, 2001 (incorporated by reference to Exhibit 10.41 to our Annual Report on Form 10-K, filed on March 1, 2002).                                                                                              
|            | 
|10.42       |  | Common Stock and Warrant Purchase Agreement, dated as of October 30, 2002, by and among us and certain investors listed therein (incorporated by reference to Exhibit 10.1 to our Current
Report on Form 8-K, filed on November 1, 2002).                                                                                                                                                                         
|            | 
|10.43       |  | Common Stock Purchase Agreement, dated as of October 30, 2002, by and among us and certain investors purchasers therein (incorporated by reference to Exhibit 10.2 to our Current Report on
Form 8-K, filed on November 1, 2002).                                                                                                                                                                                 



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|            |  |                                                                                                                                                                                                                                                                                                  
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit Name                                                                                                                                                                                                                                                                                     
|10.44       |  | Seventh Amendment to the Amended and Restated Credit Agreement, dated as of October 30, 2002, by and among FiberNet Operations, Inc., Devnet L.L.C. and the lenders identified therein
(incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K, filed on November 1, 2002). 
|            | 
|10.45       |  | Note Exchange Agreement, dated as of October 30, 2002, by and between us and SDS Merchant Fund L.P. (incorporated by reference to Exhibit 10.4 to our Current Report on Form 8-K, filed on
November 1, 2002).                                                                                    
|            | 
|10.46       |  | Share Exchange Agreement, dated as of October 30, 2002, by and among us and the holders of the Companys Series H Preferred Stock (incorporated by reference to Exhibit 10.5 to our
Current Report on Form 8-K, filed on November 1, 2002).                                                      
|            | 
|10.47       |  | Share Exchange Agreement, dated as of October 30, 2002, by and among us and the holders of the Companys Series J-1 Preferred Stock (incorporated by reference to Exhibit 10.6 to our
Current Report on Form 8-K, filed on November 1, 2002).                                                    
|            | 
|10.48       |  | Common Stock and Warrant Purchase Agreement, dated as of November 11, 2002, by and among us and certain investors listed therein (incorporated by reference to Exhibit 10.1 to our Current
Report on Form 8-K, filed on November 12, 2002).                                                      
|            | 
|10.49       |  | Eighth Amendment to the Amended and Restated Credit Agreement, dated as of November 11, 2002, by and among FiberNet Operations, Inc., Devnet L.L.C. and the lenders identified therein
(incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K, filed on November 12, 2002).
|            | 
|10.50       |  | Note Exchange Agreement, dated as of November 11, 2002, by and between us and SDS Merchant Fund L.P. (incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K, filed on
November 12, 2002).                                                                                  
|            | 
|10.51       |  | Ninth Amendment to the Amended and Restated Credit Agreement, dated as of January 10, 2003, by and among FiberNet Operations, Inc., Devnet L.L.C. and the lenders identified therein
(incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on January 13, 2003).   
|            | 
|10.52       |  | Form of Debt Exchange Agreement, dated as of January 10, 2003, by and among us and certain lenders listed therein (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K,
filed on January 13, 2003).                                                                      
|            | 
|10.53       |  | Common Stock Purchase Agreement, dated as of January 10, 2003, by and among us and certain investors listed therein (incorporated by reference to Exhibit 10.3 to Amendment No. 1 to our
Current Report on Form 8-K/A, filed on January 16, 2003).                                               
|            | 
|10.54       |  | Security Agreement, dated as of January 10, 2003, by us in favor of Deutsche Bank AG New York Branch (incorporated by reference to Exhibit 10.4 to our Current Report on Form 8-K, filed on
January 13, 2003).                                                                                   
|            | 
|10.55       |  | Securities Account Control Agreement, dated as of January 10, 2003, among us and Deutsche Bank AG New York Branch (incorporated by reference to Exhibit 10.5 to our Current Report on Form 8-K,
filed on January 13, 2003).                                                                      
|            | 
|10.56       |  | Agreement of Lease, between 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).            



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|            |  |                                                                                                                                                                                                                                                                                                                           
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit Name                                                                                                                                                                                                                                                                                                              
|10.57       |  | Amended and Restated Credit Agreement, dated February 9, 2001, among FiberNet Operations, Inc., Devnet L.L.C. and the lenders identified therein, as conformed through the Ninth Amendment of
such Credit Agreement (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on June 17, 2003).
|            | 
|10.58       |  | Tenth Amendment to the Amended and Restated Credit Agreement, dated as of June 13, 2003, by and among FiberNet Operations, Inc., Devnet L.L.C. and the lenders identified therein (incorporated
by reference to Exhibit 10.2 to our Current Report on Form 8-K, filed on June 17, 2003).                                  
|            | 
|10.59       |  | Loan Letter Agreement, dated June 13, 2003, by and among us, North Sound Legacy Fund LLC, North Sound Legacy Institutional Fund LLC and North Sound Legacy International LLC (incorporated by
reference to Exhibit 10.3 to our Current Report on Form 8-K, filed on June 17, 2003).                                       
|            | 
|10.60       |  | Amendment of Lease, between 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).                                                                                                              
|            | 
|10.61       |  | 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).                                                                                    
|            | 
|10.62       |  | 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).                                                                                             
|            | 
|10.63       |  | Eleventh Amendment to the Amended and Restated Credit Agreement, dated as of January 30, 2004, by and among FiberNet Operations, Inc. and Devnet L.L.C. and the lenders identified therein
(incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K, filed on February 6, 2004).                      
|            | 
|10.64       |  | Twelfth Amendment to the Amended and Restated Credit Agreement, dated as of March 26, 2004, by and among FiberNet Operations, Inc. and Devnet L.L.C. and the lenders identified therein
(incorporated by reference to Exhibit 10.64 to our Annual Report on Form 10-K, filed on March 30, 2004).                          
|            | 
|10.65       |  | Amendment of Lease, by and between Hudson Telegraph Associates, L.P. and FiberNet Equal Access LLC, dated as of October 29, 2004. **                                                                                                                                                                                      
|            | 
|10.66       |  | Stock Purchase Agreement, dated as of December 10, 2004, by and between us and Consolidated Edison, Inc. **                                                                                                                                                                                                               
|            | 
|10.67       |  | Securities Purchase Agreement, dated as of December 10, 2004, by and among us and each of the purchasers set forth on the execution pages thereto. **                                                                                                                                                                     
|            | 
|10.68       |  | Thirteenth Amendment to the Amended and Restated Credit Agreement, dated as of December 10, 2004, by and among FiberNet Operations, Inc. and Devnet L.L.C. and the lenders identified therein.
**                                                                                                                         
|            | 
|10.69       |  | First Amendment to Securities Purchase Agreement, dated as of December 15, 2004, by and among us and each of the purchasers set forth on the execution pages thereto. **                                                                                                                                                  
|            | 
|10.70       |  | Second Amendment to Securities Purchase Agreement, dated as of December 29, 2004, by and among us and each of the purchasers set forth on the execution pages thereto. **                                                                                                                                                 
|            | 
|10.71       |  | Consulting Agreement, dated as of February 1, 2005, by and between Michael Liss and us. **                                                                                                                                                                                                                                



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|            |  |                                                                                                                                                                                                                                                                                                                                                                                                    
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit Name                                                                                                                                                                                                                                                                                                                                                                                       
|10.72       |  | Executive Compensation Arrangements. **                                                                                                                                                                                                                                                                                                                                                            
|            | 
|10.73       |  | Director Compensation Arrangements. **                                                                                                                                                                                                                                                                                                                                                             
|            | 
|10.74       |  | Amendment, dated as of March 22, 2005, among us, FiberNet Operations, Inc., Devnet L.L.C., and Deutsche Bank AG New York Branch, to (1) the Amended and Restated Credit Agreement among
FiberNet Operations, Inc., Devnet L.L.C. and the lenders identified therein and (2) the Amended and Restated Parent Guaranty Agreement executed and delivered by us to Deutsche Bank AG New York Branch. **
|            | 
|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).                                                                                                                                                                                                                                                         
|            | 
|21.1        |  | Our Subsidiaries (incorporated by reference to Exhibit 21.1 to our Registration Statement on Form S-1, filed on August 15, 2000).                                                                                                                                                                                                                                                                  
|            | 
|31.1        |  | Certification of Chief Executive Officer **                                                                                                                                                                                                                                                                                                                                                        
|            | 
|31.2        |  | Certification of Chief 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.
|-- | ---------------



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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.
DELUCAName:

Jon A. DeLucaTitle:

Director, President and Chief Executive OfficerDate: March 30, 2005




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. DELUCAJon A. DeLuca                       |  | Director, President and Chief Executive Officer (Principal Executive Officer)                       |  | March 30, 2005
|                                                        |  |                                                                                                    
|/s/    EDWARD J.
GRANAGHANEdward J.
Granaghan           |  | Senior Vice President-Finance, Chief Financial Officer (Principal Financial and Accounting Officer) |  | March 30, 2005
|                                                        |  |                                                                                                    
|/s/    MICHAEL S. LISSMichael S. Liss                   |  | Chairman                                                                                            |  | March 30, 2005
|                                                        |  |                                                                                                    
|/s/    RICHARD E.
SAYERSRichard E.
Sayers               |  | Director, Vice Chairman                                                                             |  | March 30, 2005
|                                                        |  |                                                                                                    
|/s/    TIMOTHY P.
BRADLEYTimothy P.
Bradley             |  | Director                                                                                            |  | March 30, 2005
|                                                        |  |                                                                                                    
|/s/    OSKAR BRECHEROskar Brecher                       |  | Director                                                                                            |  | March 30, 2005
|                                                        |  |                                                                                                    
|/s/    ROBERT E.
LABLANCRobert E.
LaBlanc               |  | Director                                                                                            |  | March 30, 2005
|                                                        |  |                                                                                                    
|/s/    ROY (TREY) D. FARMER
IIIRoy (Trey) D. Farmer III |  | Director                                                                                            |  | March 30, 2005
|                                                        |  |                                                                                                    
|/s/    CHARLES J.
MAHONEYCharles J.
Mahoney             |  | Director                                                                                            |  | March 30, 2005



81