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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, 2003



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 March 25, 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 $25,694,711, as computed by reference to the price at which the common stock was last sold on June 30, 2003.



The number of shares outstanding of the registrants common stock, as
of March 25, 2004, was 51,055,572 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



Documents Incorporated by Reference:  The registrants definitive proxy statement related to the annual meeting of stockholders, which
proxy statement will be mailed on or before April 29, 2004.



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PART I



ITEM 1. DESCRIPTION OF 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 to 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, delivering
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 part to the advent of the Internet and the deregulation of the
telecommunications industry. This increase in bandwidth intensive data applications and providers of these services has resulted in additional demand for transmission capacity on communications networks and additional capacity to the national and
international telecom infrastructure. More businesses are relying on communications services to conduct mission critical operations, increasing the need for greater network reliability, security and speed, as well.



In the past few years, general economic weakness and oversupply have severely
impacted the telecommunications industry. 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 additional 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.



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



Long-Haul Networks. Expected 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. This segment of the market has been subject to the
most severe downturn in the industry.



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



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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.



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.



Carrier Neutral Transport Services. Traditionally, service providers have relied on ILECs and RBOCs for metropolitan connectivity,
also known as transport. However, in addition to providing network transport, both the ILECs and RBOCs provide communications services directly to end-users. This puts service providers at a competitive disadvantage. Unless these service providers
undertake the time-consuming and costly construction of their own proprietary networks, they are dependent on their competitors networks for transport.



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.



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Our Solution



We are focused on owning and operating advanced broadband networks that provide superior carrier neutral 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.



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 wholesale metropolitan fiber-optic network capacity in our markets. We intend to serve select, commercial office properties and major carrier hotels in our



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markets with carrier neutral, 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 carrier customers. We intend to promote:



| |  | our carrier-neutral position;
| | - | -----------------------------



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



| |  | our ability to provide services to multiple broadband carriers;
| | - | ---------------------------------------------------------------



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



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



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



We believe that due to our wholesale strategy we have a broad potential 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, 2003, we had 152 customers, including 360networks, AT&T, Bell Nexxia, BellSouth,
British Telecom, Entel Chile, Equant, FLAG Telecom, France Telecom, Hanaro Telecom, NTT America, Qwest, SBC Communications, Sprint, SwissFone, T-Systems (formerly Deutsche Telekom), Verizon and WilTel Communications.



Develop the platforms that enable our customers to offer new
revenue-generating communications 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 to improve performance and decrease the cost of operating our network.



Our Services



Our services, which are designed to provide communications transport and colocation within our markets, and communications access management and
infrastructure in markets nationwide, 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 dark fiber, as well.



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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 room within the carrier hotel where they can cross connect with one another in a secure, rapid and cost-effective manner.



Network Solutions Transport. In 2003, we initiated a new type of transport service offering to 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. With this new initiative, we believe that we can better serve the broader
network capacity needs of our customers than we are currently able to on our own networks. 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.



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 ancillary 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 New York City are located in 60 Hudson Street and 111 Eighth Avenue. We have established nine other secondary carrier point facilities in New York City, Long Island and New Jersey, which we have
connected to both 60 Hudson Street and 111 Eighth Avenue via our metropolitan



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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 network, which
connects them with other carrier hotels and our on-net buildings. We are exploring opportunities to develop additional meet-me-rooms in other carrier hotels.



Metropolitan Transport Networks



We acquire dark fiber rights, install our own optical transmission equipment to light the fiber and then provide lit circuits to 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 consists 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. In the future, we may establish additional metropolitan transport networks in additional markets, if we determine that there is a need for additional
capacity.



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. We have a team of highly trained and experienced communications professionals and engineers that design and oversee the
installation of our FINs. This team performs a thorough analysis of each building that we have targeted, including an assessment of available space to house equipment in the building and install fiber cables in the vertical shafts, or risers, the
adequacy of the power supply, and the diversity of fiber-optic entrance conduits from our metropolitan transport network. The standard design specifications for our FINs are then 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 and 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.



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



Direct and diverse routing to 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. Certain of our carrier point facilities can be substantially larger, up to 50,000
square feet. 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 using Preside and MetaSolv TBS software. 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.



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



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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. During the
recent downturn in the telecommunications industry, a large number of our customers have experienced significant financial distress. Customers that have filed for bankruptcy include 360networks, Cambrian Communications, Enron Broadband Services,
FLAG Telecom, Genuity Solutions, Global Crossing, AboveNet, NorthEast Optical Networks (NEON) and WilTel Communications. In addition, 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 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, 2003, our transport and colocation customers included
360networks, AT&T, Bell Nexxia, BellSouth, British Telecom, Callipso, Entel Chile, Equant, FLAG Telecom, France Telecom, Hanaro Telecom, NTT America, PPL Telecom, Qwest, SBC Communications, Sprint, SwissFone, T-Systems (formerly Deutsche
Telekom), Verizon and WilTel Communications.



Access Management Customers



Our access management customers include facilities-based
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, 2003, our access customers included AT&T, 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.



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Local Telephone Companies. In New York City and Los Angeles, we face significant competition from
ILECs and RBOCs, which 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,
which include established brand names, reputation and significant capital. 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 could indirectly compete against us by not utilizing our FIN to gain connectivity to tenants in their buildings. We have competed and will continue to
compete with some of these companies for in-building communications services and license agreements.



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 Winstar, 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 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. FiberNet Telecom, Inc.
owns all of the outstanding membership interests in Local Fiber, L.L.C. 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.



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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 eight years
as the result of the enactment of the Telecommunications Act of 1996, which amended the Communications Act of 1934 (Act).



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 8.7% of gross interstate end-user telecommunications revenues for the second quarter of 2004, 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.



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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.



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.



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. 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. In addition, several parties have asked the FCC to reconsider its decision. The FCC has taken no action on either the remand from the federal court or on the petitions for
reconsideration. 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 other alternative
modifications to 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



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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.



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.



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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.



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, 2003, 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



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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 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.



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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 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, 2003, we had 66 employees, including 40 in engineering and network operations, 13 in sales and marketing and 13 in finance and administration. During fiscal 2003, we downsized the number of our employees from 75 to 66. We have not
experienced any work stoppages and consider our relations with our employees to be good.



ITEM 2. DESCRIPTION OF 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 11,912 square feet and expires in 2015. 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.



As of February 2, 2004, we acquired a lease for a 49,000
square foot communications hub and colocation facility located at 165 Halsey Street in Newark, New Jersey. The term of this lease expires in 2016.



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 AND RELATED STOCKHOLDER MATTERS



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 Nasdaq National Market System and the Nadsdaq SmallCap Market System from January 1, 2002 through
December 31, 2003:



|                            |  |      |      |      |   |      |  |     |       |  |   |     
|--------------------------- |  | ---- | ---- | ---- | - | ---- |  | --- | ----- |  | - | ----
|                            |  | 2003 |      | 2002
|                            |  | High |      | Low  |   | High |  | Low
|Quarter ending March 31     |  | $    | 3.90 |      | $ | 1.50 |  | $   | 11.70 |  | $ | 4.50
|Quarter ending June 30      |  | $    | 1.80 |      | $ | 1.00 |  | $   | 6.60  |  | $ | 3.00
|Quarter ending September 30 |  | $    | 1.74 |      | $ | 1.03 |  | $   | 4.20  |  | $ | 2.40
|Quarter ending December 31  |  | $    | 1.69 |      | $ | 1.12 |  | $   | 5.40  |  | $ | 1.50



As of March 25, 2004,
there were 281 holders of record of our common stock and, according to our estimates, approximately 4,100 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, 2003



|                                                           |  |                                                                                              |  |                                                                             |       |                                                                                                                                            |        
|---------------------------------------------------------- |  | -------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- | ----- | ------------------------------------------------------------------------------------------------------------------------------------------ | -------
|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     |  | 745,186                                                                                      |  | $                                                                           | 31.80 |                                                                                                                                            | 459,541
|Equity compensation plans not approved by security holders |  | 198,258                                                                                      |  | $                                                                           | 6.06  |                                                                                                                                            |       



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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Payables Warrants, dated June 30, 1999: provided common stock purchase warrants to
certain creditors in connection with the payment of certain outstanding payables, to purchase an aggregate of 7,733 shares of our common stock at a purchase price of $20.10 and an aggregate of 13,000 shares of common stock at a purchase price of
$45.00 per share, all with an expiration date of June 30, 2004.



Settlement Warrants, dated February 28, 2000: provided common stock purchase warrants to certain stockholders in settlement of certain litigation, to purchase an aggregate of 2,546 shares of our common stock at a
purchase price of $20.10 per share, with an expiration date of May 7, 2004.



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.



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, 2003, 2002, and 2001 and the balance sheet data as of December 31, 2003 and 2002 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, 2001, 2000 and 1999 and for the years ended December 31, 2000 and 1999 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, 2003 and 2002 have been audited by Deloitte
& Touche LLP, independent auditors. 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, |        
|                                                                        |  | 1999                    |         |   | 2000 |   |         | 2001 |  |   | 2002     |   |  | 2003 |        
|Statement of Operations Data:                                           |  |                         |         |   |      |   |         |      |  |   |          |   |  |      |         |   |  |   |         |  
|Revenues                                                                |  | $                       |        |   |      | $ | 13,117  |      |  | $ | 31,195   |   |  | $    | 25,334  |   |  | $ | 26,604  |  
|Operating expenses:                                                     |  |                         |         |   |      |   |         |      |  |   |          |   |  |      |         |   |  |   |         |  
|Cost of services (exclusive of items shown separately below)            |  |                         |        |   |      |   | 5,388   |      |  |   | 13,801   |   |  |      | 7,537   |   |  |   | 8,806   |  
|Selling, general and administrative expenses                            |  |                         | 7,355   |   |      |   | 27,072  |      |  |   | 32,917   |   |  |      | 16,053  |   |  |   | 16,409  |  
|Stock related expense for selling, general and administrative matters   |  |                         | 803     |   |      |   | 8,468   |      |  |   | (1,172   | ) |  |      | 225     |   |  |   | 222     |  
|Non-recurring expenses                                                  |  |                         | 4,304   |   |      |   |        |      |  |   |         |   |  |      |        |   |  |   |        |  
|Impairment of property, plant and equipment                             |  |                         |        |   |      |   |        |      |  |   | 51,848   |   |  |      | 13,175  |   |  |   | 1,346   |  
|Impairment of goodwill                                                  |  |                         |        |   |      |   |        |      |  |   | 56,467   |   |  |      |        |   |  |   | 7,509   |  
|Loss on early extinguishments of debt                                   |  |                         |        |   |      |   |        |      |  |   | 7,398    |   |  |      | 7,859   |   |  |   | 8,951   |  
|Depreciation and amortization                                           |  |                         | 520     |   |      |   | 7,652   |      |  |   | 15,319   |   |  |      | 10,346  |   |  |   | 8,840   |  
|                                                                        |  |                         |         |   |      |   |         |      |  |   |          |   |  |      |         |   |  |   |         |  
|Total operating expenses                                                |  |                         | 12,982  |   |      |   | 48,580  |      |  |   | 176,578  |   |  |      | 55,195  |   |  |   | 52,083  |  
|                                                                        |  |                         |         |   |      |   |         |      |  |   |          |   |  |      |         |   |  |   |         |  
|Loss from operations                                                    |  |                         | (12,982 | ) |      |   | (35,463 | )    |  |   | (145,383 | ) |  |      | (29,861 | ) |  |   | (25,479 | )
|Interest income (expense), net                                          |  |                         | (1,356  | ) |      |   | (5,657  | )    |  |   | (8,594   | ) |  |      | (7,543  | ) |  |   | (2,296  | )
|Interest expense from beneficial conversion                             |  |                         | (15,870 | ) |      |   |        |      |  |   |         |   |  |      |        |   |  |   |        |  
|                                                                        |  |                         |         |   |      |   |         |      |  |   |          |   |  |      |         |   |  |   |         |  
|Net loss                                                                |  |                         | (30,208 | ) |      |   | (41,120 | )    |  |   | (153,977 | ) |  |      | (37,404 | ) |  |   | (27,775 | )
|Preferred stock dividends                                               |  |                         | (757    | ) |      |   | (8,113  | )    |  |   | (1,080   | ) |  |      | (44     | ) |  |   |        |  
|Preferred stockbeneficial conversion                                   |  |                         | (100    | ) |      |   | (27,766 | )    |  |   | (23,109  | ) |  |      |        |   |  |   |        |  
|                                                                        |  |                         |         |   |      |   |         |      |  |   |          |   |  |      |         |   |  |   |         |  
|Net loss applicable to common stockholders                              |  | $                       | (31,065 | ) |      | $ | (76,999 | )    |  | $ | (178,166 | ) |  | $    | (37,448 | ) |  | $ | (27,775 | )
|                                                                        |  |                         |         |   |      |   |         |      |  |   |          |   |  |      |         |   |  |   |         |  
|Net loss applicable to common stockholders per share: basic and diluted |  | $                       | (55.47  | ) |      | $ | (77.93  | )    |  | $ | (130.14  | ) |  | $    | (6.09   | ) |  | $ | (0.75   | )
|Weighted average common shares outstanding: basic and diluted           |  |                         | 560     |   |      |   | 988     |      |  |   | 1,369    |   |  |      | 6,148   |   |  |   | 37,192  |  



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 these selected financial data have been adjusted to reflect the reverse stock split.



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|                                   |  |                    |        |      |   |         |  |      |         |      |   |         |  |   |       
|---------------------------------- |  | ------------------ | ------ | ---- | - | ------- |  | ---- | ------- | ---- | - | ------- |  | - | ------
|                                   |  | As of December 31,
|                                   |  | 1999               |        | 2000 |   | 2001    |  | 2002 |         | 2003
|Balance Sheet Data:                |  |                    |        |      |   |         |  |      |         |      |   |         |  |   |       
|Cash and cash equivalents          |  | $                  | 9,512  |      | $ | 1,582   |  | $    | 3,338   |      | $ | 3,788   |  | $ | 3,488 
|Other current assets               |  |                    | 160    |      |   | 14,990  |  |      | 3,359   |      |   | 3,505   |  |   | 6,876 
|Property, plant and equipment, net |  |                    | 55,177 |      |   | 126,114 |  |      | 109,837 |      |   | 95,122  |  |   | 86,958
|Total assets                       |  |                    | 77,588 |      |   | 227,165 |  |      | 136,587 |      |   | 113,795 |  |   | 99,618
|Long-term liabilities              |  |                    | 956    |      |   | 46,559  |  |      | 89,403  |      |   | 30,558  |  |   | 18,330
|Total stockholders equity         |  |                    | 68,252 |      |   | 144,283 |  |      | 24,348  |      |   | 68,598  |  |   | 64,734



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:



| |  | 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. In 2003, we also initiated a new type of transport service offering to 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. With this new initiative, we believe that we can better serve the broader network capacity needs of our customers than we are
currently able to on our own networks.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  | 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 includes a commitment to use our transport services.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 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 2002 and
2003, we continued to experience a trend of entering into shorter term contracts with our customers. Previously, our customers typically entered into contracts with terms of three to five years. Increasingly, our customers are electing to purchase
services on a month-to- month basis or for a contracted period of only one year.



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
significantly over the past year, with transport services experiencing the greatest decreases. We expect our operating results to continue to be negatively 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 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 telecommunications 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 by establishing minimum revenue
commitments 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.



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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 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 is
a result of an increase in the number of circuits we have provisioned, offsetting our disconnections and price declines.



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 demand for access to commercial office properties from carriers has declined precipitously. 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. 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 reduced the number of our employees from 75 at the beginning of 2003 to 66 as of December 31, 2003. Prospectively, we do not anticipate significant changes in headcount, and we
believe that our personnel costs will increase moderately. Professional



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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 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.



In December 2000, we repriced stock options for certain of our executive
officers, resulting in variable plan accounting in accordance with FASB Interpretation (FIN) No. 44, Accounting for Certain Transactions Involving Stock Compensation (FIN No. 44), from the date of modification. The additional
intrinsic value was determined on the date of modification using the then market price of the common stock. The additional compensation cost was recognized over the period from the date of modification to the date the awards vest. The additional
compensation cost has been adjusted in subsequent periods for changes in the market price. After the awards vested, adjustments to compensation cost for changes in the market price were recognized immediately. In subsequent periods, the market price
declined, resulting in negative compensation cost being recognized. In accordance with FIN No. 44, illustration 3(g), income (negative expense) has been recognized up to the amount of expense previously recognized in prior periods relating
specifically to the modified awards.



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. As a result of the impairments of fixed assets that we recorded
during 2003, 2002 and 2001, depreciation and amortization expense may decrease going forward.



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 difference 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 contract with a customer. The majority of our revenues are invoiced
on a monthly recurring basis under long-term contracts, 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.



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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 the year. 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 $5.2 million, or 17%, of revenues in 2001 and $5.4 million of our cost of services. In 2002,
reciprocal agreements accounted for $0.8 million, or 3%, of revenues and $0.8 million of our cost of services. For the year ended December 31, 2003, our only reciprocal agreement accounted for $0.5 million, or 2%, of revenues and $0.5 million of our
cost of services.



Allowance for Doubtful Accounts



We continuously monitor collections and payments from our customers and
maintain allowances 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.



In 2001, we also determined that our forecasts for revenues for certain of our facilities would not be achieved due to the significant adverse change in
the business climate. We further determined that the dramatic change in the operating environment for the telecommunications industry resulted in a significantly less demand for our services in these facilities. We believe that the decrease in
demand was a result of the significant number of bankruptcies of telecommunications companies that were existing or potential customers of ours and the overall economic recession. We also determined that a rebound in demand for our services would
not occur in the near term. As a result, we revised our business plan and conducted extensive reviews of our 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 our expected business activity. We also determined that certain financial covenants in our credit facility would need to reflect
the revised business plan, including our reduced revenue forecasts. Consequently, we amended our credit facility in December 2001.



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 have recorded an asset impairment of



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approximately $51.8 million in the fourth quarter of 2001, based on the amount by which the carrying amount of these assets exceeded their fair value. Of
this amount, $40.4 million related to assets held for use, and $11.4 million represented assets to be disposed of.



The assets that we identified for disposition were abandoned, as we determined that these assets had no value. Consequently, there was no cost to us for
this abandonment, nor do we expect to receive any proceeds or other consideration from this abandonment. We recorded no reserves, accruals or other liabilities related to this abandonment. These assets primarily related to engineering and network
architecture design costs and general contracting and project management costs for facilities that we are no longer pursuing.



During 2002, we recovered approximately $0.3 million from the sale of assets previously written off as impaired. The proceeds were recorded as a recovery
of the impairment recorded previously.



During 2002, we
recorded a write-off of property, plant and equipment of $0.7 million. We recorded this write-off of capital assets due to the termination of several 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.



During 2002, we again determined that our forecasts for revenues at certain facilities would not be achieved due to the ongoing difficulties in the
overall business climate and the continued deterioration of the telecommunications industry. The dramatic change in the operating environment for our industry has resulted in significantly less demand for our services in these facilities, and we
also determined that a rebound in demand for our services would not occur in the near term. In fact we concluded that the prospects for the industry, and our business in particular, were worse than we had forecasted in 2001, because the economy had
not rebounded as expected and many significant telecommunications business failures occurred in 2002. As a result, we revised our business plan and conducted extensive 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.



We again 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 $12.7 million in the fourth quarter of 2002, based on the amount by which the carrying amount of these assets exceeded their fair value.



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



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 has
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 again 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



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flow model to measure the impairment. As a result of this analysis, we have 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.



Impairment of Goodwill



During 2001, we performed an assessment of the goodwill related to our acquisition of Devnet, LLC, pursuant to SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of
(SFAS No. 121). Devnet had entered into exclusive license agreements to manage communications access to commercial office properties, and we associated the goodwill resulting from the acquisition primarily to those agreements. We made
the determination to perform an assessment based upon significant negative industry and economic trends. In 2001, a change in the business environment resulted in significantly less demand for telecommunications access to commercial office
properties, and the number of potential customers seeking these services diminished greatly. Consequently, we revised our forecasted cash flows from Devnet and determined that the decline in the market conditions within this market segment was
material and other than temporary. After using an undiscounted cash flow model of the future cash flows forecasted to be generated from business activities in the commercial office properties underlying the license agreements and determining there
was an impairment, we used a discounted cash flow model to determine the size of the impairment. As a result, we recorded a charge of $56.5 million during the third quarter of 2001 to reduce goodwill associated with the purchase of Devnet. The
charge was based on the amount by which the carrying amount of these assets exceeded their fair value. During 2001, we recorded approximately $3.1 million of amortization of goodwill relating to Devnet.



In June 2001, the FASB issued 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.



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, 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 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



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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.



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. However, in the coming year we expect occupancy expenses to increase by 25% to 30% over 2003, as we consolidate the
costs of the carrier point facility at 165 Halsey Street in Newark, New Jersey that we acquired in the first quarter of 2004. 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, 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



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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. We anticipate selling, general and administrative
expenses to increase modestly in 2004 with the general growth of our business.



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.



In December 2000,
we repriced stock options for certain of our executive officers, resulting in variable plan accounting in accordance with FIN No. 44, from the date of modification. The additional intrinsic value was determined on the date of modification using the
then market price of the common stock. The additional compensation cost was recognized over the period from the date of modification to the date the awards vest. The additional compensation cost has been adjusted in subsequent periods for changes in
the market price. After the awards vested, adjustments to compensation cost for changes in the market price were recognized immediately. In subsequent periods, the market price declined, resulting in negative compensation cost being recognized. In
accordance with FIN No. 44, illustration 3(g), income (negative expense) has been recognized up to the amount of expense previously recognized in prior periods relating specifically to the modified awards.



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 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.



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



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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 $5.8 million related to the extinguishment of our subordinated note payable on
October 30, 2002, as part of our recapitalization. Also included in 2002 was a charge of $2.1 million incurred for professional fees related to our recapitalization in October 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.



Interest Expense, Net. Interest expense, net for 2003 was $2.3 million, compared to $7.5 million in 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.



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.



Fiscal Year Ended December 31,
2002 Compared to Fiscal Year Ended December 31, 2001



Revenues. Revenues for the fiscal year ended December 31, 2002 were $25.3 million as compared to $31.2 million for the fiscal year ended December 31, 2001. During 2002, our number of customers increased from 88 at the beginning of
the year to 104 at the end of the year.



Revenues were
generated by providing transport, colocation and communications access management services to our customers. We recognized $15.8 million in transport services in 2002, down from $19.6 million in 2001. Revenues from colocation and other services
increased to $5.9 million in 2002 from $5.5 million in 2001, and revenues from communications access management services declined to $3.6 million in 2002 from $6.1 million in 2001.



The decrease in transport services was primarily the result of the termination of three of our reciprocal agreements and
customer service disconnections. These negative trends were partially offset by the provisioning of new services for new and existing customers. Colocation revenues grew as we leased more space in our carrier point facilities to our customers. 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.



For fiscal year 2002, two customers accounted for approximately 24.0% of our
revenues. During 2001, three customers accounted for approximately 53.3% of our revenues. Two of those companies have filed for



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bankruptcy. Once a customer has filed for bankruptcy, we recognize revenues from that customer only upon the receipt of payment. Reciprocal agreements
accounted for $0.8 million, or 3%, of revenues in 2002, down from $5.2 million, or 17%, of revenues in 2001. In 2001, we terminated two of our reciprocal agreements, and in 2002 we terminated one additional reciprocal agreement.



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 $1.4 million reduction in revenues for the year ended December 31, 2002. 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 $7.5 million in 2002, compared to $13.8 million in 2001. Occupancy expenses, consisting of rent and utility costs, for our carrier hotel facilities, on-net buildings and off-net buildings, were 84% of our cost of
services in 2002, down from 92% in 2001. Cost of services also includes license fees and maintenance and repair costs. License fees were 7% and 4% of cost of services in 2002 and 2001, respectively, and maintenance and repair costs were 9% and 4% of
cost of services in 2002 and 2001, respectively. The decrease of $6.3 million was due to a reduction in expenses associated with the elimination of certain of our network facilities and the termination of certain reciprocal agreements.



In addition, cost of services for the year ended December 31, 2002 was
reduced by $0.7 million due to certain, non-recurring concessions that we negotiated from vendors, thereby reducing accounts payable. These items were expensed in prior periods and included in our cost of services. Reciprocal agreements accounted
for $0.8 million of our cost of services in 2002 and $5.4 million of our cost of services for 2001.



Selling, General and Administrative Expenses. Selling, general and administrative expenses for 2002 were $16.1 million compared to $32.9 million
for 2001. The decrease was a result of our aggressive cost savings initiatives to reduce corporate overhead in line with our outlook for business activity. Cost reductions were realized in nearly all components of selling, general and administrative
expenses, including advertising and marketing costs, professional fees and travel and entertainment expenses. The greatest decrease in overhead came in personnel costs, as we reduced headcount from 108 employees at the beginning of 2002 to 75, as of
December 31, 2002. Personnel costs, as a percentage of selling, general and administrative expenses, were approximately 62% and 65% in 2002 and 2001, respectively. Included in selling, general and administrative expenses for 2002 was a legal
settlement expense of approximately $0.6 million.



Stock
Related Expense. Stock related expense for 2002 was $0.2 million, compared to $(1.2) million for 2001. This non-cash expense relates to the granting of stock options to employees. The amount for the prior period reflects a reversal of a
previously recorded expense, due to the decline in the price per share of our common stock.



In December 2000, we repriced stock options for certain of our executive officers, resulting in variable plan accounting in accordance with FIN No. 44 from the date of modification. The additional intrinsic value was
determined on the date of modification using the then market price of the common stock. The additional compensation cost was recognized over the period from the date of modification to the date the awards vest. The additional compensation cost has
been adjusted in subsequent periods for changes in the market price. After the awards vested, adjustments to compensation cost for changes in the market price were recognized immediately. In subsequent periods, the market price declined, resulting
in negative compensation cost being recognized. In accordance with FIN No. 44, illustration 3(g), income (negative expense) has been recognized up to the amount of expense previously recognized in prior periods relating specifically to the modified
awards.



Impairment of property, plant and equipment. In
2002, we recorded an asset impairment of $13.2 million to reflect our revised business plan and forecast of revenues due to the continued adverse business environment and



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industry conditions. Included in this charge is a recovery of $0.3 million due to the disposition of equipment that was impaired in 2001. 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. In 2001, we recorded an asset
impairment of $51.8 million to reflect our revised business plan and the state of the market at that time.



Impairment of goodwill. In 2001, we recorded a charge for the impairment of goodwill, relating to our acquisition of Devnet, LLC in the amount of
$56.5 million. We recorded this write down of goodwill in accordance with SFAS No. 121. No additional impairment of goodwill was recorded in 2002.



Loss on early extinguishment of debt. In 2002, we recorded a non-cash charge of $5.8 million related to the extinguishment of our subordinated note
payable on October 30, 2002, as part of our recapitalization. Also included in 2002 was a charge of $2.1 million incurred for professional fees related to our recapitalization in October 2002. In 2001, we recorded a non-cash charge of $7.4 million
related to an early extinguishment of debt from the modification of our credit facility on February 9, 2001.



Depreciation and Amortization. Depreciation and amortization expense for 2002 was $10.3 million, compared to $15.3 million for 2001. This decrease
resulted from the impairment of property, plant and equipment that we recorded in 2001 and the adoption of 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 December 31, 2001 no longer be amortized, but instead be reviewed for recoverability annually.



Interest Expense, Net. Interest expense, net for 2002 was $7.5
million, compared to $8.6 million in 2001. Interest expense decreased due to lower effective interest rates on the indebtedness under our credit facility, and the conversion of debt into equity as part of our recapitalization that occurred in
October 2002.



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. In 2001, we paid non-cash
dividends on our series D, E, F, H and I preferred stock of $1.1 million in the form of additional shares of each respective series of preferred stock, which were convertible into shares of common stock. The amounts of the dividends assume the
market price per share of the underlying common stock, as of the date the dividends are paid. The decrease in preferred dividends was the result of a decline in the public market price of our common stock and the conversion of certain series of
preferred stock. The liquidation value of the dividends paid in 2002 was $0.6 million, compared to $5.3 million for dividends paid in 2001.



Preferred Stock - Beneficial Conversion.In February 2001, the conversion price of our series H and series I preferred stock was reduced to $4.38,
in accordance with the original terms of the issuance transactions. The certificates of designation of the series H and series I included provisions requiring the conversion prices to be lowered to the per share price at which we issued any shares
of common stock, subject to certain exceptions, subsequent to the initial issuance of the series H and series I. In February 2001, we issued shares of common stock in a directed public offering at a price of $4.38 per share, resulting in the
reduction of the conversion price. We recorded a beneficial conversion charge of $21.0 million as a result of the reduction of the conversion price. Additionally, in connection with the conversion of the series H and series I, the conversion price
of the remaining 100,000 shares of series H was reduced to $1.31. However, as all of the proceeds from the issuances of the series H and series I had been allocated to beneficial conversion features, no additional proceeds were allocated upon the
reset of the conversion price of the series H to $1.31.



On
December 7, 2001, we consummated a directed public offering of 360 shares of a new series of preferred stock, designated series J preferred stock for an aggregate purchase price of $3.6 million. Subject to certain



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adjustments, the series J preferred stock was convertible into the number of shares of common stock equal to 90% of the average of the five lowest volume
weighted average prices for our common stock during the 15 trading days immediately prior to the date of conversion, provided that such average price shall not be less than $0.20 nor greater than $0.50. In connection with this transaction, we
recorded a non-recurring, non-cash charge for a beneficial conversion feature in the amount of $2.1 million to reflect the market price of the common stock as of the date of the issuance. The amounts of the beneficial conversion charges assume the
market price per share of the underlying common stock, as of the date the charge is incurred, in accordance with EITF Issue 98-05, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion
Ratio. There was no preferred stock - beneficial conversion recorded in 2002.



Net Loss Applicable to Common Stockholders. We reported a net loss applicable to common stockholders of $37.4 million in 2002 compared to a loss of $178.2 million in 2001. 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 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 2003 of $25.5 million and $27.8 million, respectively, compared to a loss from operations and a net loss applicable to common stockholders of $29.9 million and
$37.4 million, respectively, for 2002. During 2003, cash provided by operating activities was $2.2 million, and cash purchases of property, plant and equipment were $2.4 million, compared to cash used to fund operating activities of $4.5 million and
$2.5 million of cash purchases of property, plant and equipment for 2002.



For the year ended December 31, 2003 we received $2.2 million in net cash proceeds from financing activities. For the year ended December 31, 2002 we received $7.4 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 October 30, 2002, we completed a series of transactions with the lenders under our credit facility as well as certain
investors to undertake the recapitalization of our company. Pursuant to the terms of a common stock purchase agreement dated as of October 30, 2002 by and among us and our lenders under our credit facility, we issued 14,666,666 shares of our common
stock to the lenders at a price of $4.50 per share, as prepayment of an aggregate of $66.0 million of outstanding indebtedness under our credit facility. We also issued warrants to purchase 3,666,666 shares of common stock at an exercise price of
$3.60 per share with a term of five years to the lenders.



Furthermore, the payment of all accrued interest on borrowings during the period beginning on October 30, 2002 and ending on June 30, 2003 was capitalized and added to the outstanding principal amount of the term loan indebtedness. Prior to
October 30, 2002, there was $5.2 million of interest due and payable on the indebtedness outstanding under the credit facility. As part of this transaction, accrued interest of $3.2 million was capitalized and added to the outstanding principal
amount of the term loan indebtedness. Subsequently on November 11, 2002, we issued to our lenders in exchange for the remaining $2.0 million of accrued interest 666,666 shares of common stock and warrants to purchase 666,666 shares of common stock
at an exercise price of $3.60 per share with a term of five years.



On October 30, 2002, we also 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 1,266,666 shares of common stock for a price of $3.00 per
share for an aggregate cash consideration of $3.8 million. Pursuant to the terms of this purchase agreement, we also issued to such investors warrants to purchase an additional 1,266,666 shares of common stock at an exercise price of $3.60 per share
with a term of five years.



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We also consummated certain related transactions on October 30, 2002 and November 11, 2002, whereby we
converted $2.5 million of other indebtedness into 2,033,401 shares of common stock and our series H and series J preferred stock, with a combined liquidation preference of $13.7 million, into 5,506,048 shares of common stock.



In total, 21,739,449 shares of common stock and warrants to purchase an
aggregate of 4,933,333 shares of common stock were issued on October 30, 2002, as part of these transactions, and a total of 2,400,000 shares of common stock and warrants to purchase an aggregate of 666,666 shares of common stock were issued on
November 11, 2002.



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.



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



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purchases, privately negotiated transactions, block trades or otherwise. Repurchases are 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 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 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.



As of December 31, 2003, we had $22.4 million of indebtedness outstanding under our credit facility and $6.1 million of outstanding letters of credit,
which together reflect the total amount available under the credit facility. The weighted average interest rate on our outstanding borrowings under the facility was 4.78% at an applicable borrowing rate of LIBOR+375 basis points. Effective January
1, 2004 our applicable borrowing rate increased to LIBOR+450 basis points. We were in full compliance with all of the covenants contained in the credit agreement underlying the facility as of December 31, 2003. 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 $2.4 million in capital expenditures during 2003, primarily for the implementation of customer orders. Our capital expenditures totaled $2.5 million in 2002. We have substantially completed the deployment of our FINs,
carrier hotel facilities and metropolitan transport networks. In 2004, we expect to invest $3.0 million to $4.0 million in capital expenditures, also primarily for customer order activity. 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, 2003, holders of warrants exercised warrants for 1.5 million shares of common stock
with an exercise price ranging from $0.001 to $0.03 per share. During the year ended December 31, 2003, we granted options to purchase an aggregate of 408,500 shares of common stock to employees with a weighted average exercise price of $1.13
per share.



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



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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.



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 connection with the purchase agreements, we
entered into a registration rights agreement with the investors, which requires 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.



We utilized a portion of the gross proceeds to permanently repay $2.1 million of term loan indebtedness underlying the credit facility and to cancel $1.1 million of letter 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, we also released for general corporate purposes $0.5 million of restricted cash previously held as cash collateral. Furthermore, we temporarily 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. As a result of these transactions, we have $16.8 million of outstanding indebtedness and $4.8 million of outstanding letters of credit as of March 15, 2004. In
addition, we have $3.5 million of available borrowing capacity and $0.2 million of availability to issue letters of credit under the credit facility, again subject to compliance with the terms of the credit agreement.



In connection with the consummation of both the 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. As of March 15, 2004 we 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, 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. All of the repriced warrants were immediately exercised by the lenders.



On February 12, 2004, we provided 200,000 shares of common stock to a
stockholder in settlement of certain litigation matters. The price on the date of the grant 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 in an arbitration regarding a breach of contract. We were awarded
approximately $2.7 million, which included approximately $0.4 million for the reimbursement of legal fees. As of March 15, 2004, we had not yet received payment of the award.



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As of March 15, 2004, we had approximately 51.1 million shares of common stock outstanding, or
approximately 58.1 million shares of common stock outstanding on a fully diluted basis, assuming the exercise of all outstanding options and warrants.



We believe that the completion of the transactions 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 if actual results vary from the anticipated results of
our operating plan, we may not be able to fund our 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. Our credit agreement prohibits us from incurring additional indebtedness. Consequently if we were to
require additional capital, we would be limited to issuing additional equity securities, or otherwise obtaining a waiver from our lenders. There can be no assurance that we will be able to successfully consummate any such financing on acceptable
terms, if at all. We do not have any off-balance sheet financing arrangements, nor do we anticipate entering into any.



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, 2003. As discussed above, we have made all mandatory repayments and reductions of indebtedness for 2004 as of March 15, 2004.



|                                                    |  |                                       |        |      |   |        |  |      |        |      |   |        |  |            |       |  |   |       |  |   |       
|--------------------------------------------------- |  | ------------------------------------- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | ---------- | ----- |  | - | ----- |  | - | ------
|                                                    |  | Payments Due by Period (in thousands)
|Contractual Obligation                              |  | Total                                 |        | 2004 |   | 2005   |  | 2006 |        | 2007 |   | 2008   |  | Thereafter
|Mandatory Repayments and Reductions of Indebtedness |  | $                                     | 22,433 |      | $ | 1,795  |  | $    | 8,973  |      | $ | 10,768 |  | $          | 897   |  | $ |      |  | $ |      
|Operating Leases(1)                                 |  |                                       | 75,948 |      |   | 9,425  |  |      | 7,880  |      |   | 6,692  |  |            | 6,257 |  |   | 6,198 |  |   | 39,496
|                                                    |  |                                       |        |      |   |        |  |      |        |      |   |        |  |            |       |  |   |       |  |   |       
|Total Contractual Obligations                       |  | $                                     | 98,381 |      | $ | 11,220 |  | $    | 16,853 |      | $ | 17,460 |  | $          | 7,154 |  | $ | 6,198 |  | $ | 39,496
|                                                    |  |                                       |        |      |   |        |  |      |        |      |   |        |  |            |       |  |   |       |  |   |       

|(1) | Includes estimated future license fees for carrier hotel facilities.
|--- | --------------------------------------------------------------------



Recent Accounting Pronouncements



In July 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, which we adopted on January 1, 2003. The statement
requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the
related long-lived asset. Over time, the liability is accreted to its then present value, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation
for its recorded amount or incurs a gain or loss upon settlement. The adoption of this statement did not have a material impact on our consolidated financial statements.



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In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements 4, 44 and 64, Amendment
of FASB Statement 13, and Technical Corrections (SFAS No. 145). SFAS No. 145 rescinds the provisions of SFAS No. 4 that requires companies to classify certain gains and losses from debt extinguishments as extraordinary items,
eliminates the provisions of SFAS No. 44 regarding transition to the Motor Carrier Act of 1980 and amends the provisions of SFAS No. 13 to require that certain lease modifications be treated as sale leaseback transactions. The provisions of SFAS No.
145 related to classification of debt extinguishment are effective for fiscal years beginning after May 15, 2002, and were adopted on January 1, 2003. As a result of the adoption of this statement we classified debt extinguishment costs within
income from operations and reclassified previously reported debt extinguishments as such.



In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS No. 146). SFAS No. 146 nullifies Emerging Issues Task Force (EITF)
No. 94-3, Liability Recognition for certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in as Restructuring) (EITF No. 94-3). The principal difference between SFAS No.
146 and EITF No. 94-3 relates to its requirements for recognition of a liability for a cost associated with an exit or disposal activity. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at the date of an entitys commitment to an exit plan. SFAS No. 146 was adopted on January 1, 2003. The adoption of SFAS No. 146 did not have a
material impact on our consolidated financial statements.



In
December 2002, the 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.



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity
(SFAS No.150). SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some circumstances). The requirements of this statement apply to issuers classification and measurement of freestanding financial instruments, including those that comprise
more than one option or forward contract. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The
initial adoption did not have a material effect on our consolidated financial statements.



In November 2002, the Emerging Issues Task Force (EITF) of the FASB reached a consensus on EITF No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables (EITF No.
00-21). EITF No. 00-21 addresses how to account for arrangements that may involve multiple revenue-generating activities. The consensus guidance will be applicable to agreements entered into in quarters beginning after June 15, 2003. We
adopted EITF No. 00-21 effective July 1, 2003 and are applying it on a prospective basis. The initial adoption did not have a material effect on our consolidated financial statements.



In November 2002, the FASB issued FIN No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements



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No. 5, 57 and 107 and rescission of FASB Interpretation No. 34 (FIN No. 45). FIN No. 45 elaborates on the disclosures to be made by the
guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. The initial recognition and measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The adoption of this statement did not have a material impact on our consolidated financial statements.



In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN No. 46). FIN No. 46
addresses whether certain types of entities, referred to as variable interest entities (VIE) should be consolidated in a companys financial statements. A VIE is an entity that either (1) has equity investors that lack certain
essential characteristics of a controlling financial interest (including the ability to control the entity, the obligation to absorb the entitys expected losses and the right to receive the entitys expected residual returns), or (2)
lacks sufficient equity to finance its own activities without financial support provided by other entities, which in turn would be expected to absorb at least some of the expected losses of the VIE. An entity should consolidate a VIE if it stands to
absorb a majority of the VIEs expected losses or to receive a majority of the VIEs expected residual returns. In October 2003, the FASB issued a Final FASB Staff Position deferring the effective date of FIN No. 46 for all public entities
until the first interim or annual period ending after December 15, 2003. As such, FIN No. 46 is effective for us as of March 31, 2004.



In addition to conforming to previously issued FASB Staff Positions, FIN No. 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 will not have any impact on our 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 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



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basis. We have not achieved profitability and expect to continue to incur operating losses and net losses in 2004, and we may not for the foreseeable future.
In 2001, we had an operating loss of $145.4 million and a net loss applicable to common stockholders of $178.2 million, and in 2002, we had an operating loss of $29.9 million and a net loss applicable to common stockholders of $37.4 million. In
2003, we had an operating loss of $25.5 million and a net loss applicable to common stockholders of $27.8 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.



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 2003, we experienced 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



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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 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.



There can be no assurance that additional funds will be available at the time needed, or on terms acceptable to us. Our inability to obtain additional
financing, as needed, could have a material adverse effect on our business.



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.



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We should 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 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



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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. We have previously announced the intention of Michael S. Liss, our President and Chief Executive Officer, to resign during 2004. There can be no assurance that Mr.
Liss departure will coincide with the hiring of his replacement or that this transition will not adversely impact our business.



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,



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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 February 28, 2004, we had total outstanding debt of $16.8 million,
with the availability to borrow an additional $3.5 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 beginning in 2004 and extending 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 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. 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



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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 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 majority 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 51.6% 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



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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 7.0 million shares of common stock subject 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.



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 February 28, 2004, we had borrowed $16.8 million under our credit facility, with a current weighted average interest rate of 5.25%.



On January 2, 2002, we entered into an interest rate swap transaction with
Deutsche Bank AG for a notional amount of $25.0 million and a term of two years. Pursuant to this transaction, we were obligated to make quarterly interest payments at a fixed, annual interest rate of 3.7%. Because such interest rate excluded the
applicable margin of 4.5% that we paid on our credit facility at the time, the total interest rate for us on this swap transaction was 8.2%. As part of this agreement, Deutsche Bank AG was obligated to pay to us on a quarterly basis a floating rate
of interest based upon LIBOR with a designated maturity of three months. On March 20, 2002, we terminated this interest rate swap transaction with Deutsche Bank AG with no payments or other amounts owed by either party. As a result, all of our
outstanding borrowings under our credit facility bear interest at a floating rate.



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 Public Accountants        |  | 47  
|Consolidated Balance Sheets                     |  | 50  
|Consolidated Statements of Operations           |  | 51  
|Consolidated Statements of Stockholders Equity |  | 52  
|Consolidated Statements of Cash Flows           |  | 53  
|Notes to Consolidated Financial Statements      |  | 54  



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INDEPENDENT AUDITORS REPORT



To the Shareholders of FiberNet Telecom Group, Inc.:



We have audited the accompanying consolidated balance sheets of FiberNet Telecom Group, Inc. (FiberNet) as of
December 31, 2003 and 2002, and the related consolidated statements of operations, stockholders equity and cash flows for each of the two years in the period ended December 31, 2003. 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. The consolidated financial statements of FiberNet Telecom Group, Inc. for the year ended December 31, 2001, were audited by
other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those consolidated financial statements in their report dated February 28, 2002 (except with respect to the matters discussed in Note 17, as to which the
date is May 16, 2002).



We conducted our audits in accordance
with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, such 2003 and 2002 consolidated financial statements present fairly, in all material respects, the financial position of FiberNet Telecom
Group, Inc., as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States
of America.



As described in Note 2 to the consolidated
financial statements FiberNet adopted Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets effective January 1, 2002, and adopted Statement of Financial Accounting Standards No. 145,Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Correction,.



As discussed above, the consolidated financial statements of the Company as of December 31, 2001 and for the year then ended were audited by other
auditors who have ceased operations. These consolidated financial statements have been revised as follows:



| | 1. | As described in Note 2, these consolidated financial statements have been revised to include the transition disclosures required by Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets, which was adopted by the Company as of January 1, 2002. Our audit procedures with respect to 2001 included (a) agreeing previous reported net loss to the previously issued consolidated financial statements
and the adjustments to reported net loss representing amortization expense recognized in those periods relating to goodwill to the Companys underlying records obtained from management, and (b) testing the mathematical accuracy of the
reconciliation of adjusted net loss to reported net loss.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | As described in Notes 2 these consolidated financial statements have been revised to include the reclassification provisions required by Statement of Financial Accounting Standards
No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Correction, which was adopted by the Company as of January 1, 2003. Our audit procedures with respect to 2001 included (a)
agreeing the reported amount to underlying accounting records obtained from management, and (b) testing the mathematical accuracy of reclassification of gain on early extinguishment of debt to operating expenses.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | 3. | As described in Note 2, these financial statements have been revised to give effect to the one for 30 reverse stock split on May 12, 2003. Our audit procedures with respect to 2001
included (a) comparing the amounts shown in the earnings per share disclosures for 2001 to the Companys underlying accounting analysis obtained from management, (b) comparing the previously reported shares outstanding and income statement
amounts per the Companys accounting analysis to the previously issued financial statements, and (c) recalculating the additional shares to give effect to the stock split and testing the mathematical accuracy of the underlying analysis.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In our opinion, such disclosures and
reclassifications are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2001 consolidated financial statements of the Company other than with respect to such disclosures and
reclassifications, and accordingly, we do not express an opinion or any other form of assurance on the 2001 consolidated financial statements taken as a whole.



/s/    DELOITTE & TOUCHE LLPParsippany, New JerseyMARCH 29, 2004




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THIS REPORT SET FORTH BELOW IS A COPY OF A PREVIOUSLY ISSUED AUDIT REPORT BY ARTHUR ANDERSEN LLP. THIS
REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP IN CONNECTION WITH ITS INCLUSION IN THIS FORM 10-K.



REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To FiberNet Telecom Group, Inc.:



We have audited the accompanying consolidated balance sheets of FiberNet Telecom Group, Inc. and subsidiaries (a Delaware corporation) as of December 31, 2001 and 2000, and the related consolidated statements of operations,
stockholders equity and cash flows for the years ended December 31, 2001, 2000 and 1999, as restated-see Note 16. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express
an opinion on these financial statements based on our audits.



We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



We have also audited the adjustments described in Note 16 that were applied to restate the 1999 financial statements. In our opinion, such adjustments are
appropriate and have been properly applied.



In our opinion,
the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FiberNet Telecom Group, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their
cash flows for the years ended December 31, 2001, 2000 and 1999, as restated, in conformity with accounting principles generally accepted in the United States.



/s/    ARTHUR ANDERSEN LLPNew York, New YorkFebruary 28, 2002




(except with respect to the
matters discussed in Note 17, as to which the date is May 16, 2002)



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FIBERNET TELECOM GROUP, INC.



CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)



|                                                                                                                                                                       |  |                  |          |   |                  |   |          |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                       |  | December 31,2003 |          |   | December 31,2002 |  
|ASSETS                                                                                                                                                                 |  |                  |          |   |                  |   |          |  
|Current Assets:                                                                                                                                                        |  |                  |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                              |  | $                | 3,488    |   |                  | $ | 3,788    |  
|Restricted cash                                                                                                                                                        |  |                  | 2,337    |   |                  |   |         |  
|Accounts receivable, net of allowance of $721 and $1,005 at December 31, 2003 and 2002, respectively                                                                   |  |                  | 3,785    |   |                  |   | 2,765    |  
|Prepaid expenses and other                                                                                                                                             |  |                  | 754      |   |                  |   | 740      |  
|                                                                                                                                                                       |  |                  |          |   |                  |   |          |  
|Total current assets                                                                                                                                                   |  |                  | 10,364   |   |                  |   | 7,293    |  
|Property, plant and equipment, net                                                                                                                                     |  |                  | 86,958   |   |                  |   | 95,122   |  
|Other Assets:                                                                                                                                                          |  |                  |          |   |                  |   |          |  
|Goodwill                                                                                                                                                               |  |                  |         |   |                  |   | 7,509    |  
|Deferred charges, net of accumulated amortization of $1,402 and $1,405 at December 31, 2003 and 2002, respectively                                                     |  |                  | 2,035    |   |                  |   | 3,383    |  
|Other assets                                                                                                                                                           |  |                  | 261      |   |                  |   | 488      |  
|                                                                                                                                                                       |  |                  |          |   |                  |   |          |  
|Total other assets                                                                                                                                                     |  |                  | 2,296    |   |                  |   | 11,380   |  
|                                                                                                                                                                       |  |                  |          |   |                  |   |          |  
|TOTAL ASSETS                                                                                                                                                           |  | $                | 99,618   |   |                  | $ | 113,795  |  
|                                                                                                                                                                       |  |                  |          |   |                  |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                   |  |                  |          |   |                  |   |          |  
|Current Liabilities:                                                                                                                                                   |  |                  |          |   |                  |   |          |  
|Accounts payable                                                                                                                                                       |  | $                | 3,598    |   |                  | $ | 4,147    |  
|Accrued expenses                                                                                                                                                       |  |                  | 5,138    |   |                  |   | 5,608    |  
|Deferred revenues                                                                                                                                                      |  |                  | 6,023    |   |                  |   | 4,613    |  
|Notes payablecurrent portion                                                                                                                                          |  |                  | 1,795    |   |                  |   |         |  
|Capital lease obligationcurrent portion                                                                                                                               |  |                  |         |   |                  |   | 271      |  
|                                                                                                                                                                       |  |                  |          |   |                  |   |          |  
|Total current liabilities                                                                                                                                              |  |                  | 16,554   |   |                  |   | 14,639   |  
|Long-Term Liabilities:                                                                                                                                                 |  |                  |          |   |                  |   |          |  
|Notes payable, less original issue discount of $2,308 and $4,880 at December 31, 2003 and 2002, respectively                                                           |  |                  | 18,330   |   |                  |   | 30,356   |  
|Capital lease obligation                                                                                                                                               |  |                  |         |   |                  |   | 202      |  
|                                                                                                                                                                       |  |                  |          |   |                  |   |          |  
|Total liabilities                                                                                                                                                      |  |                  | 34,884   |   |                  |   | 45,197   |  
|Commitments and contingent liabilities (Note 7)                                                                                                                        |  |                  |          |   |                  |   |          |  
|Stockholders Equity:                                                                                                                                                  |  |                  |          |   |                  |   |          |  
|Common stock, $.001 par value, 2,000,000,000 shares authorized and 40,540,334 and 26,405,482 shares issued and outstanding at December 31,
2003 and 2002, respectively |  |                  | 41       |   |                  |   | 26       |  
|Additional paid-in-capital and other                                                                                                                                   |  |                  | 429,991  |   |                  |   | 401,298  |  
|Deferred compensation                                                                                                                                                  |  |                  | (4,797   | ) |                  |   |         |  
|Accumulated deficit                                                                                                                                                    |  |                  | (360,501 | ) |                  |   | (332,726 | )
|                                                                                                                                                                       |  |                  |          |   |                  |   |          |  
|Total stockholders equity                                                                                                                                             |  |                  | 64,734   |   |                  |   | 68,598   |  
|                                                                                                                                                                       |  |                  |          |   |                  |   |          |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                             |  | $                | 99,618   |   |                  | $ | 113,795  |  
|                                                                                                                                                                       |  |                  |          |   |                  |   |          |  



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



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FIBERNET TELECOM GROUP, INC.



CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)



|                                                                            |  |                         |         |   |      |   |         |      |  |   |          |  
|--------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                                                                            |  | Year Ended December 31, |        
|                                                                            |  | 2003                    |         |   | 2002 |   |         | 2001 | 
|Revenues                                                                    |  | $                       | 26,604  |   |      | $ | 25,334  |      |  | $ | 31,195   |  
|Operating expenses:                                                         |  |                         |         |   |      |   |         |      |  |   |          |  
|Cost of services (exclusive of items shown separately below)                |  |                         | 8,806   |   |      |   | 7,537   |      |  |   | 13,801   |  
|Selling, general and administrative expense excluding stock related expense |  |                         | 16,409  |   |      |   | 16,053  |      |  |   | 32,917   |  
|Stock related expense for selling, general and administrative matters       |  |                         | 222     |   |      |   | 225     |      |  |   | (1,172   | )
|Impairment of property, plant and equipment                                 |  |                         | 1,346   |   |      |   | 13,175  |      |  |   | 51,848   |  
|Impairment of goodwill                                                      |  |                         | 7,509   |   |      |   |        |      |  |   | 56,467   |  
|Loss on early extinguishment of debt                                        |  |                         | 8,951   |   |      |   | 7,859   |      |  |   | 7,398    |  
|Depreciation and amortization                                               |  |                         | 8,840   |   |      |   | 10,346  |      |  |   | 15,319   |  
|                                                                            |  |                         |         |   |      |   |         |      |  |   |          |  
|Total operating expenses                                                    |  |                         | 52,083  |   |      |   | 55,195  |      |  |   | 176,578  |  
|                                                                            |  |                         |         |   |      |   |         |      |  |   |          |  
|Loss from operations                                                        |  |                         | (25,479 | ) |      |   | (29,861 | )    |  |   | (145,383 | )
|Interest income                                                             |  |                         | 46      |   |      |   | 28      |      |  |   | 182      |  
|Interest expense                                                            |  |                         | (2,342  | ) |      |   | (7,571  | )    |  |   | (8,776   | )
|                                                                            |  |                         |         |   |      |   |         |      |  |   |          |  
|Net loss                                                                    |  |                         | (27,775 | ) |      |   | (37,404 | )    |  |   | (153,977 | )
|Preferred stock dividends                                                   |  |                         |        |   |      |   | (44     | )    |  |   | (1,080   | )
|Preferred stock-beneficial conversion                                       |  |                         |        |   |      |   |        |      |  |   | (23,109  | )
|                                                                            |  |                         |         |   |      |   |         |      |  |   |          |  
|Net loss applicable to common stockholders                                  |  | $                       | (27,775 | ) |      | $ | (37,448 | )    |  | $ | (178,166 | )
|                                                                            |  |                         |         |   |      |   |         |      |  |   |          |  
|Net loss applicable to common stockholders per sharebasic and diluted      |  | $                       | (0.75   | ) |      | $ | (6.09   | )    |  | $ | (130.14  | )
|Weighted average common shares outstandingbasic and diluted                |  |                         | 37,192  |   |      |   | 6,148   |      |  |   | 1,369    |  





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



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FIBERNET TELECOM GROUP, INC.



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(in thousands, except per share amounts)



|                                                                 |  |                 |   |  |              |         |                                   |        |            |                      |        |   |                    |  |   |         |   |  |   |        |   |  |   |          |   |  |   |          |  
|---------------------------------------------------------------- |  | --------------- | - |  | ------------ | ------- | --------------------------------- | ------ | ---------- | -------------------- | ------ | - | ------------------ |  | - | ------- | - |  | - | ------ | - |  | - | -------- | - |  | - | -------- | -
|                                                                 |  | Preferred Stock |   |  | Common Stock |         | AdditionalPaid inCapitaland Other |        |            | DeferredCompensation |        |   | AccumulatedDeficit |  |   | Total   |  
|                                                                 |  | Shares          |   |  | Amount       |         |                                   | Shares |            |                      | Amount |   |                    |  |  
|Balance at December 31, 2000                                     |  | 1,605,422       |   |  | $            | 101,085 |                                   |        | 1,107,945  |                      |        | $ | 1                  |  | $ | 154,854 |   |  | $ |       |   |  | $ | (111,658 | ) |  | $ | 144,282  |  
|                                                                 |  |                 |   |  |              |         |                                   |       
|Direct issuance of common stock, Feb 2001                        |  |                |   |  |              |        |                                   |        | 214,667    |                      |        |   |                   |  |   | 24,806  |   |  |   |       |   |  |   |         |   |  |   | 24,806   |  
|Issuance of warrants in connection with bank financing           |  |                |   |  |              |        |                                   |        |           |                      |        |   |                   |  |   | 7,148   |   |  |   |       |   |  |   |         |   |  |   | 7,148    |  
|Series D preferred stock dividends                               |  | 12,123          |   |  |              | 96      |                                   |        |           |                      |        |   |                   |  |   |        |   |  |   |       |   |  |   |         |   |  |   | 96       |  
|Series E preferred stock dividends                               |  | 22,802          |   |  |              | 184     |                                   |        |           |                      |        |   |                   |  |   |        |   |  |   |       |   |  |   |         |   |  |   | 184      |  
|Series F preferred stock dividends                               |  | 27,445          |   |  |              | 219     |                                   |        |           |                      |        |   |                   |  |   |        |   |  |   |       |   |  |   |         |   |  |   | 219      |  
|Series H preferred stock dividends                               |  | 33,959          |   |  |              | 264     |                                   |        |           |                      |        |   |                   |  |   |        |   |  |   |       |   |  |   |         |   |  |   | 264      |  
|Series I preferred stock dividends                               |  | 4,885           |   |  |              | 38      |                                   |        |           |                      |        |   |                   |  |   |        |   |  |   |       |   |  |   |         |   |  |   | 38       |  
|Exercise of options and warrants to purchase common stock        |  |                |   |  |              |        |                                   |        | 3,686      |                      |        |   |                   |  |   | 1       |   |  |   |       |   |  |   |         |   |  |   | 1        |  
|Beneficial conversion on repricing of series H                   |  |                |   |  |              | 16,254  |                                   |        |           |                      |        |   |                   |  |   |        |   |  |   |       |   |  |   |         |   |  |   | 16,254   |  
|Beneficial conversion on repricing of series I                   |  |                |   |  |              | 4,766   |                                   |        |           |                      |        |   |                   |  |   |        |   |  |   |       |   |  |   |         |   |  |   | 4,766    |  
|Issuance of warrants in connection with conversions              |  |                |   |  |              |        |                                   |        |           |                      |        |   |                   |  |   | 279     |   |  |   |       |   |  |   |         |   |  |   | 279      |  
|Conversion of series C preferred stock                           |  | (83,688         | ) |  |              | (135    | )                                 |        | 2,790      |                      |        |   |                   |  |   | 135     |   |  |   |       |   |  |   |         |   |  |   |         |  
|Conversion of series D preferred stock                           |  | (334,827        | ) |  |              | (6,291  | )                                 |        | 111,609    |                      |        |   |                   |  |   | 6,291   |   |  |   |       |   |  |   |         |   |  |   |         |  
|Conversion of series E preferred stock                           |  | (340,655        | ) |  |              | (7,528  | )                                 |        | 113,552    |                      |        |   |                   |  |   | 7,528   |   |  |   |       |   |  |   |         |   |  |   |         |  
|Conversion of series F preferred stock                           |  | (403,647        | ) |  |              | (14,093 | )                                 |        | 134,549    |                      |        |   |                   |  |   | 14,093  |   |  |   |       |   |  |   |         |   |  |   |         |  
|Conversion of series H preferred stock                           |  | (373,947        | ) |  |              | (63,990 | )                                 |        | 284,912    |                      |        |   | 1                  |  |   | 63,989  |   |  |   |       |   |  |   |         |   |  |   |         |  
|Conversion of series I preferred stock                           |  | (69,316         | ) |  |              | (13,773 | )                                 |        | 63,375     |                      |        |   |                   |  |   | 13,773  |   |  |   |       |   |  |   |         |   |  |   |         |  
|Issuance of series J preferred stock, net                        |  | 360             |   |  |              | 7,094   |                                   |        | 10,909     |                      |        |   |                   |  |   | 1,862   |   |  |   |       |   |  |   |         |   |  |   | 8,956    |  
|Subscription receivable on series J preferred stock              |  |                |   |  |              | (5,700  | )                                 |        |           |                      |        |   |                   |  |   |        |   |  |   |       |   |  |   |         |   |  |   | (5,700   | )
|Beneficial conversion on series J preferred stock                |  |                |   |  |              |        |                                   |        |           |                      |        |   |                   |  |   | 2,091   |   |  |   |       |   |  |   |         |   |  |   | 2,091    |  
|Conversion of series J preferred stock                           |  | (4              | ) |  |              | (31     | )                                 |        | 4,427      |                      |        |   |                   |  |   | 31      |   |  |   |       |   |  |   |         |   |  |   |         |  
|Stock compensation to employees                                  |  |                |   |  |              |        |                                   |        |           |                      |        |   |                   |  |   | (1,172  | ) |  |   |       |   |  |   |         |   |  |   | (1,172   | )
|Net loss applicable to common stockholders                       |  |                |   |  |              |        |                                   |        |           |                      |        |   |                   |  |   |        |   |  |   |       |   |  |   | (178,166 | ) |  |   | (178,166 | )
|                                                                 |  |                 |   |  |              |         |                                   |        |            |                      |        |   |                    |  |   |         |   |  |   |        |   |  |   |          |   |  |   |          |  
|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 applicable to common stockholders                       |  |                |   |  |              |        |                                   |        |           |                      |        |   |                   |  |   |        |   |  |   |       |   |  |   | (27,775  | ) |  |   | (27,775  | )
|                                                                 |  |                 |   |  |              |         |                                   |        |            |                      |        |   |                    |  |   |         |   |  |   |        |   |  |   |          |   |  |   |          |  
|Balance at December 31, 2003                                     |  |                |   |  | $            |        |                                   |        | 40,540,334 |                      |        | $ | 41                 |  | $ | 429,991 |   |  | $ | (4,797 | ) |  | $ | (360,501 | ) |  | $ | 64,734   |  
|                                                                 |  |                 |   |  |              |         |                                   |        |            |                      |        |   |                    |  |   |         |   |  |   |        |   |  |   |          |   |  |   |          |  



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



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FIBERNET TELECOM GROUP, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                          |  |                         |         |   |      |   |         |      |  |   |          |  
|----------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                                                                                          |  | Year Ended December 31, |        
|                                                                                          |  | 2003                    |         |   | 2002 |   |         | 2001 | 
|Cash flows from operating activities:                                                     |  |                         |         |   |      |   |         |      |  |   |          |  
|Net loss applicable to common stockholders                                                |  | $                       | (27,775 | ) |      | $ | (37,448 | )    |  | $ | (178,166 | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                         |         |   |      |   |         |      |  |   |          |  
|Depreciation and amortization                                                             |  |                         | 8,840   |   |      |   | 10,346  |      |  |   | 15,319   |  
|Preferred stock dividends                                                                 |  |                         |        |   |      |   | 44      |      |  |   | 1,080    |  
|Preferred stockbeneficial conversion                                                     |  |                         |        |   |      |   |        |      |  |   | 23,109   |  
|Stock related expense for selling, general and administrative matters                     |  |                         | 222     |   |      |   | 225     |      |  |   | (1,172   | )
|Impairment of property, plant and equipment                                               |  |                         | 1,544   |   |      |   | 13,175  |      |  |   | 51,848   |  
|Impairment of goodwill                                                                    |  |                         | 7,509   |   |      |   |        |      |  |   | 56,467   |  
|Loss on early extinguishments of debt                                                     |  |                         | 8,951   |   |      |   | 7,859   |      |  |   | 7,398    |  
|Non-cash interest expense capitalized on notes payable                                    |  |                         | 663     |   |      |   | 5,421   |      |  |   |         |  
|Other non-cash expenses                                                                   |  |                         | 977     |   |      |   | 1,418   |      |  |   | 4,545    |  
|Change in assets and liabilities:                                                         |  |                         |         |   |      |   |         |      |  |   |          |  
|(Increase) decrease in accounts receivable, prepaid expenses and other assets             |  |                         | (807    | ) |      |   | (789    | )    |  |   | 9,686    |  
|Increase (decrease) in accounts payable, accrued expenses, and deferred revenue           |  |                         | 2,124   |   |      |   | (4,757  | )    |  |   | (12,144  | )
|                                                                                          |  |                         |         |   |      |   |         |      |  |   |          |  
|Cash provided by (used in) operating activities                                           |  |                         | 2,248   |   |      |   | (4,506  | )    |  |   | (22,030  | )
|Cash flows from investing activities:                                                     |  |                         |         |   |      |   |         |      |  |   |          |  
|Capital expenditures                                                                      |  |                         | (2,388  | ) |      |   | (2,453  | )    |  |   | (46,737  | )
|Increase in restricted cash                                                               |  |                         | (2,337  | ) |      |   |        |      |  |   |         |  
|                                                                                          |  |                         |         |   |      |   |         |      |  |   |          |  
|Cash used in investing activities                                                         |  |                         | (4,725  | ) |      |   | (2,453  | )    |  |   | (46,737  | )
|Cash flows from financing activities:                                                     |  |                         |         |   |      |   |         |      |  |   |          |  
|Payments of financing fees                                                                |  |                         | (1,238  | ) |      |   | (448    | )    |  |   | (2,306   | )
|Proceeds from debt financing                                                              |  |                         |        |   |      |   | 2,307   |      |  |   | 45,000   |  
|Proceeds from subordinated note payable                                                   |  |                         |        |   |      |   | 2,000   |      |  |   |         |  
|Proceeds from issuance of equity securities                                               |  |                         | 3,500   |   |      |   | 3,800   |      |  |   | 28,062   |  
|Repayment of capital lease obligation                                                     |  |                         | (85     | ) |      |   | (250    | )    |  |   | (233     | )
|                                                                                          |  |                         |         |   |      |   |         |      |  |   |          |  
|Cash provided from financing activities                                                   |  |                         | 2,177   |   |      |   | 7,409   |      |  |   | 70,523   |  
|                                                                                          |  |                         |         |   |      |   |         |      |  |   |          |  
|Net (decrease) increase in cash and cash equivalents                                      |  |                         | (300    | ) |      |   | 450     |      |  |   | 1,756    |  
|Cash and cash equivalents at beginning of year                                            |  |                         | 3,788   |   |      |   | 3,338   |      |  |   | 1,582    |  
|                                                                                          |  |                         |         |   |      |   |         |      |  |   |          |  
|Cash and cash equivalents at end of year                                                  |  | $                       | 3,488   |   |      | $ | 3,788   |      |  | $ | 3,338    |  
|                                                                                          |  |                         |         |   |      |   |         |      |  |   |          |  
|Supplemental disclosures of cash flow information:                                        |  |                         |         |   |      |   |         |      |  |   |          |  
|Interest paid                                                                             |  | $                       | 563     |   |      | $ | 35      |      |  | $ | 6,732    |  
|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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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 all 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. 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 of 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 failure of the Company to achieve certain operational results would violate certain debt covenants thereby potentially
accelerating the outstanding balance of certain indebtedness for immediate payment.



The Company believes that the completion of the transactions that constituted its recapitalization, as discussed in Note 6, significantly enhanced its liquidity and improved its financial position. Under
FiberNets current operating plan, which reflects the events discussed in Note 16, it does not anticipate requiring any additional external sources of capital to fund its operations in the coming year. However if actual results vary from the
anticipated results of its operating plan, it may not be able to fund operating and investing activities with internally generated cash flows, and the Company may require external sources of capital. From time to time, FiberNet 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 its business or for other strategic purposes. There can be no assurance that the Company
will be able to successfully consummate any such financing on acceptable terms, or at all. The Company does not have any off-balance sheet financing arrangements, nor does it anticipate entering into any.



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FIBERNET TELECOM GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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.



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 our outstanding letters of credit, which are in lieu of a cash security deposit for its facilities. See Note 6.



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
|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.



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FIBERNET TELECOM GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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 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, 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. Most of its customers are obligated to make minimum payments for the utilization of its networks and facilities. Customers may elect to purchase
additional services in excess of minimum contractual requirements.



Revenues are derived from three general types of services:



Transport services. FiberNets transport services include the offering of broadband circuits on its metropolitan transport networks and FiberNet in-building networks (FINs). Over the Companys metropolitan transport
networks, it can provision circuits from one of its carrier point facilities to another carrier point facility or to an on-net building via an interconnection with its FIN in that building. The Company can also provision circuits vertically between
floors in a carrier point facility or an on-net building. In 2003, the Company also initiated a new type of transport service offering to provide its customers with circuits on networks that it does not own. The Company intends to sell this
connectivity to its customers and purchase the underlying circuits from other wholesale telecommunications carriers.



Colocation services. FiberNets colocation services include providing customers with the ability to locate their communications and networking
equipment at its carrier point facilities in a secure technical operating environment. The Company also can provide its customers with colocation services in the central equipment rooms of certain of its on-net and off-net buildings. If a customer
colocates its equipment at the Companys facilities, FiberNets agreement with them may include a minimum commitment to use its transport services.



Communications access management services. FiberNets access management services include providing its customers with the non-exclusive right to
market and provide their retail services to tenants in its on-net and off-net buildings. Customers typically enter into an agreement with the Company to gain access to a significant number of its properties. For certain of its on-net and off-net
buildings, the Company has the exclusive right to manage communications access. Once a customer has entered into an agreement with the Company for access services, FiberNet typically requires that customer to utilize its in-building network
infrastructure for connectivity to end-user tenants, if such networking infrastructure is available.



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FIBERNET TELECOM GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



As of December 31, 2003 and 2002 the Company has one reciprocal agreement. As of December 2001 the
Company had four reciprocal agreements. The services provided and obtained through these agreements were priced at fair market value as of the date of the agreements and are included in revenues and cost of services in the accompanying consolidated
statements of operations. The Company recorded revenues from these reciprocal agreements for transport services and colocation services in the amount of approximately $0.5 million, $0.8 million and $5.2 million for the years ended December 31, 2003,
December 31, 2002 and December 31, 2001, respectively. The Company leased colocation facilities under these agreements. The total amounts expensed for services rendered under the reciprocal agreements for the years ended December 31, 2003, December
31, 2002, and December 31, 2001 were approximately $0.5 million, $0.8 million and $5.4 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). In June 2001, the Financial Accounting Standards Board
(FASB) issued SFAS No. 142, which is applicable for fiscal years beginning after December 15, 2001. SFAS No. 142, which was adopted by the Company 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. The Company performs its annual impairment test in December. The Company determined that there was an impairment as a
result of this annual test. See Note 5.



The following table
presents the impact of SFAS No. 142 as if it had been in effect for the years ended December 31, 2003, 2002 and 2001 (in thousands, except per share amounts):



|                                                    |  |                         |         |   |      |   |         |      |  |   |          |  
|--------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                                                    |  | Year Ended December 31, |        
|                                                    |  | 2003                    |         |   | 2002 |   |         | 2001 | 
|Net loss applicable to common stockholders          |  | $                       | (27,775 | ) |      | $ | (37,448 | )    |  | $ | (178,166 | )
|Plus: goodwill amortization                         |  |                         |        |   |      |   |        |      |  |   | 3,724    |  
|Adjusted net loss applicable to common stockholders |  | $                       | (27,775 | ) |      | $ | (37,448 | )    |  | $ | (174,442 | )
|Basic and diluted earnings per share:               |  |                         |         |   |      |   |         |      |  |   |          |  
|Net loss applicable to common stockholders          |  | $                       | (0.75   | ) |      | $ | (6.09   | )    |  | $ | (130.14  | )
|Plus: goodwill amortization                         |  |                         |        |   |      |   |        |      |  |   | 2.72     |  
|Adjusted net loss applicable to common stockholders |  | $                       | (0.75   | ) |      | $ | (6.09   | )    |  | $ | (127.42  | )



The Company performed
the annual goodwill asset impairment analysis during the year ended December 31, 2003. Based on the results if this impairment test, and in accordance with SFAS No. 142, the Company recorded an impairment charge of $7.5 million during the year ended
December 31, 2003.



The following summarizes the changes in
goodwill for the years ended December 31, 2003 and 2002:



|                                    |  |   |        |  
|----------------------------------- |  | - | ------ | -
|Net balance as of December 31, 2001 |  | $ | 7,509  |  
|Amortization                        |  |   |       |  
|                                    |  |   |        |  
|Net balance as of December 31, 2002 |  | $ | 7,509  |  
|                                    |  |   |        |  
|Amortization                        |  |   |       |  
|Impairment charges                  |  |   | (7,509 | )
|                                    |  |   |        |  
|Net balance as of December 31, 2003 |  | $ |       |  
|                                    |  |   |        |  



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FIBERNET TELECOM GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Deferred Charges



Deferred charges include the cost to access buildings and deferred financing costs. Costs to access buildings are amortized over 15 years, which
represents the term of the related contracts. Deferred financing costs are amortized over the term of the related debt instrument.



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. Dilutive options, warrants and other securities did not have an effect on the computation of
diluted earnings per share for the years ended December 31, 2003, 2002 and 2001, 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 these financial statements has been adjusted to reflect the reverse stock split.



Concentration of Credit Risk



The Company has concentration of credit risk among its customer base. The
Company performs ongoing credit evaluations of its customers financial condition. As of December 31, 2003, one customer accounted for 12.2% of the Companys total accounts receivable, and as of December 31, 2002 one customer accounted for
15.2% of the Companys total accounts receivable.



For the
year ended December 31, 2003, there were no individual customers 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. For the
year ended December 31, 2001, three customers in the aggregate accounted for 53.3% of the Companys total revenue.



As of December 31, 2003, the Company had an allowance for doubtful accounts of $0.7 million. During the year ended December 31, 2003, the Company did not
record any additional 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, 2002, and 2001, FiberNet
recorded $0.5 million and $0.9 million of bad debt expense, respectively. During the years ended December 31, 2003, 2002, and 2001, FiberNet wrote-off $0.3 million, $1.7 million, and $2.6 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.



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FIBERNET TELECOM GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In December 2002, the 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)                                                                                                       |  | 2003                    |         |   | 2002 |   |         | 2001 | 
|Net loss applicable to common stockholders, as reported                                                                      |  | $                       | (27,775 | ) |      | $ | (37,448 | )    |  | $ | (178,166 | )
|Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects                     |  |                         |        |   |      |   | 225     |      |  |   | (1,172   | )
|Deduct: Total stock-based employee compensation expense determined under fair value based method, net of related tax effects |  |                         | (2,306  | ) |      |   | (5,826  | )    |  |   | (2,853   | )
|Pro forma net loss                                                                                                           |  | $                       | (30,081 | ) |      | $ | (43,049 | )    |  | $ | (182,191 | )
|Net loss per share applicable to common stockholders:                                                                        |  |                         |         |   |      |   |         |      |  |   |          |  
|As reported: Basic and diluted                                                                                               |  | $                       | (0.75   | ) |      | $ | (6.09   | )    |  | $ | (130.14  | )
|Pro forma: Basic and diluted                                                                                                 |  | $                       | (0.81   | ) |      | $ | (7.00   | )    |  | $ | (133.08  | )



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, 2003, 2002 and 2002: risk-free interest rates of 4.18%, 3.375% and 4.875%, respectively,
expected dividend yields of 0%, expected life of six years to expiration and expected volatility of 357%, 113% and 159%, respectively.



On July 30, 2003, the Company issued 4.7 million shares of restricted stock and 0.4 million stock options at an exercise price of $1.13 per share to
employees and directors under its Equity Incentive Plan. During 2003, 0.3 million shares were returned to the Company 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 July 30, 2004, subject to the terms and conditions of the Equity Incentive Plan. The Company recorded $5.3 million of deferred compensation for this issuance. 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 ten-year cliff vesting period.



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



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FIBERNET TELECOM GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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 to
be reporting in earnings.



On January 2, 2002, the Company
entered into an interest rate swap transaction with Deutsche Bank AG for a notional amount of $25.0 million and a term of two years. Pursuant to this transaction, the Company was obligated to make quarterly interest payments at a fixed, annual
interest rate of 3.7%, excluding the applicable margin that it paid on its credit facility. As part of this agreement, Deutsche Bank AG was obligated to pay to the Company on a quarterly basis a floating rate of interest based upon LIBOR with a
designated maturity of three months. On March 20, 2002, the Company terminated this interest rate swap transaction with Deutsche Bank AG with no payments or other amounts owed by either party. As a result, all of its outstanding borrowings under the
Companys credit facility bear interest at a floating rate.



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.



Recent Accounting Pronouncements



In July
2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, which was adopted by the Company on January 1, 2003. The statement requires entities to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its then present
value, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The adoption of
this statement did not have a material impact on the Companys consolidated financial statements, and the Company currently does not have any asset retirement obligations.



In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
(SFAF No. 144). The statement replaces SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (SFAS No. 121), although it retains the impairment testing
methodology used in SFAS No. 121. The accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions (APB No. 30) are superceded by SFAS No. 144, except that the statement preserves the requirement of APB Opinion No. 30 to report discontinued operations separately from continuing operations. The
statement covers a variety of implementation issues inherent in SFAS No. 121, unifies the framework used in accounting for assets to be disposed of and discontinued operations, and 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 and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The statement is effective for fiscal years beginning
after December 15, 2001. FiberNet adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 did not have a material impact on the Companys consolidated financial statements.



In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements 4, 44 and 64, Amendment of FASB Statement 13, and Technical Corrections (SFAS No. 145). SFAS No. 145 rescinds the provisions of



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FIBERNET TELECOM GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



SFAS No. 4 that requires companies to classify certain gains and losses from debt extinguishments as extraordinary items, eliminates the provisions of SFAS
No. 44 regarding transition to the Motor Carrier Act of 1980 and amends the provisions of SFAS No. 13 to require that certain lease modifications be treated as sale leaseback transactions. The provisions of SFAS No. 145 related to classification of
debt extinguishment are effective for fiscal years beginning after May 15, 2002, and were adopted by the Company on January 1, 2003. As a result of the adoption of this statement the Company classified debt extinguishment costs within income from
operations and reclassified previously reported debt extinguishments as such.



In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS No. 146). SFAS No. 146 nullifies Emerging Issues Task Force (EITF)
No. 94-3, Liability Recognition for certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in as Restructuring) (EITF No. 94-3). The principal difference between SFAS No.
146 and EITF No. 94-3 relates to its requirements for recognition of a liability for a cost associated with an exit or disposal activity. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at the date of an entitys commitment to an exit plan. SFAS No. 146 was adopted by the Company on January 1, 2003. The adoption of SFAS No. 146 did
not have a material impact on the Companys consolidated financial statements.



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (SFAS No.150). SFAS No. 150 establishes standards for
how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in
some circumstances). The requirements of this statement apply to issuers classification and measurement of freestanding financial instruments, including those that comprise more than one option or forward contract. SFAS No. 150 is effective
for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Companys adoption did not have a material effect on the
Companys consolidated financial statements.



In November
2002, the Emerging Issues Task Force (EITF) of the FASB reached a consensus on EITF No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables (EITF No. 00-21). EITF No. 00-21 addresses how to
account for arrangements that may involve multiple revenue-generating activities. The consensus guidance will be applicable to agreements entered into in quarters beginning after June 15, 2003. The Company adopted EITF No. 00-21 effective July 1,
2003 and is applying it on a prospective basis. The Companys adoption did not have a material effect on the Companys consolidated financial statements.



In November 2002, the FASB issued FIN No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34 (FIN No. 45). FIN No. 45 elaborates on the disclosures to be made by the
guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. The initial recognition and measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The adoption of this statement did not have a material impact on the Companys consolidated financial statements.



In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN No. 46). FIN No. 46
addresses whether certain types of entities, referred to as variable interest entities (VIE) should be consolidated in a companys financial statements. A VIE is an entity that either (1) has equity



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FIBERNET TELECOM GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



investors that lack certain essential characteristics of a controlling financial interest (including the ability to control the entity, the obligation to
absorb the entitys expected losses and the right to receive the entitys expected residual returns), or (2) lacks sufficient equity to finance its own activities without financial support provided by other entities, which in turn would be
expected to absorb at least some of the expected losses of the VIE. An entity should consolidate a VIE if it stands to absorb a majority of the VIEs expected losses or to receive a majority of the VIEs expected residual returns. In
October 2003, the FASB issued a Final FASB Staff Position deferring the effective date of FIN No. 46 for all public entities until the first interim or annual period ending after December 15, 2003. As such, FIN No. 46 is effective for the Company as
of March 31, 2004.



In addition to conforming to previously
issued FASB Staff Positions, FIN No. 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 will not have any impact on the Companys
consolidated results of operations, consolidated financial position or consolidated cash flows.



3. PROPERTY, PLANT AND EQUIPMENT



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



|                                     |  |                  |         |   |                  |   |         |  
|------------------------------------ |  | ---------------- | ------- | - | ---------------- | - | ------- | -
|                                     |  | December 31,2003 |         |   | December 31,2002 |  
|Computer software                    |  | $                | 200     |   |                  | $ | 200     |  
|Computer equipment                   |  |                  | 256     |   |                  |   | 250     |  
|Leasehold improvements               |  |                  | 30      |   |                  |   | 30      |  
|Office equipment and furniture       |  |                  | 146     |   |                  |   | 146     |  
|Network equipment and infrastructure |  |                  | 113,858 |   |                  |   | 113,725 |  
|                                     |  |                  |         |   |                  |   |         |  
|Total                                |  |                  | 114,490 |   |                  |   | 114,351 |  
|Accumulated depreciation             |  |                  | (27,532 | ) |                  |   | (19,229 | )
|                                     |  |                  |         |   |                  |   |         |  
|Property, plant and equipment, net   |  | $                | 86,958  |   |                  | $ | 95,122  |  
|                                     |  |                  |         |   |                  |   |         |  



Depreciation expense
on property, plant and equipment was $8.8 million, $9.6 million and $10.9 million for the years ended December 31, 2003, 2002 and 2001, 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.



Beginning in 2001 and continuing through 2003, the Company determined that its forecasts for revenues for certain of its facilities would not be achieved
due to the significant adverse change in the business climate. The Company further determined 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.



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FIBERNET TELECOM GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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.



The Company 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 the facilities discussed above, and used
a discounted cash flow model to measure the impairment. As a result of this analysis during 2001, the Company recorded an asset impairment of approximately $51.8 million based on the amount by which the carrying amount of these assets exceeded their
fair value. Of this amount, $40.4 million related to assets held for use, and $11.4 million represented assets to be disposed of.



The assets that the Company identified for disposition were abandoned, as the Company determined that these assets had no value. Consequently, there was
no cost to the Company for this abandonment, nor did the Company expect to receive any proceeds or other consideration from this abandonment. The Company recorded no reserves, accruals or other liabilities related to this abandonment. These assets
primarily related to engineering and network architecture design costs and general contracting and project management costs for facilities that the Company is no longer pursuing.



The Company has recovered approximately $0.3 million from the sale of assets previously written off as impaired during the
year ended December 31, 2002. The proceeds were recorded as a recovery of the impairment previously recorded.



As a result of an update to the forecast and analysis performed in 2002, the Company has recorded an additional asset impairment of approximately $12.7
million in 2002, 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. The Company 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 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, reducing revenues and capital expenditures without commensurate decreases
in operating expenses. Utilizing this analysis, the Company again evaluated the carrying value of its assets as of December 31, 2003. The Company 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. Also during 2003, the Company has recovered approximately $0.2 million from the sale of assets previously written off as impaired. The proceeds were recorded as a recovery of the impairment
previously recorded.



5. IMPAIRMENT OF GOODWILL



During 2001, the Company evaluated the carrying value of certain long-lived
assets and acquired equity investments, consisting primarily of goodwill resulting from the Companys acquisition of Devnet. Pursuant to APB Opinion No. 16, Business Combinations, the purchase price was determined and goodwill was
recorded based on the stock price at the time the merger agreement was executed and announced. During 2001, the Company reviewed the carrying value of long-lived assets including goodwill and property, plant and equipment



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FIBERNET TELECOM GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



for impairment whenever events and circumstances indicated the carrying value of an asset would not be recoverable from the estimated future cash flows
expected to result from its use and eventual disposition.



An
assessment of the goodwill related to the Devnet acquisition was performed pursuant to SFAS No. 121, due to the negative industry and economic trends affecting certain of the Companys current operations and expected future revenues, as well as
the general decline in the valuations of telecommunications companies. The conclusion of that assessment was that the decline in market conditions within the telecommunications industry was significant and other than temporary.



Devnet had entered into exclusive license agreements to manage communications
access to commercial office properties, and the company associated the related goodwill primarily to those agreements. The Company used an undiscounted forecasted cash flow model to determine if there was an impairment based on the cash flows
expected to be generated from business activities in the commercial office properties underlying the license agreements and used a discounted cash flow model to measure the impairment. As a result, the Company recorded a charge of $56.5 million
during 2001 to reduce goodwill associated with the purchase of Devnet. The charge was based on the amount by which the carrying amount of the asset exceeded its fair value.



In June 2001, the FASB issued SFAS No. 142 applicable for fiscal years beginning after December 15, 2001, which was adopted
by the Company effective January 1, 2002 and 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 annually.
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
2003, the Company performed its annual impairment test and determined that there was an impairment of goodwill. The Company determined it has one reporting unit where 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.



6. NOTES PAYABLE AND NOTE PAYABLE-AFFILIATE



Note Payable-Affiliate



On December 7, 2001 the Company issued a promissory note in the amount of $2.3 million to Nortel Networks Inc., a related party, as consideration for
accounts payable previously due and owing for equipment and services. The note bore interest at an annual rate of 14% and was payable in eight monthly installments of approximately $300,000 beginning in January 2002. The Company believes the terms
of this transaction were no less favorable than could be received from an independent, third party. 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, the remaining amount of the note was converted into common stock as part of the recapitalization of the Company, discussed below.



Credit Facility



On April 11, 2000, the Company entered into a $75.0 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. In addition to the initial lenders, First Union National Bank, Bank One Capital Corporation and IBM Credit Corporation were lenders under the Credit Facility.
FiberNet used the funds available under the Credit Facility for the acquisition and construction of its network infrastructure and for general corporate purposes. The Credit Facility had a term of four and one-half years, consisting of revolving



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FIBERNET TELECOM GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



credit availability for the first 18 months and a term loan for the remaining three years. The Credit Facility is secured by the Companys assets,
except for the assets pledged in connection with its capital lease obligations, and contains certain restrictive covenants customary for a financing of this type. In connection with the placement of the Credit Facility, the Company issued to the
lenders approximately 50,000 warrants to purchase common stock with and exercise price of $541.86 and a term of five years.



On December 18, 2000, the Company issued 16,820 additional warrants to its lending group with an exercise price of $511.86 and an expiration date of April
11, 2005, and repriced the warrants issued on April 11, 2000 from $541.86 to an exercise price of $511.86. The discount is being amortized over the term of the Credit Facility. The fair value of the warrants was estimated on the date of issuance
using the Black-Scholes option pricing model. The transaction was evaluated in accordance with the guidance in EITF Issue 96-19, Debtors Accounts for a Modification or Exchange of Debt Instruments (EITF 96-19). The
value on December 18, 2000 of the cash flows under the terms of the revised debt instrument as compared to the cash flows under the original debt instrument resulted in a difference that was not substantially different. An adjustment was
made to the original issue discount, initially recorded in connection with the issuance of the warrants, and to additional paid-in-capital to reflect the new exercise price of those warrants.



On February 9, 2001, the Company amended the Credit Facility to increase the
availability thereunder to $105.0 million and to the extend the maturity thereof to six years. In connection with this amended Credit Facility, the Company issued warrants to purchase an additional 15,147 shares of its common stock, with an
expiration date of April 11, 2005, at an exercise price of $240.00 per share. In addition, all warrants issued under the original credit agreement were replaced with warrants to purchase an equivalent amount of the Companys common stock, with
an expiration date of April 11, 2005, at an exercise price of $240.00 per share. The transaction was evaluated in accordance with EITF 96-19, and it was determined that a substantial modification of terms had been made. As such, the transaction was
accounted for, and reported in the same manner as an extinguishment, and the Company recorded a $7.4 million charge for the loss from extinguishment of debt, representing deferred financing fees and the original issue discount relating to the
original Credit Facility.



Also, on April 27, 2001, in
connection with a waiver and agreement under our Credit Facility, warrants to purchase 10,000 shares of our common stock at a purchase price of $240.00 per share held by Deutsche Banc Alex Brown were replaced with new warrants to purchase an
equivalent amount of our common stock at a purchase price of $0.30 per share.



The Company valued the warrants at each issuance and pricing date using the Black-Scholes valuation model and recorded a debit to original issue discount with a credit to additional paid-in-capital for the
warrants value.



In connection with the Companys
sale of its series J preferred stock, on December 7, 2001, it entered into an amendment of its Credit Facility with its lenders pursuant to which the lenders consented to the sale of the series J preferred stock and adjusted certain covenants
contained in the credit agreement underlying the Credit Facility. Additionally, all warrants outstanding issued to the lenders under the Credit Facility were replaced with warrants with identical terms other than with respect to a reduction of the
exercise price to $15.00.



On October 30, 2002, the Company
completed a series of transactions with the lenders under its Credit Facility as well as certain investors to undertake the recapitalization of the Company. These transactions are described below.



Pursuant to the terms of a common stock purchase agreement dated as of
October 30, 2002 by and among FiberNet and the lenders under the Companys Credit Facility, FiberNet issued 14,666,666 shares of its common



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



stock to the lenders with a fair market value of $3.60 per share on the date of issuance, as prepayment of an aggregate of $66.0 million of outstanding
indebtedness under the Credit Facility. The Company also issued warrants to purchase 3,666,666 shares of common stock at an exercise price of $3.60 per share with a term of five years to the lenders valued at $10.7 million using the Black-Scholes
option pricing model on the date of issuance. These warrants are immediately exercisable and contain standard anti-dilution protection. As of October 30, 2002, the 14,666,666 shares issued to the lenders constituted approximately 61% of the total
number of outstanding shares of common stock. Such shares, together with shares issuable upon exercise of the warrants, also constituted approximately 61% of the shares of common stock outstanding on a fully diluted basis, assuming the exercise of
all outstanding options and warrants. Prior to October 30, 2002, there was $5.2 million of interest due and payable on the indebtedness outstanding under the Credit Facility. As part of this transaction, accrued interest of $3.2 million was
capitalized and added to the outstanding principal amount of the term loan indebtedness, included above. Subsequently, on November 11, 2002, the Company issued to its lenders in exchange for the remaining $2.0 million of accrued interest 666,666
shares of common stock with a fair market value of $3.60 per share on the date of issuance, and warrants to purchase 666,666 shares of common stock at an exercise price of $3.60 per share with a term of five years valued at $1.9 million using the
Black-Scholes option pricing model on the date of issuance. These warrants are immediately exercisable and contain standard anti-dilution protection. The Company evaluated the accounting for this transaction under the guidance of EITF No. 02-4
Determining Whether a Debtors Modification or Exchange of Debt Instruments is within the Scope of Financial Accounting Standards Board Statement No. 15, FASB No. 15 Accounting by Debtors and Creditors for Troubled Debt
Restructurings and EITF No. 96-19 Debtors Accounts for a Modification or Exchange of Debt Instruments. As a result of the above transaction, the Company deducted the fair value of the consideration given on the date of the
transaction from the carrying value of the debt. The Company then determined that the remaining modified debt was not substantially different from the original debt, and accordingly, no extinguishment gain or loss was recognized. The difference
resulting from the modification and settlement of debt is being treated as an adjustment to yield and is being amortized as a charge to interest expense over the remaining life of the debt.



In connection with this transaction, FiberNet and certain of its lenders also
entered into a stockholders agreement dated as of October 30, 2002. Under the terms of this stockholders agreement, such lenders have the right to designate two independent persons to be members of the Companys board of directors, along with
other certain rights and privileges. Together with the lenders, the Company also executed a seventh amendment to its credit agreement which, among other things, amends certain terms of the credit agreement in conjunction with the transactions that
were consummated on October 30, 2002.



As part of the seventh
amendment, the term loan commitments and revolving loan commitments available under the credit facility were reduced to a total of $40.5 million from a total of $105.0 million. The term loan commitments were reduced to $26.2 million, all of which
was drawn and outstanding, and the revolving loan commitments were reduced to $14.4 million. All of the Companys revolving loan commitments were utilized with drawn, outstanding borrowings of $7.3 million and outstanding letter of credit
issued in the amount of $7.1 million. In addition, the effective applicable interest rate on FiberNets borrowings was reduced from LIBOR+450 basis points to LIBOR+375 basis points until December 31, 2003. Furthermore, the payment of all
accrued interest on borrowings during the period beginning on October 30, 2002 and ending on June 30, 2003 were capitalized and added to the outstanding principal amount of the term loan indebtedness. Other amendments to the Companys Credit
Facility include modifications to the automatic reduction of commitments and to financial covenants. Previously the first automatic reduction in the availability under the credit facility was to have occurred on June 30, 2003. However as amended,
the automatic reduction of commitments were rescheduled to begin on a quarterly basis on March 31, 2004. The Company was also subject to amended financial covenants. The Company was now required to comply with financial covenants that include
minimum consolidated revenue, minimum consolidated EBITDA (as defined in the credit agreement underlying the Credit



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Facility) and maximum cumulative capital expenditures. Beginning on December 31, 2003 in addition to those requirements, the Companys financial
covenants also included 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 the Companys Credit Facility, as amended.



Pursuant to the terms of an investors rights agreement entered into on October 30, 2002 by and among FiberNet and its lenders, the Company also
agreed to file a resale registration statement with respect to all of the shares issued to its lenders, including shares issuable upon exercise of the warrants. This registration statement also included shares issued in the other recapitalization
transactions described below.



On October 30, 2002, the Company
also entered into a common stock purchase agreement with certain investors, pursuant to which the Company issued to the investors in a private offering an aggregate of 1,024,593 shares of common stock for a price of $3.00 per share, or an aggregate
cash consideration of $3.0 million. Pursuant to the terms of this purchase agreement, the Company also issued to such investors warrants to purchase an additional 1,024,593 shares of common stock at an exercise price of $3.60 per share with a term
of five years valued at $1.4 million using the Black-Scholes option pricing model on the date of issuance. These warrants are also immediately exercisable and contain standard anti-dilution protection.



Immediately prior to the private offering of common stock and warrants,
FiberNet consummated certain related transactions with the investors. In one such transaction, the Company issued to one of the investors, SDS Merchant Partners, L.P. (SDS), 300,068 shares of common stock with a fair market value of
$3.60 on the date of issuance, in exchange for the surrender by SDS of a promissory note originally issued on December 7, 2001 by the Company to a related party, which promissory note had been assigned by such related party to SDS immediately prior
to such exchange for $150,000 in cash. This exchange was consummated pursuant to the terms of a note exchange agreement dated as of October 30, 2002 by and among the Company and SDS. Such promissory note, at the time of surrender, had an outstanding
principal amount of $450,102. In addition, the Company sold 242,074 shares of common stock to SDS in connection with the common stock purchase agreement discussed above, for a price of $3.00 per share, or an aggregate cash consideration of $0.7
million. Pursuant to the terms of this purchase agreement, the Company also issued to SDS, warrants to purchase an additional 242,074 shares of common stock at an exercise price of $3.60 per share with a term of five years valued at $0.7 million
using the Black-Scholes option pricing model on the date of issuance. These warrants are also immediately exercisable and contain standard anti-dilution protection.



On November 11, 2002, FiberNet also issued to SDS 1,733,333 shares of common stock with a fair market value of $3.60 on the
date of issuance in exchange for the surrender, by SDS, of the promissory note issued by the Company on March 14, 2002 in the initial principal amount of $2.0 million, pursuant to the terms of a note exchange agreement. Such promissory note, at the
time of surrender, had outstanding principal and accrued interest of $2.1 million owing thereon. Furthermore, the Company also agreed to include such shares issued to its lenders and SDS on November 11, 2002, within the terms of agreements
previously entered into on October 30, 2002, including the registration rights agreement. Other than the inclusion of such additional shares, the terms of such amended and restated agreements are unchanged from those of their respective
predecessors. The Company evaluated the accounting for the above transaction in accordance with FASB Technical Bulletin (FTB) No. 80-1 Early Extinguishment of Debt through Exchange for Common or Preferred Stock (FTB No.
80-1). The Company recorded a charge of $5.8 million related to the early extinguishment of debt for the difference between the net carrying amount of both notes that were extinguished and the reacquisition price represented by the total fair
market value of the common stock and warrants exchanged in the transaction.



Related to the above transactions, the Company issued an aggregate of 3,486,048 shares of common stock with a fair market value of $3.60 on the date of issuance, to the investors pursuant to the terms of a share
exchange



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FIBERNET TELECOM GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



agreement dated as of October 30, 2002 by and among the Company and the investors. Such shares were issued upon the conversion of all 104,578 outstanding
shares of the Companys series H convertible preferred stock. Such investors had, immediately prior to such exchange and conversion, acquired these series H preferred shares, along with shares of common stock, from a related party for cash
consideration of $735,000. The series H preferred stock had a carrying value of $17.1 million prior to conversion and an aggregate liquidation preference, including accrued dividends thereon, of $10.7 million. The series H preferred stock was
converted pursuant to its original terms. During 2001, the Company recorded charges related to the beneficial conversion feature of the preferred instrument which aggregated the total proceeds from the initial issuance This discount on the preferred
stock resulting from the beneficial conversion feature was immediately recognized as a dividend to the preferred shareholders on the date of issuance as the series H preferred stock was immediately convertible.



In a third related transaction, the holders of all 303 outstanding shares of
the Companys series J-1 convertible preferred stock surrendered such shares to the Company as a result of an inducement offer by the Company, in exchange for 2,020,000 shares of common stock with a fair market value of $3.60 on the date of
issuance. This transaction was effected pursuant to a series J-1 exchange agreement dated as of October 30, 2002 by and among the Company and the series J-1 holders. The series J-1 preferred stock so surrendered had an aggregate liquidation
preference of $3.0 million. The Company evaluated this transaction in accordance with EITF D-42 The Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock. The Company recorded a
charge to net earnings of $5.5 million, which represents the excess of the fair value of the common stock issued in the transaction to the holders of the preferred stock over the fair value of the securities issuable pursuant to the original
conversion terms. These shares were also included in the registration rights agreement dated as of October 30, 2002 with these investors.



In total, 21,739,449 shares of common stock and warrants to purchase an aggregate of 4,933,333 shares of common stock were issued on October 30, 2002, as
part of these transactions and a total of 2,400,000 shares of common stock and warrants to purchase an aggregate of 666,667 shares of common stock were issued on November 11, 2002.



In connection with the transactions consummated on October 30, 2002 and November 11, 2002, the Company paid a fee of $0.3
million to a financial advisory firm and issued to that firm warrants to purchase an additional 206,667 shares of common stock at an exercise price of $0.03 per share with a term of one year valued at $1 million using the Black-Scholes option
pricing model on the date of issuance. In addition, the Company paid professional fees of approximately $2.1 million related to the above transactions. All such charges have been included as a charge to loss on early extinguishment of debt in the
accompanying statement of operations for the year ended December 31, 2002.



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 $3.00 per share, in satisfaction of approximately $13.4 million of indebtedness, representing all of
the outstanding principal indebtedness and accrued interest owing to these 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



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FIBERNET TELECOM GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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.



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 total 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.



As of December 31, 2003 and 2002, the outstanding balances under the Credit Facility were $22.4 and $35.2 million, respectively. These amounts are
included in notes payable in the accompanying consolidated balance sheets net of an original issue discount of $2.3 million and $4.9 million at December 31, 2003 and 2002, respectively. These discounts represent the fair value of the warrants issued
to the lenders in connection with the Credit Facility.



As of
December 31, 2003, the weighted average interest rate on its outstanding borrowings under the facility was 4.93%. There were no events of default under its credit agreement. As of December 31, 2003, the Company



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FIBERNET TELECOM GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



has no additional availability under its credit facility. As of such date, the three remaining lenders under the Companys credit facility owned
approximately 26% of the outstanding shares of the Companys common stock.



Subordinated Credit Facility



On June 13,
2003, the Company 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 the Companys 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 the Companys financial performance. The repurchase program did not obligate the Company 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; no repurchases of common stock had been made; and the facility was
terminated.



7. 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, 2003, 2002 and 2001 was approximately $7.2 million, $7.9 million, and $14.2 million, respectively.



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



|                                                    |  |                                       |        |      |   |        |  |      |        |      |   |        |  |            |       |  |   |       |  |   |       
|--------------------------------------------------- |  | ------------------------------------- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | ---------- | ----- |  | - | ----- |  | - | ------
|                                                    |  | Payments Due by Period (in thousands)
|Contractual Obligation                              |  | Total                                 |        | 2004 |   | 2005   |  | 2006 |        | 2007 |   | 2008   |  | Thereafter
|Mandatory Repayments and Reductions of Indebtedness |  | $                                     | 22,433 |      | $ | 1,795  |  | $    | 8,973  |      | $ | 10,768 |  | $          | 897   |  | $ |      |  | $ |      
|Operating Leases(1)                                 |  |                                       | 75,948 |      |   | 9,425  |  |      | 7,880  |      |   | 6,692  |  |            | 6,257 |  |   | 6,198 |  |   | 39,496
|                                                    |  |                                       |        |      |   |        |  |      |        |      |   |        |  |            |       |  |   |       |  |   |       
|Total Contractual Obligations                       |  | $                                     | 98,381 |      | $ | 11,220 |  | $    | 16,853 |      | $ | 17,460 |  | $          | 7,154 |  | $ | 6,198 |  | $ | 39,496
|                                                    |  |                                       |        |      |   |        |  |      |        |      |   |        |  |            |       |  |   |       |  |   |       

---

|(1) | Includes estimated future license fees for carrier hotel facilities.
|--- | --------------------------------------------------------------------



The Company has $6.1 million in outstanding letters of credit as of December 31, 2003 and December 31, 2002.



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 6.



As of April 1, 2003, FiberNet amended a real estate lease to reduce the rent payments thereunder indefinitely. Upon reaching a revenue threshold, the rent expense will increase by approximately $1.5 million on an
annual basis. Due to the uncertainty in forecasting future revenues, the Company does not have a reasonable basis to estimate when the revenue threshold will be reached and has not accrued for a contingent increase in rent as of December 31, 2003.



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FIBERNET TELECOM GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



8. 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, 2002, the Company granted approximately 3,699 options under the Equity Incentive Plan, at an average exercise price of approximately $4.61 per share, with a vesting period of up to three years. During the fiscal year ended
December 31, 2003, the Company granted approximately 408,500 options under the Equity Incentive Plan, at an average exercise price of approximately $1.13 per share, and the stock options vest in three equal annual installments, commencing on July
30, 2004.



The Company accounts for stock options under APB
Opinion No. 25. During the year ended December 31, 1999, the Company granted some stock options to employees with exercise prices below the market price on the date of the grant. Additionally, on December 21, 2000, the Company repriced certain
options previously granted to three of its executive officers, resulting in variable plan accounting in accordance with FIN No. 44, from the date of modification. These options were originally granted in 1999 and 2000 at exercise prices of $120.00,
$112.5, $180.00 and $279.30 per share, and were repriced at an exercise prices of $30.00 per share and $180.00 per share. The additional intrinsic value was determined on the date of modification using the then market price of the common stock. The
additional compensation cost was recognized over the period from the date of modification to the date the awards vest. The additional compensation cost has been adjusted in subsequent periods for changes in the market price. After the awards vested,
adjustments to compensation cost for changes in the market price were recognized immediately. In subsequent periods, the market price declined resulting in negative compensation cost being recognized. In accordance with FIN No. 44, expense reduction
has been recognized up to the amount of the expense previously recognized in prior periods relating specifically to the modified awards. As such the Company recorded compensation expense to employees of approximately $0.2 million and $(1.2) million
for 2002, and 2001, respectively. For the year ended December 31, 2003, there was no expense recorded related to the granting of stock options.



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FIBERNET TELECOM GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Transactions during the years ended December 31, 2003, 2002 and 2001 involving stock options are
summarized as follows:



|                                                   |  |                 |   |      |                             |       |                 |         |   |                             |   |                 |  |         |                             |  |   |       
|-------------------------------------------------- |  | --------------- | - | ---- | --------------------------- | ----- | --------------- | ------- | - | --------------------------- | - | --------------- |  | ------- | --------------------------- |  | - | ------
|                                                   |  | 2003            |   | 2002 |                             | 2001 
|                                                   |  | Number ofShares |   |      | AverageOptionPrice PerShare |       | Number ofShares |         |   | AverageOptionPrice PerShare |   | Number ofShares |  |         | AverageOptionPrice PerShare
|Options outstanding at the beginning of the period |  | 449,108         |   |      | $                           | 81.30 |                 | 505,095 |   |                             | $ | 90.00           |  | 322,571 |                             |  | $ | 192.60
|Granted                                            |  | 408,500         |   |      |                             | 1.13  |                 | 3,699   |   |                             |   | 4.61            |  | 255,737 |                             |  |   | 11.95 
|Exercised                                          |  |                |   |      |                             |      |                 |        |   |                             |   |                |  | (3,448  | )                           |  |   | 118.50
|Terminated                                         |  | (135,894        | ) |      |                             | 92.22 |                 | (59,686 | ) |                             |   | 151.20          |  | (69,765 | )                           |  |   | 282.30
|                                                   |  |                 |   |      |                             |       |                 |         |   |                             |   |                 |  |         |                             |  |   |       
|Options outstanding at the end of the period       |  | 721,714         |   |      |                             | 33.48 |                 | 449,108 |   |                             |   | 81.30           |  | 505,095 |                             |  |   | 90.00 
|                                                   |  |                 |   |      |                             |       |                 |         |   |                             |   |                 |  |         |                             |  |   |       
|Options exercisable at the end of the period       |  | 299,943         |   |      |                             | 77.68 |                 | 325,468 |   |                             |   | 96.60           |  | 261,106 |                             |  |   | 109.20
|Weighted average fair value of options granted     |  |                 |   |      | $                           | 1.13  |                 |         |   |                             | $ | 10.80           |  |         |                             |  | $ | 11.40 



The following table
summarizes information about stock options outstanding as of December 31, 2003:



|                        |  |                             |  |                                           |  |                                |        |                            |         |                                |   |       
|----------------------- |  | --------------------------- |  | ----------------------------------------- |  | ------------------------------ | ------ | -------------------------- | ------- | ------------------------------ | - | ------
|                        |  | Options Outstanding         |  | Options Exercisable                      
|Range of Exercise Price |  | Outstandingas of 12/31/2003 |  | Weighted-AverageRemainingContractual Life |  | Weighted-AverageExercise Price |        | Exercisableas of12/31/2003 |         | Weighted-AverageExercise Price
|$0.00-$1.13             |  | 380,800                     |  | 9.6                                       |  | $                              | 1.13   |                            |        |                                | $ | 0.00  
|$1.14-$11.10            |  | 160,188                     |  | 7.9                                       |  | $                              | 9.60   |                            | 119,931 |                                | $ | 9.60  
|$11.11-$90.00           |  | 85,737                      |  | 5.4                                       |  | $                              | 49.39  |                            | 85,023  |                                | $ | 49.27 
|$90.01-$605.09          |  | 94,989                      |  | 6.0                                       |  | $                              | 189.06 |                            | 94,989  |                                | $ | 189.06
|                        |  |                             |  |                                           |  |                                |        |                            |         |                                |   |       
|Total                   |  | 721,714                     |  | 8.2                                       |  | $                              | 33.48  |                            | 299,943 |                                | $ | 77.68 
|                        |  |                             |  |                                           |  |                                |        |                            |         |                                |   |       



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 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.



On July 30, 2003, the Company issued 4.7 million shares 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, commencing on July 30, 2004, subject to the terms and conditions of the Equity Incentive Plan. The Company recorded $5.3 million of deferred compensation for this issuance. During
2003, 0.3 million shares were returned to the Company as the result of employee terminations prior to vesting. As such the Company recorded compensation expense to employees of approximately $0.2 million for 2003. For the years ended December 31,
2002 and 2001, there was no expense recorded related to the granting of restricted stock.



9. STOCK RESERVED FOR FUTURE ISSUANCE



In addition to shares of common stock underlying outstanding stock options, the Company has reserved for future issuance of additional shares of common stock relating to outstanding warrants. As of December 31, 2003,
the Company had outstanding warrants exercisable into approximately 5.0 million shares of common stock at exercise prices ranging from $0.03 to $196.80 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 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 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.



10.
PREFERRED STOCK



Series C Voting Preferred Stock



On May 7, 1999 the Company issued approximately 133,000 shares of series C
voting preferred stock. Each share was entitled to 117.03 votes to be voted at any meeting of shareholders. In the event of any voluntary or involuntary liquidation, dissolution, or winding up of the corporation, the holders of shares of the series
C voting preferred stock then outstanding, were entitled to be paid, out of the assets of the Company available for distribution to its stockholders, whether from capital, surplus or earnings, before any payment shall be made in respect of the
Companys common stock in an amount equal to $1.50 per share. Each holder of each share of series C voting preferred stock had the right to convert such share for one share of common stock at a conversion price of $45.00 per share, subject to
adjustment. The holders of the series C voting preferred stock were entitled to share in any dividends declared and paid by the Company to the common stock on a ratable basis. In connection with the issuance of the series C voting preferred stock,
the Company recorded a non-recurring, non-cash charge for a beneficial conversion feature in the amount of $0.1 million, to reflect the market price of the common stock on the date of issuance.



Series D, E and F Preferred Stock



On November 30, 1999 the Company issued approximately (i) 309,000 shares of
series D preferred stock, (ii) 292,000 shares of series E preferred stock and (iii) 346,000 shares of series F preferred stock. The shares of series D, E and F preferred stock were entitled to voting rights at any meeting of shareholders. In the
event of any voluntary or involuntary liquidation, dissolution, or winding up of the corporation, the holders of shares of the series D, E and F preferred stock then outstanding, were entitled to be paid, out of the assets of the Company available
for distribution to its stockholders, whether from capital, surplus or earnings, before any payment shall be made in respect of the Companys common stock an amount equal to $15.00, $15.00 and $30.00 per share, respectively. Each holder of each
share of series D, E and F preferred stock had the right to convert such share for ten shares of common stock at conversion prices of $45.00, $45.00 and $90.00 per share, respectively, subject to adjustment. However upon the date of issuance, the
effective conversion price of these series of preferred stock ($217.50 per share) was equal to the value of the common stock that was exchanged for each share of preferred stock, and into which the preferred stock is convertible. The holders of the
series D, E and F preferred stock were entitled to receive dividends at a rate of 4%, 8% and 8% per annum, respectively. Such dividends were payable semi-annually, and at the option of the Company, in cash or in additional shares of the respective
series of series D, E or F preferred stock.



Series G, H and I Preferred
Stock



On June 30, 2000, the Company issued and sold
2,000,000 shares of series G preferred stock to Nortel in a private placement for an aggregate purchase price of $20.0 million. Each share of series G preferred stock was convertible into one share of common stock of FiberNet at $300.00 per share,
subject to anti-dilution adjustments. In connection with this transaction, the Company recorded a non-recurring non-cash charge for a beneficial conversion feature in the amount of $14.0 million to reflect the market price of the common stock as of
the date of the issuance.



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FIBERNET TELECOM GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



On July 31, 2000 the Company issued and sold 426,333 shares of series H preferred stock to Nortel in
a private placement for an aggregate purchase price consisting of $22.5 million in cash plus the cancellation by Nortel of the 2,000,000 shares of the series G preferred stock, including all accrued and unpaid dividends thereon. Each share of series
H preferred stock is convertible into ten shares of common stock at $300.00 per share, subject to anti-dilution adjustments. This amount was reflected on the Companys balance sheet net of the value of warrants to purchase 14,166 shares of
common stock of the Company issued in connection with this transaction. The value of these warrants was estimated on the date of issuance using the Black-Scholes option pricing model. In connection with this transaction, the Company recorded a
non-recurring non-cash charge for the beneficial conversion feature in the amount of $12.3 million to reflect the market price of the common stock as of the date of the issuance.



On August 11, 2000 FiberNet issued and sold 62,500 shares of series I preferred stock to Nortel in a private placement for
an aggregate purchase price of $7.5 million. Each share of series I preferred stock is convertible into ten shares of common stock at $360.00 per share, subject to anti-dilution adjustments. The Company recorded a beneficial conversion charge of
$1.5 million in connection with this issuance. Nortel invested a total of $50.0 million in preferred stock of the Company.



In February 2001, the conversion price of the series H and series I was reduced to $131.25, in accordance with the original terms of the issuance
transactions. The certificates of designation of the series H and series I included provisions requiring the conversion prices to be lowered to the per share price at which the Company issues any shares of common stock, subject to certain
exceptions, subsequent to the initial issuance of the series H and series I. In February 2001, the Company issued shares of common stock in a directed public offering at a price of $131.25 per share, resulting in the reduction of the conversion
price. The Company recorded a beneficial conversion charge of $21.0 million as a result of the reduction of the conversion price.



On December 6, 2001, all of the Companys outstanding shares of series C, D, E and F preferred stock were converted into shares of the Companys
common stock. In addition, the holder of the Companys series H and I preferred stock converted all of its series I preferred stock and 373,947 shares, or 79%, of its series H preferred stock into shares of the Companys common stock.
Additionally, in connection with the conversion of the series H and I preferred stock, the conversion price of the remaining 100,000 shares of series H preferred stock was reduced to $39.30. However, as all of the proceeds from the issuances of the
series H and series I had been allocated to beneficial conversion features, no additional proceeds were allocated upon the reset of the conversion price of the series H preferred stock to $39.30.



Accordingly, as a result of the conversion of the series C, D, E, F, H and I
preferred stock into common stock, the Company issued an aggregate of 688,252 shares of common stock to stockholders who held shares of series C, D, E, F, H and I preferred stock and cancelled an aggregate of 1,534,221 shares of series C, D, E, F, H
and I preferred stock. In connection with the conversion of the series C, D, E and F preferred stock, the holders of such preferred stock received, in the aggregate, warrants to purchase 32,833 shares of the Companys common stock. The Company
recorded a non-cash preferred stock dividend of $0.3 million, representing the fair value of the warrants issued, as determined using the Black-Scholes option model. These warrants have an exercise price of $16.50 and an expiration date of 5 years
from the date of issuance.



On October 30, 2002, as a result of
the recapitalization of the Company all outstanding shares of series H preferred stock were converted into common stock. See Note 6.



Series J Preferred Stock



On December 7, 2001, the Company consummated a directed public offering of 360 shares of a new series of preferred stock, designated series J preferred
stock for an aggregate purchase price of $3.6 million, under the



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FIBERNET TELECOM GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Companys existing shelf registration statement. Pursuant to the stock purchase agreement, the Company also issued to the purchasers two series of
warrants, series A and B, to purchase up to 340,390 shares of the Companys common stock having an expiration date five years from the date of issuance and at an exercise price of $9.00 per share, all of which are subject to adjustment in
certain circumstances and 150,330 of which, representing the series B warrants, were subject to certain vesting conditions. In addition, subject to certain conditions, the stock purchase agreement included two additional closings for the sale of an
additional $5.7 million of the Companys series J preferred stock to the purchasers. The Company also paid $0.3 million and issued 10,909 shares of its common stock to the placement agent for the sale of the series J preferred stock.



The original terms of the preferred stock provided that the
Company may redeem any or all of the currently outstanding shares of series J preferred stock for 150% of the purchase price of such stock. In addition, under certain circumstances, the Company must redeem any outstanding series J preferred stock in
exchange for either 100% or 150% of the purchase price, depending upon the event that transpires. Furthermore, subject to certain adjustments, the series J preferred stock was convertible into the number of shares of common stock equal to 90% of the
average of the five lowest volume weighted average prices for the Companys common stock during the 15 trading days immediately prior to the date of conversion, provided that such average price shall not be less than $6.00 nor greater than
$15.00 for the series J preferred stock issued at the first closing. Other than with respect to matters directly affecting the rights, preferences and privileges of the series J preferred stock, the terms of the series J preferred stock do not
provide voting rights to the holders thereof.



As the
purchasers made a firm commitment to participate in the two additional closings totaling $5.7 million, the transaction was accounted for as a subscription receivable from series J preferred stock. The series J preferred stock was reflected in the
accompanying balance sheet net of the relative fair value of warrants to purchase 340,390 shares of common stock of the Company issued in connection with this transaction. The value of these warrants was estimated on the date of issuance using the
Black-Scholes option pricing model and determined to be $3 million. However, as the value assigned to the warrants is based on the relative fair value of the warrants and the preferred stock, a valuation of $1.8 million was assigned to the warrants,
based upon their relative fair value. In connection with this transaction, the Company recorded a non-recurring non-cash charge for a beneficial conversion feature in the amount of $2.1 million to reflect the market price of the common stock as of
the date of the issuance.



On October 30, 2002, as a result of
the recapitalization of the Company all outstanding shares of series J Preferred Stock were converted into common stock. The two additional closings of the series J preferred stock were never consummated. See Note 6.



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 $37,500 in consulting fees to Richard Sayers, who is a member of the Companys board or directors, during 2003.



The Company capitalized in property, plant and equipment amounts paid for services from Nortel, a shareholder, of approximately $0.8 million, $0.1 million
and $7.4 million during 2003, 2002 and 2001, respectively. As of December 31, 2003, the Company had approximately $31,000 in accounts payables to Nortel. During 2002, the Company had a note payable to Nortel for approximately $2.3 million. 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
6, the remaining portion of this note was converted into common stock.



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FIBERNET TELECOM GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



12. INCOME TAXES



The Company accounts for income taxes in accordance with the provisions of SFAS 109, Accounting For Income Taxes. During 2003, 2002 and 2001
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, 2003, 2002 and 2001 follows (dollars in thousands):



|                                                       |  |                         |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------ |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                       |  | Year Ended December 31, |        
|                                                       |  | 2003                    |         |   | 2002 |   |         | 2001 | 
|Computed tax at federal statutory rate                 |  | $                       | (9,444  | ) |      | $ | (11,075 | )    |  | $ | (51,303 | )
|State and local tax, net of federal income tax benefit |  |                         | (917    | ) |      |   | (1,028  | )    |  |   | (7,329  | )
|Interest expense from beneficial conversion            |  |                         |        |   |      |   |        |      |  |   | 29      |  
|Prior year adjustment                                  |  |                         | 29,692  |   |      |   |        |      |  |   |        |  
|Other                                                  |  |                         | 1,205   |   |      |   | 9       |      |  |   |        |  
|Change in valuation allowance                          |  |                         | (20,536 | ) |      |   | 12,094  |      |  |   | 58,603  |  
|                                                       |  |                         |         |   |      |   |         |      |  |   |         |  
|                                                       |  | $                       |        |   |      | $ |        |      |  | $ |        |  
|                                                       |  |                         |         |   |      |   |         |      |  |   |         |  



The tax effects of
temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities, for the three years ended December 31, 2003, 2002, and 2001, consist of the following (dollars in thousands):



|                                                             |  |                         |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------ |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                             |  | Year Ended December 31, |        
|                                                             |  | 2003                    |         |   | 2002 |   |         | 2001 | 
|Deferred tax assets/(liabilities):                           |  |                         |         |   |      |   |         |      |  |   |         |  
|Deferred expenses                                            |  | $                       | 678     |   |      | $ | (645    | )    |  | $ | 933     |  
|Stock options                                                |  |                         | 4,232   |   |      |   | 4,255   |      |  |   | 4,359   |  
|Depreciation and impairment of property, plant and equipment |  |                         | (6,165  | ) |      |   | 5,301   |      |  |   | 12,163  |  
|Goodwill impairment                                          |  |                         | 7,416   |   |      |   | 28,973  |      |  |   | 29,319  |  
|Net operating loss                                           |  |                         | 65,720  |   |      |   | 54,400  |      |  |   | 35,447  |  
|Bad debts                                                    |  |                         | 269     |   |      |   | 402     |      |  |   | 898     |  
|Valuation allowance                                          |  |                         | (72,150 | ) |      |   | (92,686 | )    |  |   | (83,119 | )
|                                                             |  |                         |         |   |      |   |         |      |  |   |         |  
|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, 2003 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, 2003,
the Company had net operating loss carryforwards for federal income tax purposes of approximately $176 million. These tax loss carryforwards begin expiring in 2012. In addition, the tax



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FIBERNET TELECOM GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



Pursuant to a Private Network Agreement dated as of December 17, 1999 and other related agreements by and between Metromedia Fiber Network Services, Inc.
(MFN) and the Company (the Network Agreement), the Company issued 166,666 common shares at an assumed price of $260.70 per share. As part of the Network Agreement, the Company issued 133,333 shares (of the total 166,666) to
acquire an exclusive right of use of dark fiber in multiple markets for a total price of approximately $34.8 million. This amount has been reflected in the accompanying consolidated financial statements as property, plant and equipment. As part of
the remaining part of the Network Agreement, the Company issued 33,333 shares (of the total 166,666) to repurchase a 10% membership interest in Local Fiber held by MFN. The transaction was recorded as a purchase business combination. The Company
recorded approximately $8.7 million of goodwill in the accompanying consolidated financial statements, which was being amortized over a period of 15 years until the adoption of SFAS No.142, upon which the amortization of goodwill ceased. As of
December 31, 2003, the net balance of goodwill of $7.5 million was written off as impaired according to SFAS No.142. See Note 5.



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



|                                                                       |  |                  |         |   |              |   |        |                   |  |   |                     |   |  |   |         |  
|---------------------------------------------------------------------- |  | ---------------- | ------- | - | ------------ | - | ------ | ----------------- |  | - | ------------------- | - |  | - | ------- | -
|                                                                       |  | March 31,2003(a) |         |   | June 30,2003 |   |        | September 30,2003 |  |   | December 31,2003(b) |  
|Revenues                                                               |  | $                | 6,377   |   |              | $ | 6,451  |                   |  | $ | 6,680               |   |  | $ | 7,097   |  
|Loss from operations                                                   |  |                  | (10,551 | ) |              |   | (1,447 | )                 |  |   | (1,570              | ) |  |   | (11,911 | )
|Net loss                                                               |  |                  | (11,176 | ) |              |   | (1,990 | )                 |  |   | (2,112              | ) |  |   | (12,497 | )
|Net loss applicable to common stockholders                             |  |                  | (11,176 | ) |              |   | (1,990 | )                 |  |   | (2,112              | ) |  |   | (12,497 | )
|Net loss applicable to common stockholders per share-basic and diluted |  | $                | (0.33   | ) |              | $ | (0.06  | )                 |  | $ | (0.05               | ) |  | $ | (0.31   | )



|                                                                       |  |               |        |   |              |   |        |                   |  |   |                     |   |  |   |         |  
|---------------------------------------------------------------------- |  | ------------- | ------ | - | ------------ | - | ------ | ----------------- |  | - | ------------------- | - |  | - | ------- | -
|                                                                       |  | March 31,2002 |        |   | June 30,2002 |   |        | September 30,2002 |  |   | December 31,2002(c) |  
|Revenues                                                               |  | $             | 7,014  |   |              | $ | 6,427  |                   |  | $ | 5,875               |   |  | $ | 6,019   |  
|Loss from operations                                                   |  |               | (2,331 | ) |              |   | (2,035 | )                 |  |   | (2,401              | ) |  |   | (23,093 | )
|Net loss                                                               |  |               | (4,488 | ) |              |   | (4,154 | )                 |  |   | (4,736              | ) |  |   | (24,025 | )
|Net loss applicable to common stockholders                             |  |               | (4,516 | ) |              |   | (4,157 | )                 |  |   | (4,749              | ) |  |   | (24,025 | )
|Net loss applicable to common stockholders per share-basic and diluted |  | $             | (2.18  | ) |              | $ | (1.97  | )                 |  | $ | (2.21               | ) |  | $ | (1.33   | )

---

|(a) | 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 6.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | 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 4.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | The Company recorded a charge of $5.8 million related to an early extinguishment of its note payable. The Company recorded a $12.7 million charge for the impairment of certain
long-lived assets. See Note 4.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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FIBERNET TELECOM GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



15. LEGAL SETTLEMENT EXPENSE



In December 2002, the Company settled certain outstanding litigation matters in part by issuing approximately 13,333
warrants to purchase common stock at $0.03 per share and by repricing the exercise price of approximately 6,667 of existing warrants to purchase common stock from exercise prices ranging from $15.00 to $45.00 per share to $0.03 per share. All of
these warrants have a term of five years.



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 matters 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.



16. SUBSEQUENT EVENTS



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
$170,000 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.



Also on
January 30, 2004 in an unrelated transaction, the Company entered into a Common Stock Purchase Agreement (the Investor 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 Investor 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.



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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 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 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. All of the repriced warrants were immediately exercised by the lenders.



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, which included approximately $0.4 million for the reimbursement of legal fees.



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



In August 2002, we engaged Deloitte &
Touche LLP (Deloitte & Touche) to serve as our independent auditor for 2002. Prior to that date, Arthur Andersen LLP (Andersen) had served as our independent public accountants.



The reports by Andersen on our consolidated financial statements for the past
two years did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. Andersens report on our consolidated financial statements for 2001 was issued
on an unqualified basis in conjunction with the filing of our Annual Report on Form 10-K.



During our two most recent fiscal years, and through the date of the change, there were no disagreements with Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing
scope or procedures which, if not resolved to Andersens satisfaction, would have caused them to make reference to the subject matter in connection with their report on our consolidated financial statements for such years. In addition, there
were no reportable events, as listed in Item 304(a)(1)(v) of Regulation S-K.



The decision to change accountants was recommended by the Audit Committee and approved by the Board of Directors on August 9, 2002.



During 2003, there were no disagreements with Deloitte & Touche on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures which, if not resolved to Deloitte & Touches satisfaction, would have caused them to make reference to the subject matter in connection with their report on our consolidated
financial statements for 2003 and there were no reportable events, as listed in Item 304(a)(1)(v) of Regulation S-K.



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.



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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, 2003 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 2004 Annual Meeting of Stockholders, which we will file with the SEC within 120 days after our December 31, 2003 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, 2003 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 2004 Annual Meeting of
Stockholders, which we will file with the SEC within 120 days after our December 31, 2003 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 2004 Annual Meeting of
Stockholders, which we will file with the SEC within 120 days after our December 31, 2003 fiscal year end.



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PART IV



ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K



(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).              
|            | 
|10.1        |  | Office Lease Agreement, between Hudson Telegraph Associates and us, dated as of February 17, 1998 (incorporated by reference to our Quarterly Report on Form 10-QSB, filed on November 16,
1998).                                                                                                      
|            | 
|10.2        |  | Agreement of Lease, between 570 Lexington Company, L.P. and us, dated as of August 3, 1998 (incorporated by reference to Exhibit 10.5 to our Quarterly Report on Form 10-QSB filed on May 15,
1998).                                                                                                   
|            | 
|10.3        |  | 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).                                                                



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|            |  |                                                                                                                                                                                                                                                                              
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit Name                                                                                                                                                                                                                                                                 
|            | 
|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).                                                                          
|            | 
|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).                                                                      



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|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                   
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit Name                                                                                                                                                                                                                                                                                                                                                                                                      
|            | 
|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).                                                                                               
|            | 
|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).



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|            |  |                                                                                                                                                                                                                                                                                                                                                             
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit Name                                                                                                                                                                                                                                                                                                                                                
|            | 
|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).                                                                                                                           
|            | 
|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).                                                                                                                 



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|            |  |                                                                                                                                                                                                                                                                                                                           
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit Name                                                                                                                                                                                                                                                                                                              
|            | 
|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).                                     
|            | 
|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).                                       



88



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##### Table of Contents

|            |  |                                                                                                                                                                                                                                                                                                     
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit Name                                                                                                                                                                                                                                                                                        
|            | 
|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.
**                                                                                                         
|            | 
|14          |  | Corporate Code of Conduct and Ethics. **                                                                                                                                                                                                                                                            
|            | 
|21.1        |  | Our Subsidiaries (incorporated by reference to Exhibit 21.1 to our Registration Statement on Form S-1, filed on August 15, 2000).                                                                                                                                                                   
|            | 
|23.1        |  | Consent of Deloitte & Touche LLP. **                                                                                                                                                                                                                                                                
|            | 
|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.
|-- | ---------------



(b) Reports on Form 8-K



The following reports were filed on Form 8-K during the quarter ended December 31, 2003:



None.



89



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##### Table of Contents

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/    MICHAEL S.
LISSName:

Michael S. LissTitle:

Chairman, President and Chief Executive OfficerDate: March 29, 2004




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/    MICHAEL S.
LISSMichael S.
Liss                    |  | Chairman, President and Chief Executive Officer (Principal Executive Officer)         |  | March 29, 2004
|                                                         |  |                                                                                      
|/s/    JON A.
DELUCAJon A.
DeLuca                        |  | Senior Vice President-Finance, Chief Financial Officer (Principal Accounting Officer) |  | March 29, 2004
|                                                         |  |                                                                                      
|/s/    TIMOTHY P.
BRADLEYTimothy P.
Bradley              |  | Director                                                                              |  | March 29, 2004
|                                                         |  |                                                                                      
|/s/    OSKAR
BRECHEROskar
Brecher                        |  | Director                                                                              |  | March 29, 2004
|                                                         |  |                                                                                      
|/s/    ROBERT E.
LABLANCRobert E.
LaBlanc                |  | Director                                                                              |  | March 29, 2004
|                                                         |  |                                                                                      
|/s/    ROY (TREY ) D. FARMER
IIIRoy (Trey) D. Farmer III |  | Director                                                                              |  | March 29, 2004
|                                                         |  |                                                                                      
|/s/    CHARLES J.
MAHONEYCharles J.
Mahoney              |  | Director                                                                              |  | March 29, 2004
|                                                         |  |                                                                                      
|/s/    RICHARD E.
SAYERSRichard E.
Sayers                |  | Director                                                                              |  | March 29, 2004



90