##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Form 10-Q

|           |  |                                                                                                                                    
|---------- |  | -----------------------------------------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                                                    
|þ          |  | QUARTERLY REPORT PURSUANT TO SECTION 13
    OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD
    ENDED JUNE 30, 2003.
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934                                       

Commission File Number 000-31105

Lexent Inc.

(Exact name of registrant as specified in its
charter)


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

Registrants telephone number, including
area code:

212-981-0700


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

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12 b-2 of the
Securities Exchange Act of
1934)     Yes o          No þ

Indicate the number of shares outstanding of each
of the issuers classes of common stock, as of the latest
practicable date. Common Stock, $.001 par value, 42,266,522
shares outstanding as of August 5, 2003.



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TABLE OF CONTENTS



|                                                                             |                                                                                               |  |  |  |  |  |  | 
|---------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|TABLE OF CONTENTS                                                           
|PART I -- FINANCIAL INFORMATION                                             
|                                                                             | Item 1. Financial Statements                                                                 
|LEXENT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS          
|LEXENT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
|LEXENT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|                                                                             | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                                             | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                                                                             | Item 4. Controls and Procedures                                                              
|PART II -- OTHER INFORMATION                                                
|                                                                             | Item 1. Legal Proceedings                                                                    
|                                                                             | Item 5. Other Information                                                                    
|                                                                             | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                                                  
|302 CERTIFICATION: CEO                                                      
|302 CERTIFICATION: COO                                                      
|906 CERTIFICATION: CEO AND COO                                              



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##### Table of Contents



LEXENT INC. AND SUBSIDIARIES






TABLE OF CONTENTS


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

1



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##### Table of Contents






PART I  FINANCIAL
INFORMATION




Item 1.     Financial
Statements




LEXENT INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE
SHEETS

|                                         |                                                                                                                                                                             |                                            |       |              |         |  |       |         |         | 
|---------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----- | ------------ | ------- |  | ----- | ------- | ------- | 
|                                         |                                                                                                                                                                             | June 30,                                   |       | December 31,
|                                         |                                                                                                                                                                             | 2003                                       |       | 2002        
|                                         |                                                                                                                                                                             |                                            |       |             
|                                         |                                                                                                                                                                             | (Unaudited)                                |       |             
|                                         |                                                                                                                                                                             |                                           
|                                         |                                                                                                                                                                             | (Dollars in thousands, except             
|                                         |                                                                                                                                                                             | per share amounts)                        
|ASSETS                                   |                                                                                                                                                                             |                                            |       |              |         |  |       |        
|Current assets:                          |                                                                                                                                                                             |                                            |       |              |         |  |       |        
|                                         | Cash and cash equivalents                                                                                                                                                   |                                            | $     | 39,850       |         |  | $     | 28,109  |        
|                                         | Certificate of deposit (restricted cash)                                                                                                                                    |                                            |       | 2,009        |         |  |       | 2,012   |        
|                                         | Available-for-sale investments                                                                                                                                              |                                            |       | 34,973       |         |  |       | 44,302  |        
|                                         | Receivables, net                                                                                                                                                            |                                            |       | 23,361       |         |  |       | 28,311  |        
|                                         | Prepaid expenses and other current assets                                                                                                                                   |                                            |       | 1,800        |         |  |       | 2,048   |        
|                                         | Income taxes receivable                                                                                                                                                     |                                            |       |             |         |  |       | 14,750  |        
|                                         |                                                                                                                                                                             |                                            |       |              |         |  |       |        
|                                         |                                                                                                                                                                             | Total current assets                       |       |              | 101,993 |  |       |         | 119,532 | 
|Property and equipment, net              |                                                                                                                                                                             |                                            | 3,515 |              |         |  | 4,033 |        
|Other assets                             |                                                                                                                                                                             |                                            | 834   |              |         |  | 880   |        
|                                         |                                                                                                                                                                             |                                            |       |              |         |  |       |        
|                                         |                                                                                                                                                                             | Total assets                               |       | $            | 106,342 |  |       | $       | 124,445 | 
|                                         |                                                                                                                                                                             |                                            |       |              |         |  |       |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY |                                                                                                                                                                             |                                            |       |              |         |  |       |        
|Current liabilities:                     |                                                                                                                                                                             |                                            |       |              |         |  |       |        
|                                         | Accounts payable                                                                                                                                                            |                                            | $     | 2,606        |         |  | $     | 7,494   |        
|                                         | Accrued expenses and other liabilities                                                                                                                                      |                                            |       | 7,020        |         |  |       | 6,229   |        
|                                         | Restructure reserve                                                                                                                                                         |                                            |       | 2,773        |         |  |       | 4,023   |        
|                                         | Billings in excess of costs and estimated
    earnings on uncompleted projects                                                                                              |                                            |       | 2,437        |         |  |       | 1,837   |        
|                                         | Provision for contract losses                                                                                                                                               |                                            |       | 1,696        |         |  |       | 3,472   |        
|                                         | Subordinated note payable to stockholder                                                                                                                                    |                                            |       | 1,187        |         |  |       | 1,582   |        
|                                         | Equipment and capital lease obligations                                                                                                                                     |                                            |       | 137          |         |  |       | 451     |        
|                                         |                                                                                                                                                                             |                                            |       |              |         |  |       |        
|                                         |                                                                                                                                                                             | Total current liabilities                  |       |              | 17,856  |  |       |         | 25,088  | 
|Subordinated note payable to stockholder |                                                                                                                                                                             |                                            |      |              |         |  | 396   |        
|Accrued liabilities  noncurrent         |                                                                                                                                                                             |                                            | 900   |              |         |  | 600   |        
|Restructure reserve  noncurrent         |                                                                                                                                                                             |                                            | 5,875 |              |         |  | 6,566 |        
|Equipment and capital lease obligations  |                                                                                                                                                                             |                                            | 14    |              |         |  | 70    |        
|                                         |                                                                                                                                                                             |                                            |       |              |         |  |       |        
|                                         |                                                                                                                                                                             | Total liabilities                          |       |              | 24,645  |  |       |         | 32,720  | 
|                                         |                                                                                                                                                                             |                                            |       |              |         |  |       |        
|Commitments and contingencies            |                                                                                                                                                                             |                                            |       |              |         |  |       |        
|Stockholders equity:                    |                                                                                                                                                                             |                                            |       |              |         |  |       |        
|                                         | Common stock, $.001 par value,
    120,000,000 shares authorized, 42,244,959 and
    42,168,396 shares outstanding at June 30, 2003 and
    December 31, 2002, respectively |                                            |       | 42           |         |  |       | 42      |        
|                                         | Additional paid-in capital                                                                                                                                                  |                                            |       | 156,058      |         |  |       | 156,035 |        
|                                         | Deferred stock-based compensation                                                                                                                                           |                                            |       | (957         | )       |  |       | (2,126  | )      
|                                         | Accumulated other comprehensive income                                                                                                                                      |                                            |       |             |         |  |       | 105     |        
|                                         | Accumulated deficit                                                                                                                                                         |                                            |       | (73,446      | )       |  |       | (62,331 | )      
|                                         |                                                                                                                                                                             |                                            |       |              |         |  |       |        
|                                         |                                                                                                                                                                             | Total stockholders equity                 |       |              | 81,697  |  |       |         | 91,725  | 
|                                         |                                                                                                                                                                             |                                            |       |              |         |  |       |        
|                                         |                                                                                                                                                                             | Total liabilities and stockholders equity |       | $            | 106,342 |  |       | $       | 124,445 | 
|                                         |                                                                                                                                                                             |                                            |       |              |         |  |       |        

See accompanying notes to condensed consolidated
financial statements.

2



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##### Table of Contents






LEXENT INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                            |                                     |                                                  |        |                    |       |      |        |        |       |   |         |         |       |   |         |        |        | 
|------------------------------------------- | ----------------------------------- | ------------------------------------------------ | ------ | ------------------ | ----- | ---- | ------ | ------ | ----- | - | ------- | ------- | ----- | - | ------- | ------ | ------ | 
|                                            |                                     |                                                  |        |                   
|                                            |                                     | For the Three Months                             |        | For the Six Months
|                                            |                                     | Ended June 30,                                   |        | Ended June 30,    
|                                            |                                     |                                                  |        |                   
|                                            |                                     | 2003                                             |        | 2002               |       | 2003 |        | 2002  
|                                            |                                     |                                                  |        |                    |       |      |        |       
|                                            |                                     |                                                 
|                                            |                                     | (Unaudited)                                     
|                                            |                                     | (Dollars in thousands, except per share amounts)
|Revenues                                    |                                     | $                                                | 20,867 |                    |       | $    | 33,152 |        |       | $ | 41,212  |         |       | $ | 64,465  |       
|Cost of revenues                            |                                     |                                                  | 21,352 |                    |       |      | 31,373 |        |       |   | 43,881  |         |       |   | 60,808  |       
|                                            |                                     |                                                  |        |                    |       |      |        |        |       |   |         |         |       |   |         |       
|                                            | Gross margin                        |                                                  |        | (485               | )     |      |        | 1,779  |       |   |         | (2,669  | )     |   |         | 3,657  |       
|                                            |                                     |                                                  |        |                    |       |      |        |        |       |   |         |         |       |   |         |       
|Operating expenses:                         |                                     |                                                  |        |                    |       |      |        |        |       |   |         |         |       |   |         |       
|                                            | General and administrative expenses |                                                  |        | 3,879              |       |      |        | 4,085  |       |   |         | 6,733   |       |   |         | 8,517  |       
|                                            | Depreciation and amortization       |                                                  |        | 479                |       |      |        | 1,233  |       |   |         | 992     |       |   |         | 2,522  |       
|                                            | Non-cash stock-based compensation*  |                                                  |        | 478                |       |      |        | 760    |       |   |         | 1,159   |       |   |         | 1,781  |       
|                                            | Restructuring charges               |                                                  |        |                   |       |      |        |       |       |   |         |        |       |   |         | 1,441  |       
|                                            |                                     |                                                  |        |                    |       |      |        |        |       |   |         |         |       |   |         |       
|                                            |                                     | Total operating expenses                         |        |                    | 4,836 |      |        |        | 6,078 |   |         |         | 8,884 |   |         |        | 14,261 | 
|                                            |                                     |                                                  |        |                    |       |      |        |        |       |   |         |         |       |   |         |       
|Loss from operations                        |                                     |                                                  | (5,321 | )                  |       |      | (4,299 | )      |       |   | (11,553 | )       |       |   | (10,604 | )     
|Other income and expense:                   |                                     |                                                  |        |                    |       |      |        |        |       |   |         |         |       |   |         |       
|                                            | Interest expense                    |                                                  |        | 27                 |       |      |        | 65     |       |   |         | 61      |       |   |         | 141    |       
|                                            | Interest income                     |                                                  |        | (256               | )     |      |        | (337   | )     |   |         | (515    | )     |   |         | (696   | )     
|                                            | Other (income) expense, net         |                                                  |        | 11                 |       |      |        | 40     |       |   |         | (40     | )     |   |         | 1,448  |       
|                                            |                                     |                                                  |        |                    |       |      |        |        |       |   |         |         |       |   |         |       
|                                            |                                     | Total other (income) expense, net                |        |                    | (218  | )    |        |        | (232  | ) |         |         | (494  | ) |         |        | 893    | 
|                                            |                                     |                                                  |        |                    |       |      |        |        |       |   |         |         |       |   |         |       
|Loss before income taxes                    |                                     |                                                  | (5,103 | )                  |       |      | (4,067 | )      |       |   | (11,059 | )       |       |   | (11,497 | )     
|Provision for (benefit from) income taxes   |                                     |                                                  | 18     |                    |       |      | (1,614 | )      |       |   | 56      |         |       |   | (2,315  | )     
|                                            |                                     |                                                  |        |                    |       |      |        |        |       |   |         |         |       |   |         |       
|                                            | Net loss                            |                                                  | $      | (5,121             | )     |      | $      | (2,453 | )     |   | $       | (11,115 | )     |   | $       | (9,182 | )     
|                                            |                                     |                                                  |        |                    |       |      |        |        |       |   |         |         |       |   |         |       
|Net loss per share:                         |                                     |                                                  |        |                    |       |      |        |        |       |   |         |         |       |   |         |       
|                                            | Basic and diluted                   |                                                  | $      | (0.12              | )     |      | $      | (0.06  | )     |   | $       | (0.26   | )     |   | $       | (0.22  | )     
|                                            |                                     |                                                  |        |                    |       |      |        |        |       |   |         |         |       |   |         |       
|Weighted average common shares outstanding: |                                     |                                                  |        |                    |       |      |        |        |       |   |         |         |       |   |         |       
|                                            | Basic                               |                                                  |        | 42,245             |       |      |        | 41,832 |       |   |         | 42,220  |       |   |         | 41,766 |       
|                                            |                                     |                                                  |        |                    |       |      |        |        |       |   |         |         |       |   |         |       
|                                            | Diluted                             |                                                  |        | **                 |       |      |        | **     |       |   |         | **      |       |   |         | **     |       



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



| |    |                                         
| | -- | ----------------------------------------
| | ** | Anti-dilutive, therefore, not presented.

See accompanying notes to condensed
consolidated financial statements.

3



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##### Table of Contents






LEXENT INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                    |                                                                                |                                           |         |        |        |   |        |        |        |  
|----------------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | ----------------------------------------- | ------- | ------ | ------ | - | ------ | ------ | ------ | -
|                                                                                    |                                                                                |                                          
|                                                                                    |                                                                                | For the Six Months                       
|                                                                                    |                                                                                | Ended June 30,                           
|                                                                                    |                                                                                |                                          
|                                                                                    |                                                                                | 2003                                      |         | 2002  
|                                                                                    |                                                                                |                                           |         |       
|                                                                                    |                                                                                |                                          
|                                                                                    |                                                                                | (Unaudited)                              
|                                                                                    |                                                                                | (Dollars in thousands)                   
|Cash flows from operating activities:                                               |                                                                                |                                           |         |        |        |   |        |       
|Net loss                                                                            |                                                                                | $                                         | (11,115 | )      |        | $ | (9,182 | )     
|Adjustments to reconcile net loss to net cash
    provided by operating activities: |                                                                                |                                           |         |        |        |   |        |       
|                                                                                    | Restructuring charges                                                          |                                           |         |       |        |   |        | 1,441  |       
|                                                                                    | Depreciation and amortization                                                  |                                           |         | 992    |        |   |        | 2,522  |       
|                                                                                    | Provision for uncollectible accounts                                           |                                           |         | (100   | )      |   |        | 426    |       
|                                                                                    | Loss on investment/disposition of assets                                       |                                           |         |       |        |   |        | 1,448  |       
|                                                                                    | Provision for deferred taxes                                                   |                                           |         |       |        |   |        | 2,160  |       
|                                                                                    | Provision for contract losses                                                  |                                           |         | (1,776 | )      |   |        |       |       
|                                                                                    | Non-cash stock-based compensation                                              |                                           |         | 1,159  |        |   |        | 1,781  |       
|Changes in working capital items:                                                   |                                                                                |                                           |         |        |        |   |        |       
|                                                                                    | Receivables                                                                    |                                           |         | 5,051  |        |   |        | 6,271  |       
|                                                                                    | Income taxes receivable                                                        |                                           |         | 14,750 |        |   |        |       |       
|                                                                                    | Prepaid expenses and other current assets                                      |                                           |         | 248    |        |   |        | (1,315 | )     
|                                                                                    | Other assets                                                                   |                                           |         | 46     |        |   |        | 432    |       
|                                                                                    | Accounts payable                                                               |                                           |         | (4,888 | )      |   |        | 2,359  |       
|                                                                                    | Accrued liabilities                                                            |                                           |         | (738   | )      |   |        | (5,290 | )     
|                                                                                    | Income taxes payable and prepaid taxes                                         |                                           |         |       |        |   |        | (2,805 | )     
|                                                                                    | Billings in excess of costs and estimated
    earnings on uncompleted projects |                                           |         | 600    |        |   |        | 1,062  |       
|                                                                                    |                                                                                |                                           |         |        |        |   |        |       
|                                                                                    |                                                                                | Net cash provided by operating activities |         |        | 4,229  |   |        |        | 1,310  |  
|                                                                                    |                                                                                |                                           |         |        |        |   |        |       
|Cash flows from investing activities:                                               |                                                                                |                                           |         |        |        |   |        |       
|                                                                                    | Capital expenditures                                                           |                                           |         | (596   | )      |   |        | (705   | )     
|                                                                                    | Proceeds from renewal of certificate of deposit                                |                                           |         | 22     |        |   |        |       |       
|                                                                                    | Proceeds from sale of property and equipment                                   |                                           |         |       |        |   |        | 28     |       
|                                                                                    | Proceeds from sale of available-for-sale
    investments                       |                                           |         | 9,224  |        |   |        | 3,422  |       
|                                                                                    |                                                                                |                                           |         |        |        |   |        |       
|                                                                                    |                                                                                | Net cash provided by investing activities |         |        | 8,650  |   |        |        | 2,745  |  
|                                                                                    |                                                                                |                                           |         |        |        |   |        |       
|Cash flows from financing activities:                                               |                                                                                |                                           |         |        |        |   |        |       
|                                                                                    | Proceeds from exercise of stock options and stock
    purchase plan            |                                           |         | 23     |        |   |        | 434    |       
|                                                                                    | Repayments of subordinated note payable to
    stockholder                     |                                           |         | (791   | )      |   |        | (791   | )     
|                                                                                    | Repayments of equipment loans and capital leases                               |                                           |         | (370   | )      |   |        | (948   | )     
|                                                                                    |                                                                                |                                           |         |        |        |   |        |       
|                                                                                    |                                                                                | Net cash used in financing activities     |         |        | (1,138 | ) |        |        | (1,305 | )
|                                                                                    |                                                                                |                                           |         |        |        |   |        |       
|Net increase in cash and cash equivalents                                           |                                                                                |                                           | 11,741  |        |        |   | 2,750  |       
|Cash and cash equivalents at beginning of period                                    |                                                                                |                                           | 28,109  |        |        |   | 75,839 |       
|                                                                                    |                                                                                |                                           |         |        |        |   |        |       
|Cash and cash equivalents at end of period                                          |                                                                                | $                                         | 39,850  |        |        | $ | 78,589 |       
|                                                                                    |                                                                                |                                           |         |        |        |   |        |       
|Supplemental cash flow information:                                                 |                                                                                |                                           |         |        |        |   |        |       
|Cash paid for:                                                                      |                                                                                |                                           |         |        |        |   |        |       
|                                                                                    | Interest                                                                       |                                           | $       | 66     |        |   | $      | 153    |       
|                                                                                    | Income taxes                                                                   |                                           | $       | 75     |        |   | $      | 138    |       
|Supplemental disclosures of non-cash investing
    and financing activities         |                                                                                |                                           |         |        |        |   |        |       
|                                                                                    | Reduction in deferred stock-based compensation                                 |                                           | $       | 9      |        |   | $      | 3,658  |       

See accompanying notes to condensed consolidated
financial statements.

4



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##### Table of Contents



LEXENT INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

June 30, 2003


(Unaudited)


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

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

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

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

1.     Net Loss Per
Share

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

|                                  |  |                                          |        |                  |  |      |        |      |  |   |         |   |  |   |        |  
|--------------------------------- |  | ---------------------------------------- | ------ | ---------------- |  | ---- | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                  |  |                                          |        |                 
|                                  |  | Three Months Ended                       |        | Six Months Ended
|                                  |  | June 30,                                 |        | June 30,        
|                                  |  |                                          |        |                 
|                                  |  | 2003                                     |        | 2002             |  | 2003 |        | 2002
|                                  |  |                                          |        |                  |  |      |        |     
|                                  |  |                                         
|                                  |  | (In thousands, except per share amounts)
|Net loss per
    share  basic:   |  |                                          |        |                  |  |      |        |      |  |   |         |   |  |   |        |  
|Net loss                          |  | $                                        | (5,121 | )                |  | $    | (2,453 | )    |  | $ | (11,115 | ) |  | $ | (9,182 | )
|                                  |  |                                          |        |                  |  |      |        |      |  |   |         |   |  |   |        |  
|Weighted average shares  basic   |  |                                          | 42,245 |                  |  |      | 41,832 |      |  |   | 42,220  |   |  |   | 41,766 |  
|                                  |  |                                          |        |                  |  |      |        |      |  |   |         |   |  |   |        |  
|Net loss per share  basic        |  | $                                        | (0.12  | )                |  | $    | (0.06  | )    |  | $ | (0.26   | ) |  | $ | (0.22  | )
|                                  |  |                                          |        |                  |  |      |        |      |  |   |         |   |  |   |        |  
|Net loss per
    share  diluted: |  |                                          |        |                  |  |      |        |      |  |   |         |   |  |   |        |  
|Net loss                          |  | $                                        | (5,121 | )                |  | $    | (2,453 | )    |  | $ | (11,115 | ) |  | $ | (9,182 | )
|                                  |  |                                          |        |                  |  |      |        |      |  |   |         |   |  |   |        |  
|Weighted average shares  basic   |  |                                          | 42,245 |                  |  |      | 41,832 |      |  |   | 42,220  |   |  |   | 41,766 |  
|                                  |  |                                          |        |                  |  |      |        |      |  |   |         |   |  |   |        |  
|Dilutive effect of stock options  |  |                                          | 383    |                  |  |      | 865    |      |  |   | 368     |   |  |   | 990    |  

5



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##### Table of Contents



LEXENT INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                |  |                                          |        |                  |  |      |        |      |  |  |        |  |  |  |        | 
|----------------------------------------------- |  | ---------------------------------------- | ------ | ---------------- |  | ---- | ------ | ---- |  |  | ------ |  |  |  | ------ | 
|                                                |  |                                          |        |                 
|                                                |  | Three Months Ended                       |        | Six Months Ended
|                                                |  | June 30,                                 |        | June 30,        
|                                                |  |                                          |        |                 
|                                                |  | 2003                                     |        | 2002             |  | 2003 |        | 2002
|                                                |  |                                          |        |                  |  |      |        |     
|                                                |  |                                         
|                                                |  | (In thousands, except per share amounts)
|Dilutive effect of employee stock purchase plan |  |                                          |       |                  |  |      | 7      |      |  |  |       |  |  |  | 6      | 
|                                                |  |                                          |        |                  |  |      |        |      |  |  |        |  |  |  |        | 
|Weighted average shares  diluted               |  |                                          | 42,628 |                  |  |      | 42,704 |      |  |  | 42,588 |  |  |  | 42,762 | 
|                                                |  |                                          |        |                  |  |      |        |      |  |  |        |  |  |  |        | 
|Net loss per share  diluted                    |  |                                          | *      |                  |  |      | *      |      |  |  | *      |  |  |  | *      | 



---



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

2.     Accumulated
Other Comprehensive Income

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

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

|                           |  |                    |      |                   |  |   |      |  
|-------------------------- |  | ------------------ | ---- | ----------------- |  | - | ---- | -
|                           |  | Unrealized Gain on |      | Accumulated Other
|                           |  | Available-for-Sale |      | Comprehensive    
|                           |  | Investments        |      | Income           
|                           |  |                    |      |                  
|                           |  |                   
|                           |  | (In thousands)    
|Balance, December 31, 2002 |  | $                  | 105  |                   |  | $ | 105  |  
|                           |  |                    |      |                   |  |   |      |  
|Change for 2003            |  |                    | (105 | )                 |  |   | (105 | )
|                           |  |                    |      |                   |  |   |      |  
|Balance, June 30, 2003     |  | $                  |     |                   |  | $ |     |  
|                           |  |                    |      |                   |  |   |      |  

3.     Certificate of
Deposit (Restricted Cash)

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

6



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##### Table of Contents



LEXENT INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

4.     Receivables,
Net

|                                                                                                                               |  |                |        |              |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------ |  | -------------- | ------ | ------------ |  | - | ------ | -
|                                                                                                                               |  | June 30,       |        | December 31,
|                                                                                                                               |  | 2003           |        | 2002        
|                                                                                                                               |  |                |        |             
|                                                                                                                               |  |               
|                                                                                                                               |  | (In thousands)
|Accounts receivable  billed to
    customers                                                                                  |  | $              | 18,534 |              |  | $ | 23,891 |  
|Unbilled receivables on completed projects
    accounted for under the completed contract method                               |  |                | 162    |              |  |   | 717    |  
|Costs and estimated earnings in excess of
    billings on projects accounted for under the
    percentage-of-completion method |  |                | 4,737  |              |  |   | 5,044  |  
|Costs of uncompleted projects accounted for under
    the completed contract method                                            |  |                | 1,325  |              |  |   | 661    |  
|Retainage                                                                                                                      |  |                | 3,152  |              |  |   | 2,638  |  
|                                                                                                                               |  |                |        |              |  |   |        |  
|                                                                                                                               |  |                | 27,910 |              |  |   | 32,951 |  
|Less: allowance for uncollectible amounts                                                                                      |  |                | (4,549 | )            |  |   | (4,640 | )
|                                                                                                                               |  |                |        |              |  |   |        |  
|                                                                                                                               |  | $              | 23,361 |              |  | $ | 28,311 |  
|                                                                                                                               |  |                |        |              |  |   |        |  

The amounts written off against the allowance for
the six months ended June 30, 2003 and 2002 were
$0.3 million and $4.3 million, respectively.

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

5.     Investments

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

6.     Employee Stock
Purchase Plan

At June 30, 2002, 43,500 shares were
issuable to employees based on payroll deductions of
$0.08 million through that date. The Employee Stock
Purchase Plan was terminated in January 2003.

7.     Related Party
Transactions

During the six months ended June 30, 2003,
the Company repaid $0.8 million including interest expense
of $0.05 million on a subordinated note payable to a common
stockholder.

The Company leases buildings for office and
warehouse purposes in New York City and in South Plainfield, New
Jersey from entities owned by its two principal common
stockholders and another common stockholder. Rent expense for
these premises was $0.2 million for the six months ended
June 30, 2003.

In May 2000, the Company entered into a ten-year
lease for a garage and warehouse facility in Long Island City,
New York. Lease payments were $0.3 million for the six months
ended June 30, 2003. The facility is leased from an entity
owned by the Companys two principal common stockholders.

On July 9, 2003, the Company executed an
Agreement and Plan of Merger (the Merger Agreement)
between LX Merger Corp. (Purchaser) and the Company
pursuant to which Purchaser will merge with and into the Company
and the Company will be the surviving corporation (the
Merger). Purchaser is a newly formed corporation
owned by Hugh J. OKane, Jr., Chairman of the Board of
Lexent, and Kevin M. OKane, Chief Executive Officer
and Vice Chairman of the Board of Lexent (together, the
Purchaser Stockholders) and organized for the sole
purpose of entering into the Merger Agreement and consummating
the transactions

7



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##### Table of Contents



LEXENT INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

contemplated thereby. If the Merger is completed,
the Companys common stock will no longer be publicly
traded and the Company will become a privately-held company
owned entirely by the Purchaser Stockholders.

Pursuant to the terms of the Merger Agreement,
the stockholders of the Company (other than the Purchaser) will
receive $1.50 in cash for each outstanding share of the
Companys common stock. Outstanding options to purchase
shares of the Companys common stock will be canceled and
each holder of such options will receive $1.50 per share minus
the exercise price of the options, but only to the extent that
the exercise price is lower than $1.50.

The Merger will be accounted for as a
recapitalization transaction in accordance with accounting
principles generally accepted in the United States, under which
the total consideration for the shares acquired and the fully
vested stock options redeemed will be treated similar to the
acquisition of treasury shares and subsequently retired.
Accordingly, the basis of Lexents consolidated assets and
liabilities after the Merger will remain unchanged as compared
to such assets and liabilities before the Merger, absent the
cash utilized to effect the transaction.

The closing of the Merger is subject to various
conditions, including that the Stipulation of Settlement entered
into on August 6, 2003, by the Company, Hugh J.
OKane, Jr., Kevin M. OKane and the plaintiffs
named in the lawsuits consolidated under the caption In re
Lexent Inc. Shareholders Litigationand filed with the Court
of Chancery of the State of Delaware, is in full force and
effect, approval of the transaction by stockholders of the
Company representing a majority of the shares of common stock
actually voted on the transaction (other than shares owned by
the Purchaser or the Purchaser Stockholders), regulatory
approvals, absence of any pending or threatened litigation
related to the transaction and other customary conditions to
closing, and there can be no assurance that the conditions to
closing will be satisfied or that the Merger will be completed.

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

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

8.     Contingencies

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

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

8



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##### Table of Contents



LEXENT INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

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

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

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

The settlement is conditioned upon, among other
things, consummation of the proposed merger and approval of the
settlement by the Court of Chancery of the State of Delaware.
The Court will schedule a hearing to determine the fairness,
reasonableness and adequacy of the settlement, whether or not
the settlement should be approved and to hear and determine any
objections to the settlement.

In connection with the settlement,
plaintiffs counsel will petition the Court for an award of
attorneys fees and expenses in an aggregate amount not to
exceed $500,000. Defendants have agreed not to object to such an
application.

In the event that the stockholders of the Company
approve the proposed Merger and the proposed Merger is
completed, plaintiffs court-approved attorneys fees
and expenses will be paid by the Company.

As indicated in previous filings, a shareholder
class action lawsuit was filed on October 26, 2001,
Labansky, et al. v. Lexent Inc. et al., in the Southern
District of New York against the Company, certain of its present
and former senior executives and its underwriters. The complaint
alleged that the registration statement and prospectus relating
to the Companys initial public offering contained material
misrepresentations and/or omissions in that those documents did
not disclose that: (1) certain underwriters had solicited
and received undisclosed fees and commissions and other economic
benefits from some investors in connection with the distribution
of the Companys stock in the initial public offering; and
(2) certain underwriters had entered into arrangements with
some investors that were designed to distort and/or inflate the
market price for the Companys stock in the aftermarket
following the initial public offering. The suit against the
Company was one of a number of initial public offering
securities claims against approximately 308 other issuers and
underwriters. For the purpose of coordination, the suits were
consolidated as In re Initial Public Offering Securities
Litigation, 21 MC 92 (SAS) (the IPO
Litigation). On June 26, 2003, the plaintiffs
executive committee, responsible for coordinating and managing
the IPO Litigation for all plaintiffs, announced a proposed
settlement between plaintiffs, on the one hand, and the issuer
defendants and their respective officer and director defendants,
including Lexent Inc. and its named officers and directors, on
the other. The proposed settlement does not resolve
plaintiffs claims against the underwriter defendants. A
memorandum of understanding to settle plaintiffs claims
against the issuers and their directors and officers has been
approved as to form by counsel for the issuers and the process
of obtaining individual approval by

9



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##### Table of Contents



LEXENT INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

each of the other 308 issuer defendants has
begun. On July 9, 2003, the Company elected to adopt the
plaintiffs settlement proposal set forth in the memorandum
of understanding. The principal components of the proposed
settlement include: (i) a release of all plaintiffs
claims against the issuer defendants and their officers and
directors which have, or could have, been asserted in the IPO
Litigation arising out of the conduct alleged in the complaints
to be wrongful; (ii) the assignment by the issuers to the
plaintiffs of certain potential claims against the underwriter
defendants and the agreement by the issuers not to assert
certain claims against the underwriter defendants; and
(iii) an undertaking by the insurers of the issuer
defendants to pay to plaintiffs the difference between
$1 billion and any lesser amount recovered by plaintiffs
from the underwriter defendants in the IPO Litigation. If
recoveries in excess of $1 billion are obtained by
plaintiffs from the underwriters, the insurers of the settling
issuer defendants will owe no money to the plaintiffs. The
plaintiffs proposed settlement is contingent upon a
substantial majority of the issuer defendants entering into the
settlement and is further subject to approval by the Court.

On July 9, 2002, the Companys
subsidiary, Hugh OKane Electric Co., LLC
(HOK), was served with a Complaint filed in the
District of Maryland by several former employees, Yemele T.
William Nestor et al. v. Hugh OKane Electric Company, LLC(Employee Action), alleging violations of Title
VII of the Civil Rights Act of 1964, as amended. Plaintiffs in
the Employee Action sought compensatory and punitive damages. In
addition, on September 9, 2002, HOK was served with a
second Complaint filed in the District of Maryland by the U.S.
Equal Employment Opportunity Commission on behalf of other
employees, Equal Employment Opportunity Commission v. Hugh
OKane Electric Company, LLC (EEOC Action),
alleging violations of Title VII of the Civil Rights Act of
1964, as amended. The EEOC Action sought compensatory damages
and injunctive relief. The Employee Action and the EEOC Action
arose from the same core of allegations. HOK entered into
settlement agreements with all plaintiffs in both the Employee
Action and the EEOC Action, which settlement agreements were
effective as of July 14, 2003 and served to conclude both
the Employee Action and the EEOC Action. In connection with the
final settlement of the EEOC Action and the Employee Action, HOK
entered into a consent decree with the EEOC and contributed
towards certain settlement payments made to the plaintiffs, the
sum of which contributions did not have a material impact on the
Companys financial position or results of operations.

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

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

10



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##### Table of Contents



LEXENT INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

HOK could have a material adverse effect on the
Companys business operating results and financial
condition.

9.     Stock Options
and Awards

During the six months ended June 30, 2003,
no options were granted to purchase common shares, 504,511
options were terminated and expired and 76,563 options were
exercised. As of June 30, 2003, options to purchase
4,544,693 common shares were outstanding.

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

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

Amortization of deferred stock-based compensation
was $0.5 million and $0.8 million for the three months
ended June 30, 2003 and 2002, respectively, and
$1.2 million and $1.8 million for the six months ended
June 30, 2003 and June 30, 2002, respectively.
Deferred tax benefits were $0.2 million and
$0.1 million for the three months ended June 30, 2003
and 2002, respectively and $0.3 million and
$0.2 million for the six months ended June 30, 2003
and June 30, 2002, respectively, in connection with
amortization of deferred stock-based compensation for
nonqualified options. With respect to such deferred tax
benefits, to the extent that nonqualified options are forfeited
or are exercised when the fair value of the stock is lower than
the deemed fair value of the stock for financial reporting
purposes on the grant date ($22.80 per share), a portion of such
deferred tax benefits would not be realized and such portion may
be charged to expense. During the six months ended June 30,
2003 and 2002, $0.2 million and $2.4 million of
deferred tax assets was charged to expense in connection with
forfeited options, respectively. For the six months ended
June 30, 2003 such charges were offset by a corresponding
reduction in the deferred tax asset valuation allowance.

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

The Company applies the Accounting Principles
Board Opinion No. (APB) 25
Accounting for Stock Issued to Employees, and
related interpretations, in accounting for its stock-based
compensation plans. Accordingly, no compensation costs have been
recognized for its stock option plans and its stock purchase
plan. Had compensation cost for the Companys stock-based
compensation plans been determined based on

11



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##### Table of Contents



LEXENT INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the fair value at the grant dates for awards
under those plans consistent with SFAS 123, the
Companys net loss and loss per share would have been
increased to the pro forma amounts indicated below:

|                                                                                                                                                       |         |                                          |        |                  |   |      |        |       |   |   |         |       |   |   |         |       |  
|------------------------------------------------------------------------------------------------------------------------------------------------------ | ------- | ---------------------------------------- | ------ | ---------------- | - | ---- | ------ | ----- | - | - | ------- | ----- | - | - | ------- | ----- | -
|                                                                                                                                                       |         |                                          |        |                 
|                                                                                                                                                       |         | Three Months Ended                       |        | Six Months Ended
|                                                                                                                                                       |         | June 30,                                 |        | June 30,        
|                                                                                                                                                       |         |                                          |        |                 
|                                                                                                                                                       |         | 2003                                     |        | 2002             |   | 2003 |        | 2002 
|                                                                                                                                                       |         |                                          |        |                  |   |      |        |      
|                                                                                                                                                       |         |                                         
|                                                                                                                                                       |         | (In thousands, except amounts per share)
|Net loss as reported                                                                                                                                   |         | $                                        | (5,121 | )                |   | $    | (2,453 | )     |   | $ | (11,115 | )     |   | $ | (9,182  | )    
|Deduct: Total stock-based employee compensation
    expense determined under the fair value based method for all
    awards net of related tax effects |         |                                          | (471   | )                |   |      | (791   | )     |   |   | (1,023  | )     |   |   | (1,343  | )    
|                                                                                                                                                       |         |                                          |        |                  |   |      |        |       |   |   |         |       |   |   |         |      
|Pro forma net loss                                                                                                                                     |         | $                                        | (5,592 | )                |   | $    | (3,244 | )     |   | $ | (12,138 | )     |   | $ | (10,525 | )    
|                                                                                                                                                       |         |                                          |        |                  |   |      |        |       |   |   |         |       |   |   |         |      
|Basic and diluted net loss per share as reported:                                                                                                      |         |                                          |        |                  |   |      |        |       |   |   |         |       |   |   |         |      
|                                                                                                                                                       | Basic   |                                          | $      | (0.12            | ) |      | $      | (0.06 | ) |   | $       | (0.26 | ) |   | $       | (0.22 | )
|                                                                                                                                                       |         |                                          |        |                  |   |      |        |       |   |   |         |       |   |   |         |      
|                                                                                                                                                       | Diluted |                                          | $      | (0.12            | ) |      | $      | (0.06 | ) |   | $       | (0.26 | ) |   | $       | (0.22 | )
|                                                                                                                                                       |         |                                          |        |                  |   |      |        |       |   |   |         |       |   |   |         |      
|Basic and diluted pro forma net loss per share:                                                                                                        |         |                                          |        |                  |   |      |        |       |   |   |         |       |   |   |         |      
|                                                                                                                                                       | Basic   |                                          | $      | (0.13            | ) |      | $      | (0.08 | ) |   | $       | (0.29 | ) |   | $       | (0.25 | )
|                                                                                                                                                       |         |                                          |        |                  |   |      |        |       |   |   |         |       |   |   |         |      
|                                                                                                                                                       | Diluted |                                          | $      | (0.13            | ) |      | $      | (0.08 | ) |   | $       | (0.29 | ) |   | $       | (0.25 | )
|                                                                                                                                                       |         |                                          |        |                  |   |      |        |       |   |   |         |       |   |   |         |      

10.     Provision for
Restructuring Charges

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

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

|                                              |       |                    |       |               |  |             |   |               |  |   |        |        |   |   |       |       | 
|--------------------------------------------- | ----- | ------------------ | ----- | ------------- |  | ----------- | - | ------------- |  | - | ------ | ------ | - | - | ----- | ----- | 
|                                              |       |                    |       |               |  |             |   | Reserve      
|                                              |       | Reserve Balance at |       |               |  |             |   | Balance at   
|                                              |       | December 31, 2002  |       | Restructuring |  |             |   | June 30, 2003
|                                              |       | (including         |       | Charges       |  | Amounts     |   | (including   
|                                              |       | noncurrent         |       | Recorded in   |  | Charged to  |   | noncurrent   
|                                              |       | portion)           |       | 2003          |  | the Reserve |   | portion)     
|                                              |       |                    |       |               |  |             |   |              
|                                              |       |                   
|                                              |       | (In thousands)    
|Severance and related contractual obligations |       | $                  | 639   |               |  | $           |  |               |  | $ | (456   | )      |   | $ | 183   |      
|Lease obligations                             |       |                    | 9,921 |               |  |             |  |               |  |   | (1,456 | )      |   |   | 8,465 |      
|Property and equipment                        |       |                    | 29    |               |  |             |  |               |  |   | (29    | )      |   |   |      |      
|                                              |       |                    |       |               |  |             |   |               |  |   |        |        |   |   |       |      
|                                              | Total |                    | $     | 10,589        |  |             | $ |              |  |   | $      | (1,941 | ) |   | $     | 8,648 | 
|                                              |       |                    |       |               |  |             |   |               |  |   |        |        |   |   |       |      

11.     Deferred
Income Taxes

Statement of Financial Accounting Standards
No. 109 Accounting for Income Taxes requires
that a valuation allowance be established when it is more
likely than not that all or a portion of deferred tax
assets

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LEXENT INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

will not be realized. Based on the Companys
performance in the past few years and the current challenging
economic environment that has negatively impacted the
Companys operating results, the Company concluded that it
was appropriate to establish a full valuation allowance for its
net deferred tax assets at December 31, 2002. The Company
is continuing to provide a full valuation allowance on future
tax benefits until it can substantiate a level of profitability
that demonstrates its ability to utilize the assets. Adjustments
to increase or decrease the valuation allowance are charged or
credited, respectively, to income tax expense. For the six
months ended June 30, 2003, the Company recorded a charge
to the provision for income taxes of approximately $56,000 which
included payments for state and local taxes.

12.     Recent
Accounting Pronouncements

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

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

13



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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

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

Overview

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

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

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

Our two largest customers for the six months
ended June 30, 2003 were AT&T and a general contractor
in the NY metro area. We generated 20% and 16%, respectively, of
our revenues from each of these customers for the six months
ended June 30, 2003. Some of our key customers include IBM,
Con Edison, general contractors in the New York metro area, and
the Dormitory Authority of the State of New York.

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

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

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

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

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

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

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

In May 2003, LMC entered into a 20-year agreement
with a New York State based non-profit organization to lease
dark fiber capacity on a dark fiber network that LMC will
install throughout certain parts of New York City. The dark
fiber network will be connected to various educational and
research institutions throughout New York City who are customers
of the non-profit organization. Under the terms of the lease LMC
will fund the costs related to construction of the dark fiber
network and connection costs and shall recover these costs
through lease payments paid by the non-profit organization over
the 20-year lease period. The net cash commitment that LMC will
recover over the 20-year lease period is approximately
$4 million.

Critical Accounting Policies

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

Results of Operations



| |                                                        
| | -------------------------------------------------------
| | Second Quarter 2003 Compared to Second
    Quarter 2002

Revenues.Our
revenues decreased by 37.1% to $20.9 million in the second
quarter of 2003 from $33.2 million in the same period last
year. The decrease in revenues was primarily a result of lower
capital expenditures by several of our large telecommunications
customers due to changing conditions in the telecommunications
industry and the completion of the engineering, procurement and
construction contract in the fourth quarter of 2002.

Cost of revenues.Our cost of revenues represented
102.3% of revenues in the second quarter of 2003 compared with
94.6% of revenues in the same period last year. The increased
percentage was due in part to the fixed overhead costs which
represented a higher percentage of a lower level of revenues,
delays in completing projects, the establishment of job loss
provisions due to revisions in estimates on certain electrical
contracting projects and in part to pricing pressure. We
anticipate that pricing pressure will continue during 2003.

General and administrative expenses.Our general and administrative
expenses decreased 5.0% to $3.9 million in the second
quarter 2003 from $4.1 million in the same period last
year. The decrease is the net effect of a decrease in facilities
expenses, bad debt provision, travel and entertainment expenses,
office expenses offset against an increase in insurance
expenses, wages and benefits and legal fees.

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

Non-cash stock-based compensation.Amortization of deferred stock-based
compensation declined to $0.5 million in the second quarter
of 2003 from $0.8 million in the same period of last year.
The decrease was attributed to the decrease in the unamortized
balance of non-cash stock-based compensation as a result of
resignations, terminations and fully amortized balances.

Interest expense.Interest expense in the second quarter of 2003 was
$0.03 million compared to $0.07 million in the same
period last year. The decrease was due primarily to lower
average outstanding balances on equipment and vehicle loans and
a subordinated note payable to a stockholder.

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

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##### Table of Contents



months ended June 30, 2003. Additionally,
for the three months ended June 30, 2003, we recorded a
charge to the provision of approximately $18,000 which included
payments for state and local taxes.




| |                                                            
| | -----------------------------------------------------------
| | First Six Months 2003 Compared to First Six
    Months 2002

Revenues.Our
revenues decreased by 36.1% to $41.2 million in the first
six months of 2003, from $64.5 million for the same period
last year. The decrease in revenues was primarily a result of
lower capital expenditures by several of our large
telecommunications customers due to changing conditions in the
telecommunications industry and the completion of the
engineering, procurement and construction contract in the fourth
quarter of 2002.

Cost of revenues.Our cost of revenues represented
106.5% of revenues in the six months ended June 30, 2003,
compared with 94.3% of revenues in the same period last year.
The increased percentage was due in part to the fixed overhead
costs which represented a higher percentage of a lower level of
revenues, to the inclement weather causing a decrease in
productivity and delays in completing projects, the
establishment of job loss provisions due to revisions in
estimates on certain electrical contracting projects and in part
to pricing pressure. We anticipate that pricing pressure will
continue during 2003.

General and administrative expenses.Our general and administrative
expenses decreased 20.9% to $6.7 million for the first six
months of 2003 from $8.5 million in the same period last
year. The decrease is attributed to a reduction in wages and
related benefits as a result of a headcount reduction, a
reduction in rent and facilities expenses, a reduction in the
bad debt provision, a reduction in board of directors fees and
reduction in entertainment expenses.

Depreciation and
amortization.Our depreciation and
amortization expense decreased to $1.0 million for the six
months ended June 30, 2003 from $2.5 million in the
same period of last year. The decrease reflects a reduction in
equipment and leasehold improvements resulting from the closing
of offices in 2002.

Non-cash stock-based compensation.Amortization of deferred stock-based
compensation declined to $1.2 million in the first half of
2003 from $1.8 million in the same period of last year. The
decrease was attributed to the decrease in the unamortized
balance of non-cash stock-based compensation as a result of
resignations, terminations and fully amortized balances.

Interest expense.Interest expense in the first six months of 2003 was
$0.06 million compared to $0.1 million in the same
period last year. The decrease was due primarily to lower
average outstanding balances on equipment and vehicle loans and
a subordinated note payable to a stockholder.

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

Liquidity and Capital Resources

Net cash provided by operations was
$4.2 million for the six months ended June 30, 2003,
representing net collections of receivables offset by payments
made for accounts payable and accrued liabilities, and offset by
the net loss. Cash provided by investing activities was
$8.6 million, representing $9.2 million of proceeds
from available-for-sale investments, offset by $0.6 million
for capital expenditures. Net cash used in financing activities
was $1.1 million, comprised of repayments of
$0.4 million for equipment and capital leases and
$0.7 million of repayments on a subordinated note payable
to a stockholder.

We have no material commitments other than
installment obligations related to equipment purchases, leases
for facilities, computer equipment and vehicles, franchise fees
to the City of New York, investments into LMC to fund the
capital requirements related to the construction of the fiber
optic network and a subordinated note payable to a stockholder.
We anticipate that available cash and cash equivalents and cash

16



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##### Table of Contents



flows from operations will be sufficient to
satisfy our working capital requirements for the foreseeable
future. Our future working capital requirements and liquidity
will depend upon many factors, including our customers
financial condition and their ability to pay amounts owing to
us, our ability to replace the revenues previously derived from
several of our large telecommunications-carrier customers with
revenue from other customers, and our ability to reduce costs at
a rate commensurate with any reduction in revenues which we are
unable to replace with new revenues.


In connection with the restructuring plan
initiated during 2001, we recorded restructuring charges of
$9.1 million during the year ended December 31, 2002.
These charges primarily related to the expense associated with
certain lease obligations, the write-offs of property, equipment
and leasehold improvements, and severance costs related to our
organizational restructuring, partially offset by the reduction
to the 2001 accrual for restructuring costs. Refer to our
audited consolidated financial statements and notes thereto for
the year ended December 31, 2002 for further details and
components of these charges. During the six months ended
June 30, 2003, we had cash outflows of approximately
$1.9 million, related to the expenses associated with
certain lease obligations, property equipment and leasehold
improvements and severance that were accrued for as of
December 31, 2002. The current accrued liability for
additional cash outflows, related to the expense associated with
certain lease obligations and severance are payable as follows:
$2.1 million throughout the remainder of 2003,
$1.4 million during 2004, $1.2 million during 2005,
$0.7 million during 2006, $0.8 million during 2007,
2008, 2009 and 2010, and $0.1 million during 2011.

Impact of Recently Issued Accounting
Standards

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

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

Forward Looking Statements

This Quarterly Report on Form 10-Q contains
both historical and forward-looking statements. All statements
other than statements of historical fact are, or may be deemed
to be, forward-looking statements within the meaning of
section 27A of the Securities Act of 1933 and
section 21E of the Securities Exchange Act of 1934. These
forward-looking statements are only predictions and generally
can be identified by use of statements that include phrases such
as believe, expect,
anticipate, intend, plan,
foresee or other words or phrases of similar import.
Similarly, statements that describe the Companys
objectives, plans or goals also are forward-looking statements.
The Companys operations are subject to certain risks and
uncertainties that could cause actual results to differ
materially from those contemplated by the relevant
forward-looking statement. These risks are more fully outlined
in the Companys Annual Report on Form 10-K for the
year ended December 31, 2002 and other SEC filings. The
forward-looking statements included herein are made only as of
the date of this Quarterly Report on Form 10-Q and the
Company

17



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##### Table of Contents



undertakes no obligation to publicly update such
forward-looking statements to reflect subsequent events or
circumstances. No assurances can be given that projected results
or events will be achieved.





Item
3.     Quantitative and Qualitative
Disclosures About Market Risk

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

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

For the six months ended June 30, 2003, the
Company had revenues from two separate customers, which
comprised 20% and 16%, respectively, of the Companys total
revenues.

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

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




Item
4.     Controls and
Procedures

(a) Disclosure controls and
procedures. As of the end of the Companys most
recently completed fiscal quarter (the registrants fourth
fiscal quarter in the case of an annual report) covered by this
report, the Company carried out an evaluation, with the
participation of the Companys management, including the
Companys Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the Companys disclosure
controls and procedures pursuant to Securities Exchange Act
Rule 13a-15. Based upon that evaluation, the Companys
Chief Executive Officer and Chief Financial Officer concluded
that the Companys disclosure controls and procedures are
effective in ensuring that information required to be disclosed
by the Company in the reports that it files or submits under the
Securities Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SECs
rules and forms.

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

18



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##### Table of Contents






PART II  OTHER
INFORMATION




Item 1.     Legal
Proceedings

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




Item 5.     Other
Information



| |                 
| | ----------------
| | Nasdaq Delisting

The Company received a letter, dated
March 3, 2003, from the Nasdaq Stock Market notifying the
Company that, as a result of the resignations of its independent
directors, Lexent did not meet the independent director and
audit committee requirements for continued listing on the Nasdaq
National Market. Nasdaq rules required Lexent to have an audit
committee composed of at least three independent directors,
which it no longer had as a result of the resignations of
L. White Matthews, III, Richard Schwob, Kathleen A.
Perone and Richard W. Smith. Lexent responded to
Nasdaqs letter and requested an extension of time from
Nasdaq in which to achieve compliance with Nasdaq rules pending
the evaluation of the proposed buyout offer.

On April 23, 2003, Lexent publicly announced
that it received a Nasdaq Staff Determination letter stating
that Lexents common stock was subject to delisting from
the Nasdaq National Market for failure to meet the independent
director and audit committee requirements for continued listing
on the Nasdaq Stock Market. On April 28, 2003, Lexent
appealed the decision to delist Lexents common stock from
the Nasdaq Stock Market and requested a formal hearing with
representatives of Nasdaq. On April 28, 2003, Lexent
received notification that a formal hearing was scheduled with
Nasdaq on May 29, 2003.

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



| |                                   
| | ----------------------------------
| | Resignation of Norman
    Fornella

On June 27, 2003, Lexent publicly announced
that Norman G. Fornella, its Executive Vice President and
Chief Financial Officer, had resigned from Lexent in order to
pursue other business opportunities, effective on June 30,
2003. Since Mr. Fornellas resignation, Bruce Levy,
Lexents President and Chief Operating Officer, has been
performing the functions of the Chief Financial Officer of
Lexent.



| |                              
| | -----------------------------
| | Execution of Merger Agreement

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

Pursuant to the terms of the Merger Agreement,
the stockholders of the Company (other than the Purchaser) will
receive $1.50 in cash for each outstanding share of the
Companys common stock. Outstanding options to purchase
shares of the Companys common stock will be canceled and
each holder of such options will receive $1.50 per share
minus the exercise price of the options, but only to the extent
that the exercise price is lower than $1.50.

The Merger will be accounted for as a
recapitalization transaction in accordance with accounting
principles generally accepted in the United States, under which
the total consideration for the shares acquired

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and the fully vested stock options redeemed will
be treated similar to the acquisition of treasury shares and
subsequently retired. Accordingly, the basis of Lexents
consolidated assets and liabilities after the Merger will remain
unchanged as compared to such assets and liabilities before the
Merger, absent the cash utilized to effect the transaction.


The closing of the Merger is subject to various
conditions, including that the Stipulation of Settlement entered
into on August 6, 2003, by the Company, Hugh J.
OKane, Jr., Kevin M. OKane and the plaintiffs
named in the lawsuits consolidated under the caption In re
Lexent Inc. Shareholders Litigationand filed with the Court
of Chancery of the State of Delaware, is in full force and
effect, approval of the transaction by stockholders of the
Company representing a majority of the shares of common stock
actually voted on the transaction (other than shares owned by
the Purchaser or the Purchaser Stockholders), regulatory
approvals, absence of any pending or threatened litigation
related to the transaction and other customary conditions to
closing, and there can be no assurance that the conditions to
closing will be satisfied or that the Merger will be completed.

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

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



| |                                           
| | ------------------------------------------
| | Execution of Stipulation of
    Settlement

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

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

The settlement is conditioned upon, among other
things, consummation of the proposed merger and approval of the
settlement by the Court of Chancery of the State of Delaware.
The Court will schedule a hearing to determine the fairness,
reasonableness and adequacy of the settlement, whether or not
the settlement should be approved and to hear and determine any
objections to the settlement.

In connection with the settlement,
plaintiffs counsel will petition the Court for an award of
attorneys fees and expenses in an aggregate amount not to
exceed $500,000. Defendants have agreed not to object to such an
application.

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|        |                                     
|------- | ------------------------------------
|Item 6. | Exhibits and Reports on
    Form 8-K

Exhibits

|     |  |                                                                                                                                                                                                                       
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of the Companys Chief
    Executive Officer pursuant to 18 U.S.C. Section 1350,
    as adopted pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002.                                          
|31.2 |  | Certification of the Companys President and
    Chief Operating Officer pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 302 of
    the Sarbanes-Oxley Act of 2002.                            
|32   |  | Certification of the Companys Chief
    Executive Officer and President and Chief Operating Officer
    pursuant to 18 U.S.C. Section 1350, as adopted
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Reports



| |                    
| | -------------------
| | Reports on Form 8-K

On June 17, 2003, the Company announced an
agreement in principle among the Company, Hugh J. OKane,
Jr., and Kevin M. OKane and the plaintiffs named in the
lawsuits consolidated under the caption In re Lexent Inc.
Shareholders Litigation.

On June 25, 2003, the Company announced the
delisting of the Companys common stock from The Nasdaq
National Market effective with the open of business on
June 26, 2003.

On June 27, 2003, the Company announced the
resignation of Norman G. Fornella as the Chief Financial
Officer, and the assumption of the Chief Financial Officer
responsibilities by Bruce Levy the Companys President and
the Chief Operating Officer.

On July 10, 2003, the Company announced that
it signed an Agreement and Plan of Merger between LX Merger
Corp. and the Company.

On July 28, 2003, the Company furnished
second quarter 2003 operating results.

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SIGNATURES

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

|                      |  |                                                                                
|--------------------- |  | -------------------------------------------------------------------------------
|Dated: August 8, 2003 |  | By: /s/ KEVIN M. OKANEKevin M. OKaneChief Executive Officer and Vice Chairman
|                     
|Dated: August 8, 2003 |  | By: /s/ BRUCE LEVYBruce LevyPresident and Chief Operating Officer              

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