<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB
(Mark One)

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

For the fiscal year ended December 31, 1998
                                       OR

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

For the transition period from                 to                

                         Commission file number 33-7841

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

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

  100 Town Centre Drive, Rochester, NY                             14623
(Address of Principal Executive Offices)                         (Zip Code)

                                 (716) 340-2200
                (Issuer's Telephone Number, Including Area Code)

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

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

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

        Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for past 90 days.

Yes [X]  No [ ]

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

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

        The aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, was $26,000,000 as of December 31, 1998.

        The number of shares outstanding of each of issuer's classes of common
equity, as of December 31, 1998, was 16,000,000 shares of Common Stock, $ .001
par value.

        Documents Incorporated by Reference: None

      Transitional Small Business Disclosure Format (check one):

      Yes [ ]  No [X]
<PAGE>   2
                                     PART I

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


ITEM 1. DESCRIPTION OF BUSINESS.


                                BUSINESS OVERVIEW
Introduction

         FiberNet Telecom Group, Inc. ("FiberNet" or the "Company") is a
development stage holding company dedicated to delivering integrated
telecommunications products and services in tier-one major metropolitan service
areas ("MSA's") throughout the United States. FiberNet conducts its business 
through its direct and indirect subsidiaries, including FiberNet Telecom, Inc.

         FiberNet Telecom, Inc. is a management company organized to develop new
ventures within the telecommunications industry arising from what management
believes is the need for greater broadband capacity due to the growth of the
Internet and data communications and the favorable regulatory environment
created by the Telecommunications Act of 1996. FiberNet Telecom, Inc. manages
two operating subsidiaries, FiberNet Equal Access, LLC and Local Fiber, LLC.
Both subsidiaries are New York limited liability companies.


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      The subsidiary structure of the Company is set forth in the chart below:

                       [SUBSIDIARY STRUCTURE FLOW CHART]

           FiberNet Equal Access, LLC ("Equal Access") specializes in designing,
           building, and operating intra-building fiber optic transmission
           networks and plans to lease digital bandwidth circuits to
           telecommunications providers.

           Local Fiber, LLC ("Local Fiber") is a Competitive Local Exchange
           Carrier ("CLEC") which plans to provide competitive local
           telecommunications service as an alternative to the local exchange
           carriers.

      FiberNet has 100% ownership of Equal Access (subject to a 10% warrant) and
90% ownership of Local Fiber, with the remaining 10% ownership held by
MetroMedia Network, Inc. ("MetroMedia").

      To date, FiberNet has not generated any revenues. Successful
implementation of its business plan, as described herein, will depend upon many
factors, including the ability to raise adequate financing.

      The Company's founders have significant experience in the Competitive
Access Provider industry and intend to draw upon their expertise in the
telecommunications, electronics, and communications industries from their
predecessor companies, FiberNet, Inc. and FiberNet USA, Inc., to expand the
Company's business to be the premier provider of intra-building fiber optic
networks and local telecommunications services in selected urban markets.

      FiberNet, Inc. and FiberNet USA, Inc. were owned primarily by Petrocelli
Industries Inc., an investment company controlled by the Company's Chairman,
Santo Petrocelli. FiberNet, Inc. successfully designed, installed and operated
competitive access networks in three upstate New York


                                       -3-
<PAGE>   4
markets (Albany, Buffalo, and Rochester). These networks, covering approximately
500 route miles, were sold to Metropolitan Fiber Systems (a predecessor entity
to MCI WorldCom Inc.) in 1993. FiberNet USA, Inc. built additional networks in 
Cincinnati (OH), Raleigh-Durham (NC), Huntsville (AL), and St. Louis (MO) and 
merged with Intermedia Communications, Inc. in 1995.

FIBERNET EQUAL ACCESS, LLC

      Equal Access' business strategy is to provide high-bandwidth carrier-class
fiber and copper via transport intra-building networks in large Class-A
commercial office buildings and to lease Synchronized Optical Network ("SONET")
digital circuits to carriers. Management believes this strategy is unique in
last mile telecommunications solutions.

      Overview. Management believes Equal Access will become the "Premier
Building Transmission Provider" by creating in-building high-speed,
high-capacity fiber optic and copper networks, which it links to existing
external fiber optic networks, thus delivering a high-speed, seamless link
between users and the data and voice information they are sending and receiving.
These services will be leased on a flat rate monthly fee basis, in addition to
an installation charge, at a DS-0, DS-1, and DS-3 circuit level.

      Management believes Equal Access' fiber intra-building network, called a
Premise Distribution System ("PDS") efficiently supports the increased flow of
information that has outgrown the transmission capabilities of copper-wire only
systems. A PDS will connect various types of voice, data, and video
communication devices, switching equipment and information management systems
together, and to external fiber optic networks. Equal Access' PDS provides the
critical links between tenants, the building and carrier networks necessary for
100% fiber optic connectivity and virtual throughput.

      Equal Access intends to focus on delivering PDS technology to Class-A
(generally with a minimum of 500,000 square feet) commercial office buildings.
Management believes that Equal Access is currently the only company developing,
implementing and managing intra-building networks consisting of 100%
fully-redundant fiber optics.

      Over the next five years, Equal Access expects to construct PDS systems in
10 MSA's in the United States. Management expects that this increased demand for
PDS in the next few years will result from the increasing number of carriers
competing with Regional Bell Operating Companies ("RBOC"), on a national level.

      Business Strategy. Equal Access' business strategy will focus on securing
multi-year license agreements from building owners/managers in their buildings.
These license agreements provides Equal Access the exclusive right and ability
to resell and/or lease intra-building transport capacity to third parties. In
exchange for these agreements, each building owner receives a redundant state of
the art fiber optic telecommunications network at no cost as well as a
percentage share of the revenues generated by Equal Access in its building.

      Network Interface Equipment Room. Equal Access generally will build a
1,000 to 1,500 square foot Network Interface Equipment Room in the basement of
each building. This is the collocation facility within a building that
interconnects the carriers' networks to Equal Access' intra-building network.
Within this space, Equal Access will provide secure caged floor space with
direct fiber connectivity to make carrier utilization easy and consistent.

      Benefits. Equal Access' fiber optic voice and data network will benefit
telecommunications service providers (carriers), building tenants and building
owners.


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<PAGE>   5
      Carrier Benefits. The PDS will allow carriers to share telecommunications
equipment and fiber routes inside the building, providing significant economies
of scale. Management expects the PDS to virtually eliminate the need for
carriers to go through extensive provisioning and build-outs for each tenant.
The PDS requires no capital investment and carriers pay on an "as-needed" basis
for the services and network. Further, management anticipates carriers will
realize savings from the cost-based, non-discriminatory pricing. In addition,
carriers will not face building access problems. By dealing directly with Equal
Access, management anticipates the carriers' need to negotiate directly with
building owners to be significantly reduced. Lastly, management believes Equal
Access will dramatically improve the carriers' time-to-market, reducing delays
which can typically run up to 120 days. Management believes intra-building fiber
optic connections are faster, better, and cheaper than current copper or hybrid
systems, and offer virtually unlimited expandability.

      Building Owner Benefits. Management expects building owners to benefit
significantly from the PDS. First, the existing telecommunications systems
(consisting of copper wires) in their buildings will be upgraded to a
state-of-the-art redundant fiber system without any capital investment. Second,
since Equal Access offers revenue sharing, it may become an additional profit
center to the building. Third, management believes that buildings with PDS will
represent a powerful incentive for attracting and maintaining tenants. Fourth,
because the management of the system is outsourced, the property owner will not
need to establish an in-house team of technicians. Fifth, since the PDS is
efficient in the space it utilizes, the property owner will not have to
sacrifice square footage. Sixth, the PDS is a complete system rather than
multiple carrier systems which can clog up risers and telecommunications
closets. Finally, rather than spending time and effort each time a tenant
requests approval, the owner will only have to approve the construction plans
once. Carriers needing access can then work directly with Equal Access.

      Tenant Benefits. Management believes tenants will benefit from their
connection to multiple carriers via a high capacity fiber optic network. As a
result, tenants will have immediate and competitively priced access to enhanced
high-speed, faultless transmission of voice, data, and fax communications. In
addition, tenants may choose among a variety of different carriers.

      Strategic Partners. Equal Access has established strategic alliances and
credibility with major building owners and developers which have been leveraged
to gain long-term building contracts. Equal Access has executed agreements with
four building owners covering seven properties in New York City. These building
owners also control an additional 29 properties in New York, which Equal Access
expects to complete contracts with upon the successful completion of the initial
buildings. Equal Access began construction on the initial buildings in 1998. The
Company is negotiating with other building owners to enter into contracts
relating to the leasing of space in a number of commercial office buildings.

      Construction Costs. Management estimates the cost, subject to financing,
of completing its initial targeted buildings and developing selected PDS systems
to be in excess of $20 million. The capital will be used for the construction of
the in-building riser system, the purchase of transmission equipment, fiber and
copper cable, and the construction of a network interface equipment room in each
building.

LOCAL FIBER, LLC

      Overview. Management believes Local Fiber will be the first
facilities-based carrier to offer an end-to-end, 100% fiber carrier-class
network solution. This will be achieved through the interconnection of the Local
Fiber network with its sister subsidiary, Equal Access' in-building network. In
Manhattan, the Company plans to install a new digital switching and SONET
transmission platform that interconnects with an existing, 384-mile dark fiber
network. Local Fiber operates out of a 13,000 square foot switching facility at
60 Hudson Street, which will house its state-of-the-art 5ESS-2000 switch.


                                       -5-
<PAGE>   6
      Local Fiber's advanced network and switching architecture will allow it to
provide a broad array of services and products:

            - Carrier Link Services to Business Customers: Dedicated products,
            hub collocation, inter-building transport and carrier access
            services, including special access, dedicated access, switched
            originating access and switched terminating access.

            - Local Link Services: Switched products include Local voice line
            (POTS), Centrex, ISDN basic and primary, Direct inward and outward
            dialing.

            - "Feature Group" Options: Voice mail, three-way calling,
            call-forwarding, call waiting, distinctive ringing and metered 
            business calling.

            - "Extended and long distance service" Services: IntraLATA toll, 
            long distance toll, 800 and 888 service and calling card service.

      Business Strategy. Local Fiber will initially focus on wholesale transport
services in the New York City metropolitan area. The Company provides switched
local telecommunications and long distance services, focusing on buildings
already "on-net" with Equal Access. Management anticipates generating additional
sales by selling to off-net customers. Local Fiber will expand its capabilities
to include enhanced data and Internet Protocol services. Expansion markets for
Local Fiber will include Los Angeles, Chicago, San Francisco, Philadelphia,
Boston, Detroit, Dallas, Washington and Houston.

      Benefits. Local Fiber's unique market niche, broad industry experience and
expertise allow it to offer significant benefits to potential customers:

      Capacity and Reliability. Management believes Local Fiber's 100% fiber
optic SONET network delivers greater capacity, quality and reliability. The
self-healing fiber architecture consists of diversely routed cables so that a
cut or break will not affect service.

      State-of-the-art switch. Local Fiber deploys a highly distributed
switching architecture by using digital communication links connected to the
host switch (Lucent 5ESS-2000). This sophisticated switch enables Local Fiber to
provide a full range of services, including all types of calls (local exchange,
long distance, Centrex services and ISDN) to multiple carriers and end-user
customers. Local Fiber's bundling approach and distributive switching
architecture represent a cost-effective alternative to current local exchange
companies.

      Comprehensive service offerings. Local Fiber will provide advanced fiber
optic technology directly to each floor of the buildings it serves through its
vertical marketing integration strategy with its subsidiary Equal Access, with
comprehensive services such as on-site repairs and maintenance, and customized
solutions.

      Bundled local and long distance services: Customers will be provided with
"One Simple Bill" that contains feature rich transport and switch-based
products, as well as long distance services.

      State-of-the-Art Network. Through a contractual arrangement with
Metromedia, a 10% owner of Local Fiber, Local Fiber has the exclusive right to 
use up to eight strands (four of which are presently usable) of Metromedia's 
48-mile dark fiber New York City network for an initial term of 12 years with a
15 year renewal option at Local Fiber's request, at no cost. Management expects
that this significant cost


                                       -6-
<PAGE>   7
advantage over competitors will allow Local Fiber to provide lower costs for its
customers. Combined with Equal Access' intra-building networks, FiberNet is able
to provide 100% end-to-end fiber to customers.

      Seamless Interconnection. Local Fiber has executed its first
interconnection and co-carrier agreement with Bell Atlantic, and is currently in
negotiations with other CLECs and long distance carriers in New York City. This
arrangement will provide seamless interconnection between Local Fiber's network
and other carriers. Local Fiber will negotiate similar agreements in other
markets with the incumbent Regional Bell Operating Company and Local Exchange
Carrier.

      Network Operations Center. Both Equal Access and Local Fiber will utilize
the Network Operations Center for remote provisioning and fault management.

      The Network Operations Center ("NOC") will be a 24-hour, 365
days-per-year, technology center. The NOC will be responsible for real-time
network surveillance, remote rearrangement of circuits and database maintenance
for all wiring address and assignment records. In addition, all billing,
provisioning and fault management routines will be performed here. The NOC will
be strategically located in a 15,000 square foot facility in Rochester, New York
which will enable Equal Access and Local Fiber to take advantage of Rochester's
large technical labor force. In addition, the round the clock remote monitoring
will ensure that all network components in up to 10 markets are working at top
efficiency and security, at all times. The Company expects the NOC to be
equipped and operational in 1999.

      The NOC will be equipped with the following state-of-the-art technology:

           * Lucent NOC1

                - Allows for real-time network surveillance and alarming

           * Lucent SNC Interface & Provisioning

                - Provides provisioning of all SONET network elements 

                - Graphical user interface for alarm reporting and status 
                  display

           * Metasolv

                - electronic order processing

                - trouble ticketing

                - circuit inventory

           * Macrologic Billing Control

                - Financial reporting

                - Payment/account information

                - Billing parameters (rates/tax)

      Market Opportunities. Management believes significant factors such as
industry growth, regulatory changes and the obsolescence of current copper
networks have combined to create excellent opportunity for FiberNet and its
subsidiaries. Management expects the industry to growth substantially over the
next decade.

      Competition. Equal Access has a limited number of competitors, including
RBOCs (which own most of the in-building copper networks), but have cables with
limited broadband capabilities. Currently, however, the Company's customer base
can choose from a selection of indirect competitive alternatives. Management
believes Equal Access' redundant fiber optic network will be more
technologically advanced compared to existing systems offered by competitors.


                                       -7-
<PAGE>   8
           Local Fiber is in competition with incumbent LECs, CLECs and IXCs.
However, Local Fiber believes it offers the following competitive advantages:

           - FiberNet's end-to-end technology provides customers with fiber
           technology that originates at the Local Fiber fiber loop, and
           connects directly to the customer premise in buildings equipped with
           Equal Access' PDS infrastructure. The result is the unparalleled
           capacity, quality and reliability of a 100% fiber network.

           - Local Fiber can reach customers at a lower cost than its
           competitors. This advantage is predicated on FiberNet's exclusive 
           right of use agreement with Metromedia, which provides a dark fiber 
           backbone to Local Fiber throughout Manhattan at no cost.

      Expansion Costs. Local Fiber will require significant purchases of
equipment essential for the growth and operation of its business. Management
estimates Local Fiber will require significant additional capital over the next
three years to purchase local switching equipment, electronics equipment, DACS
equipment, a network control center and monitoring equipment, fiber and copper
cable, construction, engineering and installation.

      Federal Regulation. FiberNet intends to capitalize on the sweeping changes
that have dramatically altered the the telecommunications industry. The new
regulatory changes have opened new markets and created new opportunities for
telecommunication companies.

      The 1996 Telecommunications Act, which was enacted in February, 1996 (the
"Telcom Act') effected plenary changes in regulation at both the federal and
state levels that affect virtually every segment of the telecommunications
industry. The stated purpose of the Telcom Act is to promote competition in all
areas of telecommunications and to reduce unnecessary regulation in order to
secure lower prices and higher quality services for telecommunication consumers.

      The Telcom Act enables FiberNet to: a) connect directly to RBOCs; b) take
advantage of lower, cost-based pricing; c) purchase individual network elements
on an "as-needed" basis; and d) resell network capacity and services on a
wholesale basis to carriers.

      The Telcom Act also makes competitive entry into other services or
geographic markets more attractive to RBOCs, other ILECs and other companies,
and likely will increase the level of competition FiberNet faces. More and
diverse kinds of telecom providers will be pursuing customers and selling their
products and offerings to all market segments. However, telecommunications
users, residential and business customers can expect increased choices and
benefit from companies such as FiberNet.

      Local Regulation. The Company is also subject to numerous local
regulations, such as building code requirements. These regulations may vary
greatly from state to state and city to city.

      Employees. As of December 31, 1998, the Company employed 6 people, which
were primarily engaged in administration and marketing. Management projects the
number of employees to increase to 35 over the next twelve months. The Company's
employees are not represented by any labor union. The Company considers its
employee relations to be good.


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<PAGE>   9
ITEM 2. DESCRIPTION OF PROPERTIES

      The principal offices of FiberNet are located in its NOC facility in
Rochester, New York, consisting of approximately 15,000 square feet of space.
FiberNet leases this space under an agreement which expires in 2005, at a
current annual base rental of approximately $90,750. FiberNet recently entered
into a lease for 5,000 square feet at 570 Lexington Avenue in New York City for
additional office space for an annual base rental of approximately $276,000.

      Local Fiber has entered into an agreement to lease approximately 13,222
square feet of space to serve as the switch control site at 60 Hudson Street in
New York City for a term of ten years and eight months, expiring in July 2008 
for an annual base rental of approximately $330,000.

ITEM 3. LEGAL PROCEEDINGS

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

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

      No matters were submitted during the fourth quarter of the period covered
in this report to a vote of shareholders.

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

      The Company's common stock is currently eligible for quotation on the NASD
Electronic Bulletin Board under the symbol "FTGX". As of May 27, 1998, the
Company currently had a minimum of 328 shareholders of record.

      The following table sets forth the high and low sales prices for each
quarter for the Company's Common Stock as reported on the NASD Electronic
Bulletin Board during the fiscal year 1998:

      PERIOD - 1998 Fiscal Year, quarter ended:

<TABLE>
<CAPTION>
        ----------------------------------------------------
                                      High             Low
        ----------------------------------------------------
<S>                                <C>              <C>
        March 31, 1998              $ 8.375          $ 4.500
        ----------------------------------------------------
        June 30, 1998               $ 6.000          $ 4.000
        ----------------------------------------------------
        September 30, 1998          $ 4.688          $ 1.875
        ----------------------------------------------------
        December 31, 1998           $ 2.375          $ 1.000
        ----------------------------------------------------
</TABLE>

      All of the above quotations were obtained from Bloomberg.

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


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

GENERAL

      The Company has had no commercial operations to date. Since it inception,
the Company has engaged principally in organizational activities, including
developing strategic commitments to fund its plan. Accordingly, the Company has
no relevant operating history upon which an evaluation of its performance and
prospects can be made. The Company is subject to unforeseen capital
requirements, failure of market acceptance, failure to establish business
relationships, and competitive disadvantages against larger and more established
companies.

      The Company has generated no revenues to date, and will not generate any
meaningful revenues until after the Company successfully completes the
development and installation of Equal Access' PDS product as well as the
installation of Local Fiber's local and long distance switch. Equal Access began
construction on 3 buildings in 1998, which the Company expects to be operational
in 1999. Local Fiber expects to have its switch and network operational by the
third quarter, 1999.

LIQUIDITY AND CAPITAL RESOURCES

      The Company has to date financed its development effort through direct
equity investments from its shareholders. The Company has sustained losses in
the amount of $3.57 million for the period from inception (August 10, 1994) to
December 31, 1998. The Company had no revenues during this period, and
substantially all of such losses are attributable to initial start-up costs.

      The Company's planned operations will require significant capital to fund
equipment purchases, engineering costs, and installation. During 1998, the
Company spent approximately $5.4 million in capital expenditures, which was
primarily used in the construction of PDS products for Equal Access.
Additionally, Local Fiber has purchased a local and long distance switch,
electronics equipment, DACS equipment, network control center and monitoring
equipment, fiber and copper cable, construction, engineering, and installation
which has been financed pursuant to a $5.1 million line of credit from Comdisco,
a major leasing company. This line of credit replaced a former credit
commitment which expired in December, 1998.

      Equal Access projects that the completion of its initial plan including 36
buildings will require approximately $25 million in capital expenditures and
associated working capital. The completion of these 36 buildings is subject to
the execution of additional contracts with building owner/managers as well as
securing additional financing commitments from a third party lender. The capital
will be used for the construction of in-building risers, the purchase and
installation of transmission equipment, fiber and copper cable, and the
construction of network interface equipment rooms in the basements of each
building and network engineering.

      On November 24, 1997, the Company raised $5.075 million as a part of a one
million share Preferred Stock Private Placement to satisfy financing
requirements and to support working capital shortfalls. The Company has secured
a commitment for an equipment lease line of credit totaling $5.1 million. This
line will fund the Company's central office switch, SONET electronics for both
the switch location and within the Equal Access buildings and DACS equipment.
The Company is in the process of negotiating with other lenders regarding
additional debt and equity financing, but as of to date a final commitment has
not been secured.

      The Company expects to accelerate its growth and expand to 10 tier-one
MSA's over the next five years which includes the deployment of switching and
transmission equipment as a CLEC through Local


                                      -10-
<PAGE>   11
Fiber and the construction of Premise Distribution Systems under Equal Access.
The Company may require additional capital if the Company's expansion occurs
more rapidly than currently anticipated or if operating results are below
expectations. The Company intends to raise additional capital before such time.
The Company may secure additional funding through the sale of public or private
debt and/or equity securities. There can be no assurance, however, that the
Company will be successful in raising sufficient additional capital.

YEAR 2000 ISSUES

      The Year 2000 issue is the result of computer programs written using two
digits rather than four to define the applicable year. Without corrective
action, programs with time-sensitive software could potentially recognize a date
ending in "00" as the year 1900 rather than the year 2000, causing many computer
applications to fail or create erroneous results.

      As a result of modifications or upgrades planned, the Company believes
that the Year 2000 issue will not pose significant problems for the Company's
business, operations, or operating systems. The Company expects that any
additional modifications or upgrades of software or hardware required under the
Year 2000 compatibility will be accomplished using existing resources and will
not have a material impact on the Company's financial position or results of
operations in future periods.

ITEM 7. FINANCIAL STATEMENTS

      Audited balance sheets as of December 31, 1998 and the related statements
of operations, cash flows and stockholders' equity for the period from inception
(August 10, 1994) to December 31, 1998, together with related notes and the
reports of Arthur Andersen LLP, independent auditor, appear on pages F-1 through
F-15 of this report.

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

      None.

ITEM 9. MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

           The following tables set forth the directors and executive officers
of the Company as of December 31, 1998. Directors are elected for a period of
one year and thereafter serve until the next annual meeting at which their
successors are duly elected by the stockholders. Officers and other employees
serve at the will of the board of directors.


                                      -11-
<PAGE>   12
<TABLE>
<CAPTION>
NAME                                      AGE           POSITIONS
----                                      ---           ---------
<S>                                       <C>           <C>
Santo Petrocelli, Sr.                     63            Chairman and Director
Frank Chiaino                             55            President, Chief Executive Officer and
                                                        Director
Lawrence S. Polan                         68            Director
John J. Marchaesi                         39            Vice President-Administration and Director
Kenneth Elias                             51            Vice President - Sales and Marketing
Mark F. Lipford                           38            Vice President - Engineering and Operations
</TABLE>

      SANTO PETROCELLI, SR. served as Chairman and a Director of Fibernet
Telecom Group, Inc., and its wholly-owned subsidiaries, FiberNet Equal Access,
LLC and Local Fiber LLC., since their inception. Mr. Petrocelli is the
President, Chief Executive Officer and a Director of Petrocelli Electric
Company, and Petrocelli Communications Company. In addition, he controls
Petrocelli Industries, Inc., and SMFS, Inc., investment companies which have
held controlling interests in several communications ventures including FiberNet
Telecom, Inc., FiberNet, Inc. and FiberNet USA, Inc. Mr. Petrocelli was the
former Chairman and Chief Executive Officer of FiberNet Inc. and FiberNet USA,
Inc. prior to their acquisition by MFS, now World Comm and InterMedia
Communications Inc. He has over 40 years experience in the communications,
electrical and telecommunications industry.

      FRANK CHIAINO is President and Chief Executive Officer of FiberNet Telecom
Group, Inc. and its subsidiaries. Mr. Chiaino joined the Company's management
team after a 30 year career with Time Warner Communications, where he was most
recently President and Chief Executive Officer and concurrently served as Vice
President of Time Warner Cable. Mr. Chiaino also served as Vice President and
Chief Operating Officer at Time Inc.'s Manhattan Cable subsidiary where he built
and managed the nations first urban cable system. Mr. Chiaino has a Bachelor of
Science degree from Queens College and received his Masters of Business
Administration from Columbia University.

      LAWRENCE S. POLAN is a Director of FiberNet Telecom Group, Inc. and its
subsidiaries. Mr. Polan was a former director of FiberNet, Inc. and FiberNet
USA, Inc. In addition, Mr. Polan is the Chief Financial Officer of Petrocelli
Electric Company and Petrocelli Communications Company. Prior to joining
Petrocelli Communications, he was the Chief Financial Officer and Controller of
Visa Resources, Inc. a New York Stock Exchange Company with over $250 Million in
annual revenue. Mr. Polan holds a bachelors degree from St. John's University.

      JOHN J. MARCHAESI, CPA, is Vice President of Administration and a Director
of FiberNet Telecom Group, Inc. and its subsidiaries. Mr. Marchaesi was the
Controller of FiberNet USA, Inc. Prior to joining the Company, he was a Senior
Manager-Internal Audit and Consulting with Associated Communications Corporation
and also the controller of Cellular One/Albany Telephone Company. He has over
ten years experience in financial management within the telecommunications
industry. He holds a Masters of Business Administration from Rochester Institute
of Technology and a Bachelor of Science in business administration from SUNY,
Oswego.


                                      -12-
<PAGE>   13
      KENNETH ELIAS is Vice President of Sales and Marketing. Mr. Elias has over
29 years in the telecommunications industry. Mr. Elias began his career at NYNEX
in 1969 and during his tenure he has held a variety of executive level positions
where he was responsible for product development, market growth and sales
operations. Mr. Elias has a Bachelor of Science from the Citadel.

      MARK F. LIPFORD is Vice President of Engineering and Operations of
FiberNet Telecom Group, Inc. Prior to joining the Company, Mr. Lipford served as
Regional Vice President of Time Warner Communications. Mr. Lipford has over 18
years of experience in the telecommunications industry which includes his direct
participation in the development of the nation's first CLEC. Mr. Lipford holds a
Masters of Arts from the University of Akron.

      There are currently no arrangements or understandings regarding the length
of time each director is to serve in such capacity except as otherwise described
herein.


ITEM 10. EXECUTIVE COMPENSATION

      The following table sets forth the compensation of the executive officers
of the Company for the fiscal year 1998:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
                                                               ANNUAL COMPENSATION
                                                          ------------------------------
                                                                               OTHER           LONG            ALL
                                                                               ANNUAL          TERM           OTHER
                                                           SALARY    BONUS  COMPENSATION   COMPENSATION   COMPENSATION
NAME                       POSITION                YEAR      $         $         $               $              $
----------------------------------------------------------------------------------------------------------------------
<S>                        <C>                     <C>    <C>        <C>    <C>            <C>            <C>
Santo Petrocelli, Sr. (1)  Chairman and Director   1998   $150,000    --        --               0              0
----------------------------------------------------------------------------------------------------------------------
Frank Chiaino (2)          President, CEO &        1998   $125,000    --        --               0              0
                           Director
----------------------------------------------------------------------------------------------------------------------
Lawrence S. Polan          Director                1998   $      0    --    $ 75,000(3)
----------------------------------------------------------------------------------------------------------------------
John J. Marchaesi (4)      VP Administration
                           and Finance and         1998   $ 85,000    --        --               0              0
                           Director
----------------------------------------------------------------------------------------------------------------------
Mark Lipford (5)           VP Engineering &        1998   $110,000    --        --               0              0
                           Operations
----------------------------------------------------------------------------------------------------------------------
Kenneth Elias              VP Sales and            1998   $108,000    --        --               0              0
                           Marketing
----------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) As of January 1, 1998, the Company entered into an employment agreement with
Santo Petrocelli, Sr., the Company's Chairman. The Agreement has a term of three
years and provides for an annual base salary of $150,000. In 1997, the
disinterested members of the Board of Directors approved the issuance to Mr.
Petrocelli of options to purchase 190,000 shares of the Company's Common Stock.
In the event of a Change of Control, the Company shall pay to Mr. Petrocelli
severance pay equal to 2.75 times the amount of Mr. Petrocelli's annual base
salary and 2.75 times Mr. Petrocelli's bonus in respect of the calendar year
preceding the date of termination. The Company deferred payment to Mr.
Petrocelli in the amount of $50,000 until such time as the completion of the
Company's financing.

(2) As of January 1, 1998, the Company entered into an employment agreement with
Frank Chiaino, the Company's President and Chief Executive Officer. The
agreement has a three year term and provides for an annual base salary of
$125,000. Additionally, Mr. Chiaino may receive an annual bonus to be determined
by the board of directors of the Company. Pursuant to the employment agreement,
Mr. Chiaino shall have the right to purchase up to 150,000 shares of the
Company's Common Stock at an exercise price of $1.95 per share. In the event of
a Change of Control, the Company shall pay to Mr. Chiaino severance pay equal to
2.75 times the amount of Mr. Chiaino's annual base salary and 2.75 times


                                      -13-
<PAGE>   14
Mr. Chiaino's bonus in respect of the calendar year preceding the date of
termination. The Company deferred payment to Mr. Chiaino in the amount of
$31,250 until such time as the completion of the Company's financing.

(3) As of January 1, 1998, the Company entered into a consulting agreement with
LPS Consultants, Inc. to provide financial and consulting services for a three
year term at an annual rate of $75,000. Lawrence S. Polan is the majority
shareholder of LPS Consultants, Inc.

(4) As of January 1, 1998, the Company entered into an employment agreement with
John J. Marchaesi, the Company's Vice President of Administration and Finance.
The agreement has a three year term and provides for an annual base salary of
$85,000. Additionally, Mr. Marchaesi may receive an annual bonus to be
determined by the board of directors of the Company. As consideration of past
services, the disinterested members of the Board of Directors granted Mr.
Marchaesi options to purchase 30,000 shares of the Company's Common Stock. In
the event of a Change of Control, the Company shall pay to Mr. Marchaesi
severance pay equal to 2.75 times the amount of Mr. Marchaesi's annual base
salary and 2.75 times Mr. Marchaesi's bonus in respect of the calendar year
preceding the date of termination.

(5) Mr. Lipford left the employ of the Company as of October, 1998. The Company
paid Mr. Lipford $88,645 as compensation for services rendered through his last
date of employment with the Company.

(6) Mr. Elias left the employ of the Company as of February, 1998. The Company
paid Mr. Elias $33,750 as compensation for services rendered through his last
date of employment with the Company.

      The following table sets forth information concerning the grant of the
following options to purchase shares of the Common Stock of the Company to the
following executive officers:

                      OPTION/SAR GRANTS IN LAST FISCAL YEAR
                               (INDIVIDUAL GRANTS)

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
                                  NUMBER OF SECURITIES          PERCENT OF TOTAL                            
                                       UNDERLYING            OPTIONS/SARS GRANTED TO     EXERCISE OR BASE
             NAME                    OPTIONS GRANTED         EMPLOYEE IN FISCAL YEAR          PRICE
---------------------------------------------------------------------------------------------------------
<S>                               <C>                        <C>                         <C>
Frank Chiaino                           300,000                      44.5%               150,000 @ $1.95
                                                                                         150,000 @ $4.625
---------------------------------------------------------------------------------------------------------
John J. Marchaesi                       120,000                      17.8%               $ 4.625
---------------------------------------------------------------------------------------------------------
Mark Lipford                             40,000                       5.9%               $ 4.625
---------------------------------------------------------------------------------------------------------
Kenneth Elias                            10,000                       1.5%               $  4.50
---------------------------------------------------------------------------------------------------------
</TABLE>

THE STOCK PLAN

           In November 1997, the Company adopted an employee equity
participation program (the "Stock Plan") covering 1,500,000 shares of Common
Stock of the Company to attract, retain and reward employees. The Board of
Directors administers the Stock Plan. All employees are eligible to receive
awards under the Stock Plan, at the Board's discretion.

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

           During the fiscal year ended as of December 31, 1998, the Company had
granted an additional 203,000 options under its plan to certain employees
covering approximately 203,000 shares, of which 175,000 options were granted at
an average exercise price of $4.625, 20,000 options were granted at an exercise
price of $5.375 per share and 8,000 options were granted at an exercise price of
$1.875 per share.


                                      -14-
<PAGE>   15
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

           The following table sets forth as of December 31, 1998 the beneficial
ownership of the Company's Common Stock by each director, by each beneficial
owner of more than five percent (5%) of the Company's outstanding Common Stock
and all current directors of the Company as a group:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
                                                                      BENEFICIAL OWNERSHIP OF COMMON STOCK(1)
                                                                 ------------------------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER                             SHARES OWNED                 PERCENTAGE OF CLASS
-----------------------------------------------------------------------------------------------------------------
<S>                                                              <C>                          <C>
SMFS, Inc. (2) (3)                                                6,900,000                            43%
12-12 43rd Avenue
Long Island City, New York 11101
-----------------------------------------------------------------------------------------------------------------
LPS Consultants, Inc. (2) (3)                                      575,000                            3.5%
12-12 43rd Avenue
Long Island City, New York 11101
-----------------------------------------------------------------------------------------------------------------
LTJ Group, Inc. (2) (3)                                           4,025,000                            25%
61 Old Well Road
Rochester, New York 14626
-----------------------------------------------------------------------------------------------------------------
Michael Lauer (4)                                                 2,200,000                          13.7%
980 Post Road East
Westport, Connecticut  60880
-----------------------------------------------------------------------------------------------------------------
All current directors as a group (4 persons)                      7,475,000                          46.7%
-----------------------------------------------------------------------------------------------------------------
</TABLE>

(1)   In February 1998, the Company converted 1,000,000 shares of the Series A
      Preferred Convertible Stock to Common Stock. As a result, outstanding
      Common Stock of the Company increased to 16,000,000.

(2)   The shares are held of record by Santo Petrocelli, Sr., Lawrence S. Polan
      and Joseph A. Tortoretti, respectively.

(3)   Taking into account the 16,000,000 shares of Common Stock to be
      outstanding, and the 80,000 shares of Series B Preferred Stock, Messrs.
      Petrocelli, Polan and Tortoretti have the following voting rights: (a)
      Santo Petrocelli, Sr. 11,700,000 votes (48.75%); (b) Lawrence S. Polan
      975,000 votes (4.1%); (c) Joseph A. Tortoretti 6,825,000 (28.4%). As a
      group these persons have 19,450,000 out of 25,000,000 votes of 81%.

(4)   Michael Lauer is the investment manager of Lancer Offshore, Inc. and the
      largest shareholder of Lancer Partners LP. Mr. Lauer and his affiliates,
      Lancer Offshore, Inc. and Lancer Partners LP are the record owners of the
      2.2 million shares of the Company's Common Stock.


                                      -15-
<PAGE>   16
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

           Santo Petrocelli, Sr., as Chairman of FiberNet Telecom Group, Inc.,
is also President and Chief Executive Officer of Petrocelli Electric Company,
Petrocelli Communications Company, SMFS, Inc. and Petrocelli Industries
Incorporated. In addition, he is a director of National Abatement Corporation.
Petrocelli Industries Incorporated has provided management, marketing and
administrative services to the Company and its affiliates. As a result of an
open bidding process through an independent third party, the Company in 1998
entered into three separate contracts with Petrocelli Electric totaling
approximately $2.5 million to provide electrical contracting for the
construction of a PDS in three commercial buildings. The Company is obligated
for payment to Petrocelli Electric for services rendered in the amount of $1.4
million. Additionally, the company expensed $140,000 of consulting fees in 1998 
from this related party.
           
           Joseph Tortoretti, is the majority shareholder of Landtel
Telecommunications Group, Inc. ("Landtel") which provides engineering services
and network development and has been retained to provide consulting work to
FiberNet Telecom Group, Inc. In connection with the provision of such services,
the Company reimburses the travel expenses of Landtel which averages
approximately $3,000 per month. In consideration for services rendered, the
Company is obligated for payment to Landtel of $125,000 per year of which 
$83,334 has been paid and the remaining balance of $163,347, which includes 
amounts owed for services rendered in 1997, has been deferred until such time
as the completion of the Company's financing. LTJ Group, Inc., a shareholder of
the Company and Landtel Telecommunications Group, Inc. are owned by the same
party.

           The Company is obligated for payment of yearly management fees for
services rendered by Landtel Telecommunications Group, Inc. in the amount of
$125,000.

           Mr. Lawrence Polan, is a Director of FiberNet Telecom Group, Inc. He
is also Vice President and Chief Financial Officer for Petrocelli Electric
Company, Petrocelli Communications Company and Petrocelli Industries
Incorporated. In addition, he controls LPS Consultants, Inc. Pursuant to a three
(3) year agreement with the Company, LPS Consultants, Inc. provides financial
consulting services at a yearly rate of $75,000, of which $58, 330 has been paid
and $16,670 has been deferred until such time as the completion of the Company's
financing.

           The Company may have continuing relationships with Petrocelli,
Landtel and LPS Consultants, Inc. However, management believes that the terms
and conditions of such dealings will be fair and reasonable to the Company and
based upon terms that would be no less beneficial than could be negotiated with
unrelated parties.

ITEM 13. EXHIBITS

    10.1    Master Lease Agreement between ComDisco, Inc. and the Company dated
            as of July 27, 1998.

    23.1    Consent of Mendelsohn Kary Bell and Natoli, P.C.

    23.2    Consent of Arthur Andersen LLP

    27.1    Financial Data Schedule


                                      -16-
<PAGE>   17
                                   SIGNATURES

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

                                FIBERNET TELECOM GROUP, INC.


                                By:   /s/ Frank Chiaino                         
                                    --------------------------------------------
                                    Name: Frank Chiaino
                                    Title: President and Chief Executive Officer

Date:      March 30, 1999


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


                                By:   /s/ Santo Petrocelli, Sr.               
                                    --------------------------------------------
                                    Name: Santo Petrocelli, Sr.
                                    Title: Chairman

Date:      March 30, 1999



                                By:   /s/ Lawrence S. Polan                 
                                    --------------------------------------------
                                    Name: Lawrence S. Polan
                                    Title: Director

Date:      March 30, 1999


                                      -17-
<PAGE>   18
                          FIBERNET TELECOM GROUP, INC.
                          (A DEVELOPMENT STAGE ENTERPRISE)
                          CONSOLIDATED FINANCIAL STATEMENTS
                          AS OF DECEMBER 31, 1998 AND 1997
                          TOGETHER WITH AUDITORS' REPORT
<PAGE>   19
                          FIBERNET TELECOM GROUP, INC.
                        CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997



                                TABLE OF CONTENTS

<TABLE>
<S>                                                                          <C>
Report of Independent Public Accountants.....................................       1

Consolidated Balance Sheets..................................................       2

Consolidated Statements of Operations........................................       3

Consolidated Statements of Stockholders' Equity .............................       4

Consolidated Statements of Cash Flows........................................       5

Notes to Consolidated Financial Statements...................................  6 - 15
</TABLE>




<PAGE>   20
                   [MENDELSOHN KARY BELL & NATOLI LETTERHEAD]



                          INDEPENDENT AUDITOR'S REPORT



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


We have audited the accompanying combined balance sheet of FiberNet Telecom 
Inc. and Affiliated Entities (A Development Stage Company) as of June 30, 1997, 
and the related combined statements of operations and accumulated deficit, 
stockholders' equity and cash flows for the year then ended and for the period 
from August 10, 1994 (inception), to June 30, 1997. These financial statements 
are the responsibility of the Company's management. Our responsibility is to 
express an opinion on these financial statements based on our audit.

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

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


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


New York, New York
November 29, 1997

<PAGE>   21
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To FiberNet Telecom Group, Inc.:

We have audited the accompanying consolidated balance sheets of FiberNet Telecom
Group, Inc. (a corporation in the development stage - Note 1) and subsidiaries
as of December 31, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for the year ended December 31,
1998, the six months ended December 31, 1997 and for the period from inception
(August 10, 1994) to December 31, 1998. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of FiberNet Telecom
Group, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year ended December 31, 1998, the six months ended December 31, 1997 and for
the period from inception (August 10, 1994) to December 31, 1998, in conformity
with generally accepted accounting principles.


/s/ Arthur Andersen LLP
Arthur Andersen LLP

New York, New York
March 8, 1999


                                      -1-
<PAGE>   22
                          FIBERNET TELECOM GROUP, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                      DECEMBER 31,       DECEMBER 31,
                                                                                          1998               1997
                                                                                      -----------        -----------
<S>                                                                                   <C>                <C>
ASSETS
Current Assets:
   Cash and cash equivalents                                                          $   257,384        $ 5,146,327
   Accounts receivable                                                                    309,365                  -
   Other current assets                                                                         -              3,954
                                                                                      -----------        -----------
       Total current assets                                                               566,749          5,150,281
Property, plant and equipment, net                                                      5,397,109             92,223
Deferred charges and other assets                                                         363,839            131,837
                                                                                      -----------        -----------
   TOTAL ASSETS                                                                       $ 6,327,697        $ 5,374,341
                                                                                      ===========        ===========
LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
   Accounts payable                                                                   $ 2,587,085        $   490,125
   Accounts payable - related party                                                     1,387,265            240,000
   Accrued expenses                                                                       337,384                  -
                                                                                      -----------        -----------
       Total current liabilities                                                      $ 4,311,734        $   730,125
                                                                                      -----------        -----------
Minority interest                                                                         104,429             (1,142)

Stockholders' Equity
   Common Stock, $0.001 par value, 50,000,000 shares authorized, 15,000,000 and
   16,000,000 shares issued and outstanding at December 31, 1997 and 1998, 
   respectively                                                                            16,000             15,000

   Series A Convertible Preferred Cumulative Stock, $0.001 par value, 5,000,000
   shares authorized, 1,000,000 and 0 shares issued and outstanding at December
   31, 1997 and 1998, respectively (Preference in involuntary
   liquidation value, $5.125 per share)                                                         -              1,000

   Series B voting Preferred Stock $0.001 par value, 80,000 shares issued and
   outstanding (Preference in involuntary liquidation value, $1.00 per share)                  80                 80

   Capital in excess of par value                                                       5,465,564          5,382,901

   Deficit accumulated during the development stage                                    (3,570,110)          (753,623)
                                                                                      -----------        -----------
   Total stockholders' equity                                                         $ 1,911,534        $ 4,645,358
                                                                                      -----------        -----------
   TOTAL LIABILITIES & STOCKHOLDERS' EQUITY                                           $ 6,327,697        $ 5,374,341
                                                                                      ===========        ===========
</TABLE>

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


                                      -2-
<PAGE>   23
                          FIBERNET TELECOM GROUP, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                                      FOR THE PERIOD  PERIOD FROM
                                                                        (UNAUDITED)                   FROM INCEPTION   INCEPTION 
                                          (UNAUDITED)     SIX MONTHS     SIX MONTHS                     (AUGUST 10,      (AUGUST
                             YEAR ENDED    YEAR ENDED       ENDED           ENDED       YEAR ENDED        1994) TO    10, 1994) TO
                            DECEMBER 31,  DECEMBER 31,   DECEMBER 31,   DECEMBER 31,     JUNE 30,         JUNE 30,    DECEMBER 31,
                                1998          1997           1997           1996           1997            1996           1998
                            ------------  ------------   ------------   ------------   ------------   --------------  ------------ 
<S>                         <C>           <C>            <C>            <C>            <C>            <C>             <C>          
Cost and expenses:
   Cost of sales                      -              -              -              -              -              -               -
   General and 
      administrative          2,867,108        594,348        299,982         79,308        373,674          9,387       3,550,151
   Other - related party        272,000        120,000        120,000              -              -              -         392,000
                           ------------   ------------   ------------   ------------   ------------   ------------    ------------ 
Loss from operations         (3,139,108)      (714,348)      (419,982)       (79,308)      (373,674)        (9,387)     (3,942,151)
Interest income and other       156,392         26,180         26,180              -              -              -         182,572
                           ------------   ------------   ------------   ------------   ------------   ------------    ------------ 
Loss before minority 
      interest               (2,982,716)      (688,168)      (393,802)       (79,308)      (373,674)        (9,387)     (3,759,579)
Minority interest               166,229         23,240         23,240              -              -              -         189,469
                           ------------   ------------   ------------   ------------   ------------   ------------    ------------ 
Net loss                   $ (2,816,487)  $   (664,928)  $   (370,562)  $    (79,308)  $   (373,674)  $     (9,387)   $ (3,570,110)
                           ============   ============   ============   ============   ============   ============    ============ 
Earning per share
       Basic and diluted   $      (0.18)  $      (0.04)  $     (0.027)  $     (0.005)  $     (0.025)  $     (0.001)   $      (0.23)
                           ============   ============   ============   ============   ============   ============    ============ 
       Weighted average 
          shares
            outstanding      15,847,222     15,000,000     15,000,000     15,000,000     15,000,000     15,000,000      15,847,222
                           ------------   ------------   ------------   ------------   ------------   ------------    ------------ 
</TABLE>

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


                                      -3-
<PAGE>   24
                          FIBERNET TELECOM GROUP, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                                PREFERRED STOCK                         COMMON STOCK               
                                                            SHARES            AMOUNT              SHARES            AMOUNT         
                                                           ---------        -----------         ----------       -----------       
<S>                                                        <C>              <C>                 <C>              <C>               
Balance at August 10, 1994                                         -        $         -                  -       $         -       
Issuance of 240 shares of common stock for cash,
   out of 1,000 shares authorized.  August
   10, 1994, at $.001 per share                                    -                  -                240                 -       
Net loss for the period from inception to June
   30, 1996                                                        -                  -                  -                 -       
                                                           ---------        -----------         ----------       -----------       
Balance at June 30, 1996                                           -        $         -                  -       $         -       
Capital contribution                                               -                  -                  -                 -       
Net loss for the year ended June 30, 1997                          -                  -                  -                 -       
                                                           ---------        -----------         ----------       -----------       
Balance at June  30, 1997                                          -        $         -                  -       $         -       
Capital contribution                                               -                  -                  -                 -       
Effect of reverse acquisition of DND (See Note 1),
   issuance of 15,000,000 share common stock,
   0.01 par value. November 24, 1997                               -                  -         15,000,000            15,000       
Issuance of 1,000,000 shares Series A
   Convertible Preferred Cumulative Stock, $0.001
   par value. November 24, 1997                            1,000,000              1,000                  -                 -       
Issuance of 80,000 shares Series B Preferred
   Stock, 0.001 par value. November 24, 1997                  80,000                 80                  -                 -       
Preferred Stock Dividend accrued during 1997                       -                  -                  -                 -       

Net loss for the six months ended December 31, 1997
                                                                   -                  -                 -                 -        
                                                           ---------        -----------         ----------       -----------       
Balance at December 31, 1997                               1,080,000        $     1,080         15,000,000       $    15,000       

Conversion of the 1,000,000 shares Series A
Preferred Cumulative stock, $0,001 par value into
common stock.  February 24, 1998                          (1,000,000)            (1,000)         1,000,000             1,000       

Dividends Paid                                                     -                  -                  -                 -       

Earned Compensation, Executive Stock Options                       -                  -                  -                 -       

Net loss for year ended December 31,1998                           -                  -                  -                 -       
                                                           ---------        -----------         ----------       -----------       
Balance at December 31, 1998                                  80,000        $        80         16,000,000       $    16,000       
                                                           =========        ===========         ==========       ===========       
</TABLE>
<TABLE>
<CAPTION>
                                                                            ACCUMULATED                             
                                                                              DEFICIT                               
                                                          CAPITAL IN        DURING THE                              
                                                          EXCESS OF         DEVELOPMENT                             
                                                          PAR VALUE            STAGE              TOTAL             
                                                         -----------        -----------        -----------          
<S>                                                      <C>                <C>                <C>
Balance at August 10, 1994                               $         -        $         -        $         -          
Issuance of 240 shares of common stock for cash,                                                                    
   out of 1,000 shares authorized.  August                                                                          
   10,1994, at $.001 per share                                61,000                  -             61,000          
Net loss for the period from inception to June                                                                      
   30, 1996                                                        -             (9,387)            (9,387)         
                                                         -----------        -----------        -----------          
Balance at June 30, 1996                                 $    61,000        $    (9,387)       $    51,613          
Capital contribution                                          80,796                  -             80,796          
Net loss for the year ended June 30, 1997                                      (373,674)          (373,674)         
                                                         -----------        -----------        -----------          
Balance at June  30, 1997                                $   141,796        $  (383,061)       $  (241,265)         
Capital contribution                                         212,348                  -            212,348          
Effect of reverse acquisition of DND (See Note 1),                                                                  
   issuance of 15,000,000 share common stock,                                                                       
   0.01 par value. November 24, 1997                         (15,000)                 -                  -          
Issuance of 1,000,000 shares Series A                                                                               
   Convertible Preferred Cumulative Stock, $0.001                                                                   
   par value. November 24, 1997                            5,074,000                  -          5,075,000          
Issuance of 80,000 shares Series B Preferred                                                                        
   Stock, 0.001 par value. November 24, 1997                     (80)                 -                  -          
Preferred Stock Dividend accrued during 1997                 (30,163)                 -            (30,163)         
                                                                                                                    
Net loss for the six months ended December 31, 1997                                                                 
                                                                               (370,562)          (370,562)         
                                                         -----------        -----------        -----------          
Balance at December 31, 1997                             $ 5,382,901        $  (753,623)       $ 4,645,358          
                                                                                                                    
Conversion of the 1,000,000 shares Series A                                                                         
Preferred Cumulative stock, $0,001 par value into                                                                   
common stock.  February 24, 1998                                   -                  -                  -          
                                                                                                                    
Dividends Paid                                               (44,837)                 -            (44,837)         
                                                                                                                    
Earned Compensation, Executive Stock Options                 127,500                  -            127,500          
                                                                                                                    
Net loss for year ended December 31,1998                           -         (2,816,487)        (2,816,487)         
                                                         -----------        -----------        -----------          
Balance at December 31, 1998                             $ 5,465,564        $(3,570,110)       $ 1,911,534          
                                                         ===========        ===========        ===========          
</TABLE>


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


                                      -4-
<PAGE>   25
                          FIBERNET TELECOM GROUP, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                 (UNAUDITED)        
                                                                           (UNAUDITED)          FOR SIX              SIX            
                                                         YEAR ENDED         YEAR ENDED        MONTHS ENDED       MONTHS ENDED       
                                                        DECEMBER 31,       DECEMBER 31,       DECEMBER 31,       DECEMBER 31,       
                                                           1998                1997               1997                1996          
                                                        -----------        -----------        -----------        -----------        
<S>                                                     <C>                <C>                <C>                <C>                
CASH FLOWS FROM OPERATING ACTIVITIES:

NET LOSS                                                $(2,816,487)       $  (664,928)       $  (370,562)       $   (79,308)       
   ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
   USED IN OPERATING ACTIVITIES:
     Depreciation                                            27,951              1,842              1,842                  -        
     Amortization and write-off of deferred                                                                                         
       charges                                              227,324             56,200                  -                  -
     Minority interest                                     (166,229)            (6,446)            (6,446)                 -        
     Earned Compensation, Executive Stock Options           127,500                  -                  -                  -        
   CHANGES IN ASSETS AND LIABILITIES:
     (Increase) decrease in accounts receivable            (309,365)                 -                  -                  -        
     (Increase) decrease in prepaid rent                      3,954                  -                  -                  -        
     (Increase) decrease in other assets                   (363,839)          (153,160)           (34,924)           117,169        
     Increase (decrease) in accounts payable              1,195,356            645,596            361,482            (45,042)       
     Increase (decrease) in other liabilities               337,384                  -                  -                  -        
                                                        -----------        -----------        -----------        -----------        
   NET CASH USED IN OPERATING ACTIVITIES                 (1,736,451)          (120,896)           (48,608)            (7,181)       

   CASH FLOWS FROM INVESTING ACTIVITIES:
     Other assets                                                 -               (800)                 -                  -        
     Capital expenditures                                (3,077,492)           (94,065)           (94,065)                 -        
                                                        -----------        -----------        -----------        -----------        
   NET CASH USED IN INVESTING ACTIVITIES                 (3,077,492)           (94,865)           (94,065)                 -        
   CASH FLOWS FROM FINANCING ACTIVITIES:
     Net proceeds for the issuance of preferred                   -          5,075,000          5,075,000                  -        
     stock
     Dividends paid                                         (75,000)                 -                                              
     Capital contributed                                          -            286,248            212,348              7,100        
                                                        -----------        -----------        -----------        -----------        
  NET CASH PROVIDED BY FINANCING ACTIVITIES                 (75,000)         5,361,248          5,287,348              7,100        
  NET INCREASE (DECREASE) IN CASH                        (4,888,943)         5,145,487          5,144,675                (81)       
  CASH AT BEGINNING OF PERIOD                             5,146,327                840              1,652                921        
                                                        -----------        -----------        -----------        -----------        
  CASH AT END OF PERIOD                                 $   257,384        $ 5,146,327        $ 5,146,327        $       840        
                                                        ===========        ===========        ===========        ===========        
</TABLE>
<TABLE>
<CAPTION>
                                                                             FOR                                      
                                                                          THE PERIOD           FROM                   
                                                                            FROM             INCEPTION                
                                                                          INCEPTION         (AUGUST 10,               
                                                                         (AUGUST 10,           1994)                  
                                                      YEAR ENDED           1994) TO           THROUGH                 
                                                        JUNE 30,           JUNE 30,         DECEMBER 31,              
                                                         1997                1996               1998                  
                                                      -----------        -----------        -----------               
<S>                                                   <C>                <C>                <C>                       
CASH FLOWS FROM OPERATING ACTIVITIES:                                                                                 
                                                                                                                      
NET LOSS                                              $  (373,674)       $    (9,387)       $(3,570,110)              
   ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH                                                                      
   USED IN OPERATING ACTIVITIES:                                                                                      
     Depreciation                                               -                  -             29,793               
     Amortization and write-off of deferred                                                            
     charges                                               56,200                  -            283,524
     Minority interest                                          -                  -           (172,675)              
     Earned Compensation, Executive Stock Options               -                  -            127,500               
   CHANGES IN ASSETS AND LIABILITIES:                                                                                 
     (Increase) decrease in accounts receivable                 -                  -           (309,365)              
     (Increase) decrease in prepaid rent                        -                  -              3,954               
     (Increase) decrease in other assets                   (1,067)           (56,200)          (456,030)              
     Increase (decrease) in accounts payable              239,072                408          1,796,318               
     Increase (decrease) in other liabilities                   -                  -            337,384               
                                                      -----------        -----------        -----------               
   NET CASH USED IN OPERATING ACTIVITIES                  (79,469)           (65,179)        (1,929,707)              
                                                                                                                      
   CASH FLOWS FROM INVESTING ACTIVITIES:                                                                              
     Other assets                                            (800)                 -               (800)              
     Capital expenditures                                       -                  -         (3,171,557)              
                                                      -----------        -----------        -----------
   NET CASH USED IN INVESTING ACTIVITIES                     (800)                 -         (3,172,357)
   CASH FLOWS FROM FINANCING ACTIVITIES:                                                                              
     Net proceeds for the issuance of preferred                 -                  -          5,075,000               
     stock                                                                                                            
     Dividends paid                                             -                  -            (75,000)
     Capital contributed                                   81,000             66,100            359,448
                                                      -----------        -----------        -----------               
  NET CASH PROVIDED BY FINANCING ACTIVITIES                81,000             66,100          5,359,448               
  NET INCREASE (DECREASE) IN CASH                             731                921            257,384               
  CASH AT BEGINNING OF PERIOD                                 921                  -                  -
                                                      -----------        -----------        -----------               
  CASH AT END OF PERIOD                               $     1,652        $       921        $   257,384               
                                                      ===========        ===========        ===========               
</TABLE>

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


                                      -5-
<PAGE>   26
                          FIBERNET TELECOM GROUP, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.       ORGANIZATION AND OPERATIONS

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

         The Company is a development stage company and has not realized
         revenues. It is an integrated provider of intra-building networks and
         competitive local telecommunications services. Through its subsidiary
         FiberNet Equal Access, LLC, the Company will build and own high-speed
         redundant digital fiber optic transmission networks within major high
         rise office buildings and lease bandwidth to carriers to provide
         connections to tenants. The Company will provide facilities-based local
         telecommunications carrier services through its subsidiary Local Fiber,
         LLC, a competitive local exchange carrier (CLEC). FiberNet will enter
         the New York City market in 1999 with plans to expand its operations
         throughout the top metropolitan markets in the United States. The
         developmental nature of the activities is such that inherent risks
         exist in the Company's operations. Expenses incurred have primarily
         been research and development, administrative and marketing costs.
         After services have been successfully introduced into the market,
         additional time may be necessary before significant revenues are
         realized. During this time, the Company may require additional funds
         that may not be available.

         Certain of the Company's significant shareholders are committed to fund
         operations through December 31, 1999. The Company is actively searching
         additional financing for continued construction of its networks and its
         operating losses. The Company also believes proceeds from asset sales
         would be available to fund operations if required.

         The Company has in force and is materially dependant on agreements with
         other entities to provide access to networks and other carriers
         facilities, access to buildings and experience to obtain permits and
         meet regulatory requirements.


                                      -6-
<PAGE>   27
2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         a)     Basis of Presentation

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

         b)     Use of Estimates

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

         c)     Cash and Cash Equivalents

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

         d)     Deferred Charges and Other Assets

                Deferred charges consist primarily of rental deposits and
                financing costs. Financing costs as of December 31, 1997 were
                amortized over the term of the related loan agreement. These
                costs were expensed during the year ended December 31, 1998. See
                Note 5.

         e)     Property Plant and Equipment

                Plant and equipment are stated at cost less accumulated
                depreciation. Depreciation and amortization are provided over
                the estimated useful lives of the assets using the straight-line
                method. The estimated lives are as follows:

                Computer software           3 Years
                Leasehold improvements      3 Years
                Computer equipment          3 Years
                Office Equipment            7 Years


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



                                      -7-
<PAGE>   28
2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         f)     Fair Value of Financial Instrument

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

         g)     Earnings per Share

                In February 1997, the Financial Accounting Standards Board
                issued Statement of Financial Accounting Standard (SFAS) No.
                128, "Earnings per Share" which requires companies to present
                basic earnings per share and diluted earnings per share, instead
                of the primary and fully diluted EPS that was required. In 1997,
                the Company adopted SFAS No. 128, "Earnings per Share,"
                effective December 15, 1997 for year ended December 31, 1998 and
                1997.

                On November 24, 1997, the Company's Board of Directors approved
                a three and a half for one stock split of its common stock. All
                references in the Financial Statement and notes thereto included
                in this Form 10-K report to the number of common shares and per
                share amounts reflects the stock split and the effect of SFAS
                128.

                               FOR THE YEAR ENDED
                                  DECEMBER 1998

<TABLE>
<CAPTION>
                                                                            PER-SHARE
                                          INCOME             SHARES          AMOUNT
                                       -----------         ----------       ---------
<S>                                    <C>                 <C>              <C>
Net loss                               $(2,816,487)               -         $    -
Less:  Preferred stock dividends           (44,387)               -              -
                                       -----------         ----------       ---------
Loss available to common
  shareholders                         $(2,860,874)        15,847,222       $   (0.18)
                                       ===========         ==========       =========
</TABLE>

                            FOR THE SIX MONTHS ENDED
                                  DECEMBER 1997

<TABLE>
<CAPTION>
                                                                            PER-SHARE
                                          INCOME             SHARES          AMOUNT
                                       -----------         ----------       ---------
<S>                                    <C>                 <C>              <C>
Net loss                               $  (370,562)               -         $   -
Less:  Preferred stock dividends           (30,163)               -             -
                                       -----------         ----------       ---------
Loss available to common
  shareholders                         $  (400,725)        15,000,000       $  (0.03)
                                       ===========         ==========       =========
</TABLE>


                                      -8-
<PAGE>   29
2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

                Since the loss per share decreases, when convertible preferred
                shares and outstanding options are included in the computation,
                those convertible preferred shares and options are antidilutive
                and are ignored in the computation of diluted EPS.

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


3.       PROPERTY, PLANT AND EQUIPMENT

         Property, plant and equipment consist of the following:

<TABLE>
<CAPTION>
                                                   DECEMBER 31,   DECEMBER 31, 
                                                       1998           1997
                                                   ------------   -----------
<S>                                                <C>            <C>        
         Computer software                         $      2,661   $     2,661
         Leasehold improvements                          69,852         2,984
         Computer equipment                              61,746        10,134
         Office equipment and furniture                 360,639        15,536
         Construction in progress                     4,695,968        62,750
         Power equipment                                190,902           -
         Switching equipment                             45,134           -
                                                   ------------   -----------
         Total                                        5,426,902        94,065
         Accumulated depreciation                       (29,793)       (1,842)
                                                   ------------   -----------
         Property, Plant and Equipment, net        $  5,397,109   $    92,223
                                                   ============   ===========
</TABLE>


                                      -9-
<PAGE>   30
4.       DEFERRED CHARGES AND OTHER ASSETS

         Deferred charges consist of the following:

<TABLE>
<CAPTION>
                                      DECEMBER 31,  DECEMBER 31,
                                          1998          1997
                                      ------------  ------------
<S>                                   <C>           <C>
         Rental deposit                $ 363,839            -
         Loan commitment fee
           (See Note 5)                      -        $ 129,000
         Other                               -            2,837
                                       ---------      ---------
         Total Deferred Charges        $ 363,839      $ 131,837
                                       =========      =========
</TABLE>


5.       COMMITMENTS AND CONTINGENCIES

         a)     Credit Facilities - Local Fiber, LLC

                On June 4, 1997, Local Fiber, LLC obtained a Credit Facility
                commitment for project financing associated with its CLEC
                operations in New York City.

                As of December 31, 1998 this credit facility is no longer
                available. The cost associated to this line has been expensed.


         b)     Credit Facilities - FiberNet Equal Access, LLC

                On July 28, 1997, FiberNet Equal Access, LLC obtained a Credit
                Facility commitment for project financing in connection with the
                purchase and installation of multiple high-speed redundant
                digital fiber optic transmission networks.

                As of December 31, 1998 this credit facility is no longer
                available. The cost associated to this line has been expensed
                and is included in the statement of operations.


6.       LEASES

         The Company has entered into lease agreements for office space in
         Rochester, New York, a switching center in New York City and for
         collocation space in seven buildings. Lease expense for the years ended
         December 31, 1998 and 1997 is $331,288 and $8,334, respectively.
         Estimated future minimum lease payments are:


                                      -10-
<PAGE>   31
6.       LEASES (CONTINUED)

<TABLE>
<CAPTION>
                                                     Amount
                                                ---------------
<S>                                             <C>            
         1999                                   $       812,292
         2000                                           812,292
         2001                                           812,292
         2002                                           812,292
         2003 and thereafter                          4,470,552
                                                ---------------
         Total                                  $     7,719,720
                                                ===============
</TABLE>


7.       STOCK OPTIONS

         On November 24, 1997, the Company established an Employee Equity
         Participation Program. This plan provides that all employees are
         eligible to receive Incentive Stock Options or Nonstatutory Stock
         Options. In the case of an optionee who beneficially owns more than ten
         percent of the Company's outstanding shares as of the time the option
         is granted, the purchase price of the optioned stock must be fixed at
         not less than one-hundred and ten percent of the fair market value.
         Incentive Stock Options may not be exercised after ten years after the
         date they were granted or after five years in the case of an optionee
         who beneficially owns more than ten percent of the Company's
         outstanding shares of common stock. Options shall vest and become
         exercisable by the optionee at the rate of 20% per year for five years.
         The Company issued, related to this program, 673,000 and 600,000 stock
         options during 1998 and 1997, respectively.

         The Company accounts for stock options under APB Opinion No. 25, under
         which during 1998 and 1997, $127,500 and $0 of compensation cost was
         recognized. Had compensation cost for this program been determined
         consistent with SFAS No. 123, the Company's net income and earnings per
         share would have been reduced to the following pro forma amounts:

<TABLE>
<CAPTION>
                                                                FOR THE SIX 
                                                                MONTHS ENDED
                                                DECEMBER 31,    DECEMBER 31,
                                                    1998            1997
                                                ------------    ------------ 
<S>                                             <C>             <C>         
         Net loss:               As reported    $  2,816,487    $    370,562
                                 Pro forma      $  3,111,104    $    387,225

         Basic and diluted EPS   As reported    $      (0.18)   $      (0.03)
                                 Pro forma      $      (0.20)   $      (0.03)
</TABLE>


                                      -11-
<PAGE>   32
7.       STOCK OPTIONS (CONTINUED)

         Transactions during the year ended December 31, 1998 and the six months
         ended December 31, 1997, respectively, involving stock options are
         summarized as follows:

<TABLE>
<CAPTION>
                                                           1998                              1997
                                              -----------------------------     -----------------------------
                                               NUMBER          OPTION PRICE      NUMBER          OPTION PRICE
                                              OF SHARES         PER SHARE       OF SHARES         PER SHARE
                                              ---------        ------------     ---------        ------------
<S>                                           <C>              <C>              <C>              <C>
         Options outstanding at the
         beginning of the period                600,000           $ 1.95                -           $    -
         Granted                                673,000             4.64          600,000             1.95
                                              ---------           ------        ---------           ------
         Options outstanding at the
         end of year                          1,273,000             2.98          600,000             1.95
                                              ---------           ------        ---------           ------
         Exercisable at end of year             120,000             1.95                -                -
                                              ---------           ------        ---------           ------
         Weighted average fair value of
         options granted                                          $ 2.63                            $ 1.37
</TABLE>

         The fair value of each option grant is estimated on the date of grant
         using the Black-Scholes option pricing model with the following
         weighted-average assumptions used for grants in December 31, 1998 and
         1997: risk-free interest rates of 5.62% and 5.92%; expected dividend
         yields of 0% and 0%; expected lives of 4 and 7 years and expected
         volatility of 88.0% and 86.1%, respectively.


8.       SUBSIDIARY'S WARRANTS

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


9.       PREFERRED SHARES

         (a)    Series A Convertible Cumulative Preferred Stock

                As of November 24, 1997 the Company issued 1,000,000 shares out
                of 5,000,000 shares authorized, at $5.125 per share for gross
                proceeds of $5,075,000, net of issuance costs. The Company or
                the holders of the


                                      -12-
<PAGE>   33
9.       PREFERRED SHARES (CONTINUED)

                outstanding shares had the right to convert them into common
                stock, at any time up to November 24, 2000. Each share of
                preferred stock could be converted into one share of common
                stock.

                Dividend

                The holders were entitled to receive annual cumulative dividends
                at the rate of six percent based on a liquidation value of
                $5.125 per share.

                As of February 24, 1998, the Company paid the dividend to the
                Series A convertible preferred cumulative stock for $75,000 and
                converted all of the Series A convertible preferred stock into
                common stock. As of December 31, 1997, $30,163 of this dividend
                had been accrued in the financial statements.

          (b)     Series B Voting Preferred Stock

                As of November 24, 1997 the Company issued 80,000 shares out of
                5,000,000 shares authorized. Each share shall be entitled to
                one-hundred votes to be voted at any meeting of shareholders.

                In the event of any voluntary or involuntary liquidation,
                dissolution, or winding up of the corporation, the holders of
                shares of the Series B Voting Preferred Stock then outstanding,
                shall be entitled to be paid, out of the assets of the Company
                available for distribution to its stockholders, whether from
                capital, surplus or earning, before any payment shall be made in
                respect of the Company 's Common Stock, but after payment to
                holders of Series A Preferred Stock, an amount equal to $1 per
                share.


10.      RELATED PARTY TRANSACTIONS

         The Company capitalized services from Petrocelli Electrical Services, a
         related party, of approximately $2,500,000 and $12,000 during 1998 and
         1997, respectively. Additionally, the Company expensed approximately
         $140,000 and $20,000 of consultant fees from this related party during
         1998 and 1997, respectively. As of December 31, 1998 and 1997, the
         Company had a payable of $1,208,048 and $152,595, respectively.


                                      -13-
<PAGE>   34
10.      RELATED PARTY TRANSACTIONS (CONTINUED)


         The Company capitalized services approximately $57,000 and $6,000 of
         consulting services from Landtel Communications, a related party during
         1998 and 1997, respectively. Additionally, the Company expensed
         approximately $57,000 and $100,000 of consultant fees from this related
         party during 1998 and 1997, respectively. As of December 31, 1998 and
         1997, the Company had a payable of $163,347 and $87,405, respectively.

         The Company purchased approximately $75,000 of consulting fees from LPS
         Consultants, a related party, during 1998. As of December 31, 1998, the
         Company had a payable of $16,670.


11.      INCOME TAXES

         The Company is subject to New York State and local taxes, as well as
         federal income taxes. The Company had cumulative expenses relating to
         new business development costs of approximately $3,500,000 and $750,000
         for December 31, 1998 and 1997, respectively, that are not currently
         deductible for income taxes. Full valuation allowances have been
         recorded for the deferred tax assets related to this temporary
         difference.


12.      EMPLOYMENT CONTRACTS

         The Company has various employment contracts with key executive
         employees. The total compensation under these contracts for 1999 and
         the future years is as follows:

<TABLE>
<CAPTION>
                           DECEMBER 31,    AMOUNT
                           ------------  -----------
<S>                                      <C>
                           1999          $   525,000
                           2000              525,000
                                         -----------
                           Total         $ 1,050,000
</TABLE>


13.      MINORITY INTEREST

         The ownership of Local Fiber, LLC is divided into Class A Members (the
         Company) owning 90% and Class B Members owning 10%. The Class A Members
         have requested that Class B Members enter into a License Agreement with
         the Company, and as an inducement therefore, the Class A Members have
         made capital contributions on behalf of Class B Members in connection
         with each Class A Members' capital contribution.


                                      -14-
<PAGE>   35
14.      RECENT ACCOUNTING PRONOUNCEMENTS:

         In 1997, the Financial Accounting Standards Board ("FASB") issued
         Statement of Financial Accounting Standard No. 130, "Reporting
         Comprehensive Income," Statement of Financial Accounting Standard No.
         131, "Disclosure about Segments of an Enterprise and Related
         Information" and Statement of Financial Accounting Standard No. 132,
         "Employer's Disclosure about Pension and Other Post Retirement
         Benefits" which are effective for the Company's fiscal 1998 financial
         statements. During the year ended December 31, 1998 and six months
         ended December 31, 1997, the Company had no items of comprehensive
         income. The Company is also only in one segment. Furthermore, the
         Company does not have any defined benefit plans, therefore, additional
         disclosure are not applicable to the notes of the financial statements.

         In 1998, Statement of Financial Accounting Standards No. 133,
         "Accounting for Derivative Instruments and Hedging Activities," ("SFAS
         133") and Statement of Position 98-5, "Reporting on the Costs of Start
         up Activities" ("SOP 98-5") were issued. SFAS 133 establishes
         accounting and reporting standards requiring that every derivative
         instrument be recorded in the balance sheet as either an asset or
         liability measured at its fair value. The Company will adopt SFAS 133
         in fiscal 1999 but since it does not have derivatives currently, there
         will be no impact on the financial statements or disclosures. SOP 98-5
         provides guidance on accounting for the costs of start-up activities,
         which include preopening costs, preoperating costs, organization costs,
         and start-up costs. The Company will adopt SOP 98-5 in fiscal 1999. As
         of December 31, 1998, the Company does not have any start up costs
         capitalized on its balance sheet. Therefore, there will be no impact on
         the financial statements.



                                      -15-