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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-Q

|ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|- | -----------------------------------------------------------------------------------------

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002

OR

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

For the transition period from  to

|Commission File Number |  | Exact Name of Registrant as Specified in Its Charter; State of Incorporation; Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive
Offices |  | IRS Employer Identification Number
|---------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------
|000-31531              |  | NEON Communications, Inc. (a Delaware corporation)
2200 West Park Drive
Westborough, Massachusetts 01581
(508) 616-7800                                                                           |  | 04-3523408                        

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Securities registered pursuant to Section 12(b) of the Act:None

Securities registered pursuant to Section 12(g) of the Act:NEON Communications, Inc.Common Stock, Par Value $0.01 Per Share

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

At
May 1, 2002 there were 21,335,061 shares of NEON Communications, Inc. common stock outstanding.

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TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

|                                                                 |  |                                                                                       |  | Page
|---------------------------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | ----
|ITEM 1:                                                          |  | FINANCIAL STATEMENTS                                                                  |  |     
|Condensed Consolidated Balance Sheets (Unaudited)                |  | 2                                                                                    
|Condensed Consolidated Statements of Operations (Unaudited)      |  | 3                                                                                    
|Condensed Consolidated Statements of Cash Flows (Unaudited)      |  | 4                                                                                    
|Notes to Condensed Consolidated Financial Statements (Unaudited) |  | 5                                                                                    
|ITEM 2:                                                          |  | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  | 13  
|ITEM 3:                                                          |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            |  | 25  
|PART II: OTHER INFORMATION                                       |  |                                                                                      
|Item 1:                                                          |  | Legal Proceedings                                                                     |  | 26  
|Item 3:                                                          |  | Defaults Under Senior Securities                                                      |  | 26  
|Item 6:                                                          |  | Exhibits and Reports on Form 8-K                                                      |  | 26  
|Signatures                                                       |  | 27                                                                                   

1

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

NEON COMMUNICATIONS, INC.        Condensed Consolidated Balance Sheets        (Unaudited)

|                                               |                                                                                                             | December 31, 2001         |             | March 31, 2002 |           
|---------------------------------------------- | ----------------------------------------------------------------------------------------------------------- | ------------------------- | ----------- | -------------- | ----------
|Assets                                         |                                                                                                            
|Current Assets:                                |                                                                                                             |                           |             |                |           
|                                               | Cash and cash equivalents                                                                                   |                           | $           | 12,594,115     |           
|                                               | Short-term restricted investments                                                                           |                           |             | 14,254,180     |           
|                                               | Accounts receivable, net of allowance of approximately $774,000 and $980,000 in 2001 and 2002, respectively |                           |             | 4,770,117      |           
|                                               | Prepaid expenses and other current assets                                                                   |                           |             | 1,340,163      |           
|                                               |                                                                                                             |                           |             |                |           
|                                               |                                                                                                             | Total current assets      |             |                | 32,958,575
|                                               |                                                                                                             |                           |             |                |           
|Property and Equipment, net                    |                                                                                                             |                           | 238,040,852 |                |           
|Intangible and Other Assets, net               |                                                                                                             |                           | 81,268,714  |                |           
|                                               |                                                                                                             |                           |             |                |           
|                                               |                                                                                                             | $                         | 352,268,141 |                | $         
|                                               |                                                                                                             |                           |             |                |           
|Liabilities and Stockholders' Equity (Deficit) |                                                                                                            
|Current Liabilities:                           |                                                                                                             |                           |             |                |           
|                                               | Accounts payable                                                                                            |                           | $           | 5,193,414      |           
|                                               | Accounts payableCommunications network                                                                     |                           |             | 5,666,006      |           
|                                               | Accrued expenses                                                                                            |                           |             | 22,083,772     |           
|                                               | Deferred revenue                                                                                            |                           |             | 1,722,091      |           
|                                               | Current portion of long term obligations                                                                    |                           |             | 37,067,102     |           
|                                               |                                                                                                             |                           |             |                |           
|                                               |                                                                                                             | Total current liabilities |             |                | 71,732,385
|                                               |                                                                                                             |                           |             |                |           
|Deferred revenue, net of current portion       |                                                                                                             |                           | 15,145,571  |                |           
|Long-term obligations                          |                                                                                                             |                           | 205,417,760 |                |           
|Contingencies (Note 6)                         |                                                                                                             |                           |             |                |           
|Stockholders' Equity:                          |                                                                                                             |                           |             |                |           
|                                               | Preferred stock, $0.01 par value; 2,000,000 shares authorized; none outstanding                             |                           |             |               |           
|                                               | Common stock, $0.01 par value; 60,000,000 shares authorized; 19,948,090 shares issued and outstanding       |                           |             | 199,481        |           
|                                               | Restricted common stock1,386,972 shares issued and outstanding (Note 2)                                    |                           |             | 13,870         |           
|                                               | Subscription receivable (Note 2)                                                                            |                           |             | (27,571,232    | )         
|                                               | Additional paid-in capital                                                                                  |                           |             | 290,317,240    |           
|                                               | Accumulated deficit                                                                                         |                           |             | (202,986,934   | )         
|                                               |                                                                                                             |                           |             |                |           
|Total stockholders' equity (deficit)           |                                                                                                             |                           | 59,972,425  |                |           
|                                               |                                                                                                             |                           |             |                |           
|                                               |                                                                                                             | $                         | 352,268,141 |                | $         
|                                               |                                                                                                             |                           |             |                |           

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

2

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NEON COMMUNICATIONS, INC.        Condensed Consolidated Statements of Operations        (Unaudited)

|                                                                                            |                                     | Three Months Ended
March 31, |            
|------------------------------------------------------------------------------------------- | ----------------------------------- | ---------------------------- | -----------
|
|Revenues:                                                                                   |                                     |                              |            
|                                                                                            | Network services                    |                              | $          
|                                                                                            | Other services                      |                              |            
|                                                                                            |                                     |                              |            
|                                                                                            | Total revenues                      |                              |            
|                                                                                            |                                     |                              |            
|Expenses:                                                                                   |                                     |                              |            
|                                                                                            | Cost of revenues                    |                              |            
|                                                                                            | Selling, general and administrative |                              |            
|                                                                                            | Depreciation and amortization       |                              |            
|                                                                                            |                                     |                              |            
|                                                                                            | Total expenses                      |                              |            
|                                                                                            |                                     |                              |            
|                                                                                            | Loss from operations                |                              |            
|                                                                                            |                                     |                              |            
|Other Income (Expense):                                                                     |                                     |                              |            
|                                                                                            | Interest and other income           |                              |            
|                                                                                            | Interest and other expense          |                              |            
|                                                                                            |                                     |                              |            
|                                                                                            | Total other expense, net            |                              |            
|                                                                                            |                                     |                              |            
|Loss before cumulative effect of change in accounting principle                             |                                     |                              | (14,437,311
|Cumulative effect of change in accounting principle (Note 4)                                |                                     |                              |           
|                                                                                            |                                     |                              |            
|Net Loss                                                                                    |                                     | $                            | (14,437,311
|                                                                                            |                                     |                              |            
|Basic and Diluted Loss per Share Before Cumulative Effect of Change in Accounting Principle |                                     | $                            | (0.77      
|                                                                                            |                                     |                              |            
|Basic and Diluted Loss per Share from Cumulative Effect of Change in Accounting Principle   |                                     |                              |           
|                                                                                            |                                     |                              |            
|Basic and Diluted Loss per Share                                                            |                                     | $                            | (0.77      
|                                                                                            |                                     |                              |            
|Basic and Diluted Weighted Average Shares Outstanding                                       |                                     |                              | 18,754,414 
|                                                                                            |                                     |                              |            

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

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NEON COMMUNICATIONS, INC.        Condensed Consolidated Statements of Cash Flows        (Unaudited)

|                                                           |                                                                             | Three Months Ended
March 31,                                         |                                          
|---------------------------------------------------------- | --------------------------------------------------------------------------- | -------------------------------------------------------------------- | -----------------------------------------
|
|Cash Flows from Operating Activities:                      |                                                                             |                                                                      |                                          
|                                                           | Net loss                                                                    |                                                                      | $                                        
|                                                           | Adjustments to reconcile net loss to net cash used in operating activities |                                                                      |                                          
|                                                           |                                                                             | Cumulative effect of a change in accounting principle (Note 4)       |                                          
|                                                           |                                                                             | Depreciation and amortization                                        |                                          
|                                                           |                                                                             | Amortization and write-down of deferred financing and interest costs |                                          
|                                                           |                                                                             | Changes in assets and liabilities                                   |                                          
|                                                           |                                                                             |                                                                      | Accounts receivable                      
|                                                           |                                                                             |                                                                      | Prepaid expenses and other current assets
|                                                           |                                                                             |                                                                      | Accounts payable                         
|                                                           |                                                                             |                                                                      | Accrued expenses                         
|                                                           |                                                                             |                                                                      | Deferred revenue                         
|                                                           |                                                                             |                                                                      |                                          
|                                                           |                                                                             |                                                                      |                                          
|                                                           |                                                                             |                                                                      |                                          
|Cash Flows from Investing Activities:                      |                                                                             |                                                                      |                                          
|                                                           | Purchases of property and equipment                                         |                                                                      |                                          
|                                                           | Increase in intangible and other assets                                     |                                                                      |                                          
|                                                           |                                                                             |                                                                      |                                          
|                                                           |                                                                             |                                                                      |                                          
|                                                           |                                                                             |                                                                      |                                          
|Cash Flows from Financing Activities:                      |                                                                             |                                                                      |                                          
|                                                           | Increase (decrease) in accounts payablecommunications network              |                                                                      |                                          
|                                                           | Decrease in restricted cash and investments                                 |                                                                      |                                          
|                                                           | Proceeds from subscription receivable                                       |                                                                      |                                          
|                                                           | Payment of common stock issuance costs                                      |                                                                      |                                          
|                                                           | Proceeds from exercise of common stock options                              |                                                                      |                                          
|                                                           |                                                                             |                                                                      |                                          
|                                                           |                                                                             |                                                                      |                                          
|                                                           |                                                                             |                                                                      |                                          
|Net Increase (Decrease) in Cash and Cash Equivalents       |                                                                             |                                                                      | (9,506,721                               
|Cash and Cash Equivalents, beginning of period             |                                                                             |                                                                      | 20,650,158                               
|                                                           |                                                                             |                                                                      |                                          
|Cash and Cash Equivalents, end of period                   |                                                                             | $                                                                    | 11,143,437                               
|                                                           |                                                                             |                                                                      |                                          
|Supplemental Disclosure of Cash Flow information:          |                                                                             |                                                                      |                                          
|                                                           | Cash paid during the period for                                            |                                                                      |                                          
|                                                           |                                                                             | Interest                                                             |                                          
|                                                           |                                                                             |                                                                      |                                          
|                                                           |                                                                             | Taxes                                                                |                                          
|                                                           |                                                                             |                                                                      |                                          
|Supplemental Disclosure of Non-Cash Financing Information: |                                                                             |                                                                      |                                          
|                                                           | Decrease in subscription receivable to offset convertible note (Note 5)     |                                                                      | $                                        
|                                                           |                                                                             |                                                                      |                                          

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

4

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NEON COMMUNICATIONS, INC.        Notes to Condensed Consolidated Financial Statements

(1)  Operations and Restructuring

NEON Communications, Inc. (the "Company" or "NEON") and its subsidiary are engaged in the ownership, management, operation and installation of fiber optic
telecommunication networks and is a leading provider of advanced optical networking solutions and services in the Northeast and Mid-Atlantic regions of the United States.

To
date, the Company has recorded revenues principally from network transport and related services contracts and has incurred cumulative net losses of approximately $291,397,000,
including the effects of a one time non-cash charge of $60,000,000 in the third quarter of 2001 and a one-time non-cash charge of approximately $72,312,000 in the
first quarter of 2002 described in Notes 2 and 4, respectively. The market for fiber optic telecommunications in which the Company operates is changing rapidly due to technological advancements, the
introduction of new products and services, the increasing demands placed on equipment in worldwide telecommunications networks and the demand for telecommunications capacity compared to the supply
currently available.

The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business for the year 2002. The Company is subject to risks common to telecommunications companies including, but not limited to, the development of new products
and services, development of markets and distribution channels, dependence on key personnel, and the ability to obtain additional capital as needed to meet its operating plans. The Company is
projecting an operating loss for 2002 and will not generate sufficient cash flow from operations to fully fund operating costs, capital expenditures and debt service for the year. To conserve cash for
operations, the Company elected not to make payments on an equipment note which gives the lender the right to accelerate the due date of its note and could trigger cross-acceleration provisions in
NEON Optica's senior debt (see Note 5). These factors raise significant doubt about the Company's ability to continue as a going concern. The Company's ultimate success is dependent upon its
ability to restructure its
debt, raise sufficient equity capital to fund its business plan for the foreseeable future, and successfully develop and market its products. As discussed below, the Company is developing a plan to
restructure its debt and is seeking additional equity capital. However, there can be no assurance that the Company's efforts will be successful. The financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts, including the Company's investment in property and equipment ($236,442,574), or the amount and classification of
liabilities that might result should the Company be unable to continue as a going concern.

During
the fourth quarter of 2001, the Company engaged Credit Suisse First Boston ("CSFB") as its financial advisor to assist with developing a plan to restructure its debt and seek
additional equity capital. The Company is in discussions with a group of note holders representing more than two-thirds of NEON Optica's $180 million Senior Notes (collectively,
"Holders"); the holders of NEON Optica's 15% equipment note (see Note 5(c)); and holders of the Company's 18% subordinated convertible notes regarding the restructuring of their debt. Any such
restructuring will likely be pursued in bankruptcy in order to bind all debt holders to the terms of the plan. In addition, the Company is in discussions with the Holders regarding an equity
investment. Along with the exchange of the Company's debt, the equity investment would enable the Company to fully fund its business plan for the foreseeable future. Management believes that it will
be able to complete its restructuring and capital-raising activities during 2002. However, there can be no assurance that these activities will be successful.

5

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(2)  Network Connectivity Purchases in Exchange for Stock

On September 14, 2000, the Company closed an agreement with Consolidated Edison Communications, Inc. ("CEC") under which CEC agreed to grant the
Company an indefeasible right to use ("IRU") fiber optic facilities on the CEC network to provide network transport and carrier services in its service area, which includes New York City and
Westchester County, New York. At the same time, CEC also agreed to provide connectivity from NEON's backbone network to its local distribution facilities in its service area. This communications
network operates under the NEON brand, expanding NEON's network into and around New York. The term of the IRU granted under the CEC agreement is for no less than 25 years. In addition to the
IRUs and intangible assets, CEC agreed to contribute to the Company cash totaling $11,300,000 over the period from September 14, 2000 to April 15, 2005 for the build-out of
local points of presence (POP) and related optronic equipment and for the cost of POP rental, POP operating expenses, optronic equipment maintenance and sales and marketing expenses. As part of the
agreement, the Company has issued 2,476,735 shares of common stock to CEC, of which 56% was restricted as of March 31, 2002, with such restrictions to lapse incrementally upon the completion of
certain milestones over the terms of the agreement, as detailed in the contract with CEC. This transaction resulted in CEC owning approximately 10.5% of NEON's fully diluted common stock. Pursuant to
a stockholders' agreement entered into among the Company, CEC, Exelon Enterprises Management, Inc. (Exelon), and a subsidiary of Northeast Utilities, CEC has nominated a member of the Company's
Board of Directors. In connection with this transaction, the Company recorded a subscription receivable on the accompanying consolidated balance sheet for the value of these assets, based upon an
appraisal of the value of the tangible and intangible assets received in consideration for the stock provided under this agreement. As network assets are received under this agreement, the related
subscription receivable amount is transferred to fixed and intangible assets. The
addition of these tangible and intangible assets will result in significant depreciation and amortization expense and an increase in the Company's net loss per share over the terms of the IRU granted
under this agreement. As of March 31, 2002, approximately $77,620,000 of the subscription receivable has been transferred to fixed and intangible assets as network assets have been received and
$2,186,000 has been received in cash, while certain fiber optic facilities and approximately $4,542,000 in cash remain due under this arrangement. As discussed more fully in Note 4, the Company
wrote off all of its intangible assets in the first quarter of 2002.

On
September 14, 2000, the Company also closed a similar agreement with Exelon. Under the initial agreement, the Company issued 2,131,143 shares of common and restricted common
stock to Exelon, which resulted in Exelon owning approximately 9.1% of NEON's fully diluted common stock, and received cash totaling approximately $3,300,000 from Exelon. Exelon also entered into a
stockholders' agreement among the Company, CEC, Exelon and a subsidiary of Northeast Utilities, whereby Exelon has the right to nominate a member of the Company's Board of Directors. In connection
with the September 2000 agreement, the Company recorded a subscription receivable on the accompanying consolidated balance sheet for the value of the assets, as determined based on an
independent appraisal of the value of the tangible and intangible assets to be received. On August 10, 2001, the Company closed financing of $11,500,000 in the form of an 18% subordinated
convertible note ("Exelon Convertible Note") with Exelon (see Note 5(b)) and modified the September 2000 agreement. The Exelon Convertible Note purchase agreement provided for an
additional $10,000,000 from Exelon, payable either in cash or forgiveness of indebtedness represented by the Exelon Convertible Note on or before April 2002 in lieu of providing the IRU,
services and other cash proceeds required under the September 2000 agreement with Exelon. In February 2002, Exelon delivered notice to the Company to apply the $10 million as
forgiveness of indebtedness under the Exelon Convertible Note. Pursuant to the Exelon Convertible Note purchase agreement, all restrictions

6

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on the common stock issued to Exelon in September 2000 were released. Upon closing the Exelon Convertible Note, the Company recorded a one-time, non-cash charge to
operations of $60,000,000 to write down the subscription receivable related to the Exelon transaction. Prior to the modification of the September 2000 agreement in August 2001, the
Company had received $4,500,000 of cash from Exelon under this agreement.

(3)  Significant Accounting Policies

The accompanying consolidated financial statements reflect the application of certain accounting policies as described below and elsewhere in these notes to
consolidated financial statements.

(a) Principles of Consolidation

The accompanying consolidated financial statements include the results of operations of NEON Communications, Inc. and its wholly-owned subsidiary. All
significant inter-company transactions and balances have been eliminated in consolidation.

(b) Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission, and reflect all adjustments, consisting of only normal recurring adjustments, which, in the opinion of management, are necessary for a fair statement of the results of the
interim periods presented. These financial statements do not include disclosures associated with the annual financial statements and, accordingly, should be read in conjunction with the attached
Management's Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and footnotes for the year ended December 31, 2001 included in the Company's
Form 10-K.

(c) Management Estimates

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

(d) Revenue Recognition

The services the Company provides include short-term leases of lit fiber (fixed amounts of capacity on fiber optic transmission lines that use
optronics equipment installed by the Company) and longer-term leases of dark fiber (fiber optic transmission lines leased without optronics equipment installed by the Company) at
fixed-cost pricing over multi-year terms. Revenues on telecommunications network services are recognized ratably over the term of the applicable lease agreements with
customers, which range from one to 20 years. Amounts billed in advance of the service provided are recorded as deferred revenue. The Company also leases space to customers at its collocation
facilities. Other services revenues includes these collocation service revenues as well as revenues from nonrecurring installation charges and design, engineering and construction services.

In
accordance with Staff Accounting Bulletin ("SAB") No. 101, the Company recognizes revenues from nonrecurring installation charges and design, engineering and construction
services ratably over the multi-year network services terms to which the nonrecurring charges relate.

7

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The
Company has contracts with customers that provide service-level commitments, which may obligate the Company to provide credits against billings if service is interrupted or does not
meet the customer's operating parameters. These amounts are accounted for in cost of sales. To date, credits granted under these arrangements have not been material.

(e) Deferred Revenue

Deferred revenue represents prepayments on dark fiber optic cable leases and amounts related to nonrecurring fees to be recognized over the terms of the customer
fiber optic lease arrangements to which they relate in accordance with SAB No. 101. Lease payments are structured as either prepayments or monthly recurring charges. Prepayments are accounted
for as deferred revenue and recognized over the term of the respective customer fiber optic lease agreement.

(f) Comprehensive Income (Loss)

Statement of Financial Accounting Standards ("SFAS") No. 130,Reporting Comprehensive Income, requires
disclosure of all components of comprehensive income (loss) on an annual and interim basis. Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources. Comprehensive net loss is the same as reported net loss for all periods presented.

(g) Loss per Share

In accordance with SFAS No. 128, Earnings per Share, basic and diluted loss per share were computed by dividing net loss by the weighted average number of
common shares outstanding. Diluted net loss per share in the three months ended March 31, 2002 excludes 1,386,972 shares of restricted common stock and 3,344,332 shares issuable from the
assumed exercise of stock options, as their effect would be antidilutive. Diluted net loss per share in the three months ended March 31, 2001 excludes 2,580,412 shares of restricted stock and
2,230,316 shares issuable from the assumed exercise of stock options, as their effect would be antidilutive.

(h) New Accounting Standards

In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 144,Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement supercedes SFAS No. 121,Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, Reporting the Results of
OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. Under this
statement, it is required that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and it broadens the
presentation of discontinued operations to include more disposal transactions. The provisions of this statement are effective for financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years, with early adoption permitted. Adoption of this statement did not have a material effect on the Company's financial statements.

(4)  Write-Off of Goodwill and Other Intangible Assets

In January 2002, the Company adopted SFAS No. 142,Goodwill and Other Intangible Assets, which
requires that goodwill and other intangible assets with indefinite lives no longer be amortized but

8

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instead be measured for impairment at least annually, or when events indicate that there may be an impairment. In connection with the transition to this new accounting standard, the Company was
required to assess whether there was an indication that goodwill and other intangible assets were impaired as of the date of adoption by comparing the fair value and the carrying value of its assets
and liabilities, including goodwill and other intangible assets. To the extent the carrying amount exceeded the fair value, the Company recorded a transitional impairment loss, which is recognized as
a cumulative effect of a change in accounting principle in the statement of operations. Based on this fair value assessment, the Company has determined that it was required to take a one time,
non-cash charge of approximately $72,312,000, to write off all of its goodwill and other identifiable intangible assets. Amortization expense related to goodwill and other identifiable
intangible assets was approximately $1,806,000 for each of the years ended December 31, 1999, 2000 and 2001.

(5)  Long-term Obligations

(a) 123/4% Senior Notes

In August 1998, NEON Optica sold $180,000,000 of 123/4% Senior Notes due 2008 to the public in the debt offering. The Senior Notes are due
on August 15, 2008 and scheduled interest payments are due on February 15 and August 15 of each year, commencing February 15, 1999. Upon closing of the sale of the Senior
Notes, NEON Optica purchased approximately $72,000,000 in U.S. Government obligations to provide for payment in full of the scheduled interest payments on the Senior Notes through February 15,
2002. Such securities were pledged as security for the benefit of the holders of the Senior Notes, were classified as held-to-maturity and reported at amortized cost and were
included as restricted investments in the accompanying consolidated balance sheets. The Senior Notes are redeemable in whole or in part at the option of NEON Optica at any time on or after
August 15, 2003 at the following
redemption prices expressed as a percentage of principal plus accrued interest through the date of redemption:

Period

Redemption
Price2003

106.375
%2004

104.2502005

102.125Thereafter

100.000


In
the event of a change in control, as defined, each holder of the notes will be entitled to require NEON Optica to purchase all or a portion of such holder's Senior Notes at a purchase
price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase.

The
Senior Notes are unsecured obligations and rankpari passuin right of payment with all existing and future indebtedness of NEON
Optica that is not subordinated by its terms in right of payment and priority to the Senior Notes and is senior in right-of-payment to all future subordinated indebtedness of
NEON Optica.

In
connection with this financing, NEON Optica incurred approximately $6,300,000 of issuance costs. These costs have been classified as other assets in the accompanying consolidated
balance sheet and are being amortized, as additional interest expense, over the term of the Senior Notes.

9

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(b) 18% Subordinated Convertible Notes

On June 15, 2001, the Company closed financing of $15,000,000 in the form of an 18% subordinated convertible note ("NU Convertible Note") with Mode 1
Communications, Inc., a subsidiary of Northeast Utilities ("NU"). The NU Convertible Note matures on August 15, 2008, and scheduled interest payments are due semi-annually
commencing August 15, 2001. The Company has the option to pay the interest in cash, common stock at a price per share of $6.00 or an additional convertible note. The NU Convertible Note and
accrued interest are convertible at any time into common stock, at NU's option, at a price of $6.00 per common share, which represents 2,500,000 shares, subject to certain anti-dilution
provisions.

As
discussed in Note 2, on August 10, 2001, the Company closed financing of $11,500,000 in the form of an 18% subordinated convertible note with Exelon. The Exelon
Convertible Note matures on August 15, 2008, and scheduled interest payments are due semi-annually commencing August 15, 2001. Exelon has the option to receive the interest
in cash or common stock at a price per share of $5.00 or an additional subordinated convertible note. The Exelon Convertible Note and accrued interest are convertible at any time into common stock, at
Exelon's option, at a price of $5.00 per share, which represents 2,300,000 shares of common stock, subject to certain anti-dilution provisions. The Exelon Convertible Note purchase
agreement provides for an additional $10,000,000 from Exelon payable in either cash or forgiveness of the indebtedness represented by the note on or before April 15, 2002. In
February 2002, Exelon delivered notice to the Company to apply the $10,000,000 as forgiveness of indebtedness under the Exelon Convertible Note. This forgiveness was reflected in the Company's
financial statements as a reduction of the note payable and related subscription receivable from Exelon.

The
fair value of the Company's stock on the date the original commitment by Exelon was executed was $5.50 per share. Therefore, the Company recorded a beneficial conversion for the
difference between the conversion price and the fair value of the stock, totaling $1,150,000 as a discount on the Exelon Convertible Note. This non-cash amount is being amortized as
interest expense over the term of the Exelon Convertible Note. Due to the application of the $10,000,000 in debt forgiveness in February 2002, $944,974 of the beneficial conversion discount was
written off as interest expense in the quarter ended March 31, 2002.

(c) 15% Equipment Note

In August 2001, NEON Optica completed an agreement with Nortel Networks, Inc. ("Nortel"), one of its primary optical equipment providers, whereby
NEON refinanced its existing obligations to Nortel through the issuance of a 15% promissory note for $46,250,000. Subsequent to December 31, 2001, the equipment note was sold by Nortel to a
group of financial investors. Interest and principal payments under the equipment note are due quarterly beginning September 30, 2001 through June 30, 2003. NEON has elected not to make
its December 31, 2001 and March 31, 2002 payments under this note. The Company has not received a waiver of these payments and has been declared in default. As a result, the note holders
have the option to demand immediate payment of the remaining principal and accrued interest due under the note, which total approximately $43.5 million. If the note holders elect to accelerate
such payments, this action would also trigger a cross-acceleration provision under NEON
Optica's Senior Notes. To date, the note holders have not sought to accelerate the outstanding note balance. As a result of the default, the entire balance of the 15% equipment note has been reflected
as short-term in the accompanying consolidated financial statements.

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(6)  Contingencies

Certain claims arising in the ordinary course of business are pending against the Company. In the opinion of management, these claims are not expected to have a
material effect on operations.

(7)  Concentration of Credit Risk and Significant Customers

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short-term
investments and accounts receivable. The Company has not experienced significant losses related to receivables from any individual or groups of customers or any specific industry or geographic region.
Due to these factors, management believes there is no additional credit risk inherent in the Company's accounts receivable. For the three months ended March 31, 2001 and 2002, one customer at
the end of each period represented 13% and 12%, respectively, of the Company's revenues. At December 31, 2001 and 2002, two customers at the end of each period represented 46% and 24%,
respectively, of the Company's accounts receivable.

(8)  Segment Disclosure

SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information,requires certain
financial and supplementary information to be disclosed on an annual and interim basis for each reportable operating segment of an enterprise. Operating segments are defined as components of an
enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources
and in assessing performance. The Company's chief operating decision maker is the Chief Executive Officer of the Company.

The
Company operates in one business segment, the provision of advanced optical networking solutions. The Company analyzes and reports revenues based on lit fiber, dark fiber,
collocation and other services. The Company does not allocate for management reporting or segment reporting purposes its cost of revenues and property and equipment, which represent the primarily
operating costs, and communications network and equipment that support its revenues. Similarly, selling, general
and administrative expenses are not allocated to revenue components for management or segment reporting purposes.

Management
utilizes several measurements to evaluate its operations and allocate resources. However, the principal measurements are consistent with the Company's financial statements.
The accounting policies of the segments are the same as those described in Note 3. All of the Company's revenues and assets are located in the United States.

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Revenue
information for the Company's segments is as follows:

|          |                      | Three Months Ended
March 31,
|--------- | -------------------- | ----------------------------
|
|Revenues: |                      |                             
|          | Lit fiber leases     |                             
|          | Dark fiber leases    |                             
|          | Collocation services |                             
|          | Other services(1)    |                             
|          |                      |                             
|          |                      | Total revenues              
|          |                      |                             

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement

This Quarterly Report on Form 10-Q includes 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. All statements, other than statements of historical facts, included or incorporated in this prospectus regarding our strategy, future
operations, financial position, future revenues, projected costs, prospects, plans and objectives of management are forward-looking statements. The words "anticipates," "believes," "estimates,"
"expects," "intends," "may," "plans," "projects," "will," "would" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these
identifying words. We cannot guarantee that we actually will achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our
forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important
factors in the cautionary statements included in this report, particularly under the heading "Risk Factors," that we believe could cause actual results or events to differ materially from the
forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may
make. We do not assume any obligation to update any forward-looking statements.

References
in this document to "we," "us," "our" and "the Company" refer, to, NEON Communications, Inc. ("NEON Communications"), its wholly owned subsidiary, NEON
Optica, Inc. ("NEON Optica", formerly NorthEast Optic Network, Inc.), and NEON Optica's subsidiaries.

Overview

We are a holding company whose principal asset is all of the outstanding shares of the capital stock of NEON Optica. NEON Optica acts as the primary operating
entity, generating revenue primarily through the leasing of capacity on our network. In addition, under our agreement with Consolidated Edison Communications, Inc. ("CEC") dated
September 14, 2000, NEON Communications is the holder
of indefeasible rights of use in certain fiber optic filaments in the Northeast region, as well as certain interconnections and telecommunications facilities in and around New York City, upon delivery
of such assets by CEC pursuant to the terms of this agreement.

We
own and operate a technologically advanced, high-bandwidth fiber optic network providing capacity on a wholesale basis to telecommunications service providers, including
local, long distance and wireless telephone companies and Internet service providers. Our network currently extends from Portland, Maine to Washington, D.C. Under our agreement with CEC, we are
working to further expand our network in and around New York City. We also intend to further expand our network south of New York City in the future. Our customers can connect directly to our network
at multiple locations in the larger cities we serve and also in smaller communities along our network's routes.

To
date we have experienced net losses and negative cash flow from operating activities. Since our inception, our principal activities included building our network, developing our
business plans, hiring management and other key personnel and negotiating and executing customer contracts. We expect to continue to generate net losses and negative overall cash flow for the
foreseeable future as we expand our operations. At the same time, we are projecting an operating loss of approximately $3 million for 2002 and expect to begin generating positive EBITDA
(earnings before interest, taxes, depreciation and amortization) by the latter part of 2002. See "Liquidity and Capital Resources."

Our
network service revenues include short-term leases of lit fiber and longer-term leases of dark fiber at fixed-cost pricing over
multi-year terms. Other services revenues include collocation services at our facilities as well as nonrecurring design, engineering, and construction services. We generally

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receive fixed monthly payments from our customers for the leasing of capacity on our network and the use of collocation facilities and recognize revenues ratably over the term of the applicable
customer agreement. Design, engineering, and construction services revenues are non-refundable and generally recognized ratably over the term of the related network services arrangement
(generally ranging from one to twenty years).

Our
costs consist primarily of cost of revenues, selling, general and administrative expenses, depreciation and amortization, and interest expense. Cost of revenues relates to lease
payments for fiber optic facilities, operations and maintenance costs, right of way fees and property taxes. Selling, general and administrative expenses relate to expenses in connection with sales,
marketing, operations and administration, including personnel, advertising and promotions, office facilities and management and information technology. Depreciation and amortization expense is
associated with the build-out of our network, as well as goodwill, in 2001 (see Note 4 to the financial statements) from our reorganization on July 8, 1998. Interest expense
relates to interest on our $180,000,000 123/4% Senior Notes Due 2008, subordinated convertible notes payable to Northeast Utilities and Exelon, and a 15% equipment note payable, as
described in Note 5 to the financial statements included in this Quarterly Report.

Results of Operations

Revenues increased by $2,529,496, or 47%, to $7,924,063 for the three months ended March 31, 2002 compared to $5,394,567 for the three months ended
March 31, 2001. Revenues in the first quarter of 2002 were generated by recurring lease services of $7,122,516 and other service revenues of $801,547 which consists of collocation revenues and
nonrecurring revenues related to design, engineering, and construction. The primary reason for the increase was the growth in booking and provisioning of customer orders for additional network
services. The largest area of growth was lit services, which increased by $1,995,516 or 57% to $5,521,916 for the three months ended March 31, 2002 compared to $3,526,400 for the three months
ended March 31, 2001. Lit services represented 76% and 78%, respectively, of recurring lease revenues for the three months ended March 31, 2001 and 2002. Dark services revenue grew by
44% to $1,600,600 in the three months ended March 31, 2002 compared to $1,110,734 for the three months ended March 31, 2001.

Cost
of revenues totaled $4,460,107 for the three months ended March 31, 2002, an increase of 10% as compared to the $4,058,365 for the three months ended March 31, 2001.
The increase in cost of revenues reflects our overall growth in business volume during 2002. As a percentage of revenues, cost of revenues decreased to 56% for the three months ended March 31,
2002, compared to 75% for 2001. The improvement in cost of revenues as a percentage of revenues reflects our revenue growth and improving network utilization.

Selling,
general and administrative expenses ("SG&A") decreased 27% to $5,159,268 for the three months ended March 31, 2002 compared to $7,047,875 for the three months ended
March 31, 2001. As a percentage of revenues, SG&A expenses decreased to 65% for the three months ended March 31, 2002, compared to 131% for 2001. The improvement in SG&A expenses as a
percentage of revenues reflects our continued focus on operating efficiencies and overall cost management.

Depreciation
and amortization expense increased 28% to $5,256,195 for the three months ended March 31, 2002, compared to $4,094,273 for the three months ended March 31,
2001. This increase reflects the expansion of our communications network in our Northeast and Mid-Atlantic service areas.

Interest
and other income decreased 65% to $200,427 for the three months ended March 31, 2002 compared to $576,413 for the three months ended March 31, 2001. This decrease
was due primarily to lower cash and investment balances during 2002 compared to 2001.

Interest
and other expense increased by 79% to $9,347,015 for the three months ended March 31, 2002 compared to $5,207,778 for the three months ended March 31, 2001.
Interest expense primarily

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relates to NEON Optica's $180 million 123/4% Senior Notes Due 2008 and 15% equipment note, as well as NEON's 18% subordinated convertible notes. The increase in interest expense
during the three
months is a result of interest on the convertible notes and the equipment note payable, all of which were issued mid-2001, and the write-off of the beneficial conversion
discount discussed in Note 5(b) to the financial statements.

For
the three months ended March 31, 2002, we recorded a net loss of $88,410,006, including the effect of a one-time, non-cash charge of $72,311,911 to
write-off all of our goodwill and other intangible assets as a result of the adoption of SFAS No. 142, which is discussed more fully in Note 4 to the financial statements.
These results compare to a net loss of $14,437,311 for the three months ended March 31, 2001. The increase in net loss is primarily attributable to the one-time $72,312,000
non-cash charge and the other factors discussed above.

Liquidity and Capital Resources

Our operations have required substantial capital investment for the design, construction and development of our network and the purchase of telecommunications
equipment. We expect to continue to have substantial capital requirements in connection with (i) the expansion and improvement of our existing network, (ii) the connection of additional
buildings and customers to our network, (iii) the purchase of additional telecommunication equipment, and (iv) additional expenses required to operate and maintain existing facilities.
Capital expenditures during the three months ended March 31, 2001 and 2002 totaled approximately $13.8 and $3.7 million, respectively. We have funded a substantial portion of our
expenditures through our public offerings of equity and debt completed on August 5, 1998, which resulted in net proceeds to us of approximately $218,000,000 (after deducting expenses), of which
$72,000,000 was placed in escrow to cover the semi-annual interest payments on our 123/4% Senior Notes through February 15, 2002, as well as additional convertible
debt issuances totaling $26,500,000 in 2001 and vendor financing.

The
substantial capital investment required to build our network has resulted in negative cash flow after investing activities over the last three years. This negative cash flow after
investing activities is a result of the requirement to build a substantial portion of our network before we can connect revenue generating customers. Although we plan to focus our future capital
spending primarily on construction and deployment of the network to support customer demands, we expect to continue to experience negative cash flow after investing activities for the foreseeable
future. Accordingly, our ability to continue this expansion will be limited by our current capital resources, including new commitments for funding resulting from the discussions discussed below,
until sufficient cash flow after investing activities is generated.

Net
cash used in operating activities was $13,837,241 and $12,252,480 for the three months ended March 31, 2001 and 2002, respectively. Net cash used in operations for the three
months ended March 31, 2002 decreased compared to the three months ended March 31, 2001 as a result of business volume growing at a greater rate than operating costs, improved network
utilization, cost management, and a greater focus on up-front payments from customers, as reflected by the growth of our deferred revenue.

Cash used in investing activities totaled $9,370,684 and $3,333,713 for the three months ended March 31, 2001 and 2002, respectively. Our capital expenditures have consisted
primarily of construction and deployment of telecommunications equipment to build and expand our communications network in the Northeast and Mid-Atlantic regions to support customer
demands.

Cash
flow provided by financing activities was $13,701,204 and $10,424,136 for the three months ended March 31, 2001 and 2002, respectively. Cash flow from financing activities in
the first quarter of 2001 and 2002 were generated from the release of the restricted cash placed in escrow in connection with our 1998 initial public offering of NEON Optica's 123/4%
Senior Notes Due 2008 and cash

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received under our agreements with CEC and Exelon. All proceeds from the release of the restricted cash were used to pay our interest payments due under NEON Optica's Senior Notes.

We
anticipate that we will continue to experience negative cash flow as we expand our network, deploy telecommunications electronic equipment and market our services to an expanding
customer base, even as we focus on more customer-financed expansion activities. For the foreseeable future, cash provided by operations will not be sufficient to fund operations (including servicing
our outstanding debt) and the expansion and development of our network in the Northeast and Mid-Atlantic regions. As a result, we will require additional financing through some combination
of commercial bank borrowings, leasing, vendor financing, strategic alliances and sale of equity or debt securities if we are to complete our expansion as currently planned. As of March 31,
2002, we had approximately $7,400,000 in unrestricted cash and cash equivalents compared to approximately $12,600,000 as of December 31, 2001. As discussed below, we are in discussions to
arrange additional funding which we believe will provide sufficient cash flow to cover operations and capital expenditures for the foreseeable future.

On
December 6, 2001, we announced that we had retained the services of Credit Suisse First Boston ("CSFB") as our financial advisor to explore potential financing options and to
evaluate other strategic alternatives, including debt restructuring, in order to position us for growth in the year 2002 and beyond. In order to conserve cash for operations during this process, we
elected not to make the December 31, 2001 and March 31, 2002 payments on NEON Optica's 15% equipment note, which would have totaled approximately $14.6 million. As a result, under
the terms of the note, the note holders have the option to accelerate payments due under the note, which total approximately $43.5 million. If the note holders elect to accelerate such
payments, this action would also trigger a cross-acceleration provision under NEON Optica's Senior Notes. We have not received a waiver for non-payment of amounts due under the note, but
to date, the note holders have not sought to accelerate the outstanding note balance. In February 2002, we announced that we have been in discussions with a group of Senior Note holders
(collectively, "Holders") regarding a possible restructuring of NEON Optica's Senior Notes. The Holders, in the aggregate, own more than two-thirds of the outstanding
principal amount of NEON Optica's Senior Notes. In addition, we are in discussions with the holders of NEON Optica's 15% equipment note and our 18% subordinated convertible notes regarding the
restructuring of their debt. Any such restructuring will likely be pursued in bankruptcy in order to bind all debt holders to the terms of the restructuring plan. We are also in discussions with the
Holders regarding an equity investment.

If
we complete the restructuring of our debt and receive the additional financing discussed above, we expect to have funds sufficient to finance our operations and capital expenditures
for the foreseeable future based on our improving results from operations, our ability to manage capital expenditures and our available cash. However, any such restructuring could result in our
outstanding equity securities being rendered worthless. Management believes that it will be able to complete its restructuring and capital raising activities during 2002 though we cannot assure you
that we will complete the restructuring of our debt and financing discussed above. If we are unable to complete these transactions, we would be forced to downsize our operations and capital
expenditures, delay our network expansion and customer growth plans and obtain alternative financing in order to be able to continue our operations. If we are unable to obtain such alternative
financing, we will be required to file for bankruptcy protection, which would have a material adverse effect on our financial results.

Our
capital requirements may vary based upon the timing and the success of implementation of our business plan and as a result of regulatory, technological and competitive developments
or if demand for our services or cash flow from operations is less than or more than expected, our plans or projections change or prove to be inaccurate, we make acquisitions, or we accelerate
deployment of our network or otherwise alter the schedule or targets for the implementation of our business plan. The expectations of required future capital expenditures are based on our current
estimates.

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New Accounting Standards

In August 2001, the FASB issued SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived
Assets. This Statement supercedes SFAS No. 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30,Reporting the Results of
OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. Under this
Statement, it is required that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and it broadens the
presentation of discontinued operations to include more disposal transactions. The provisions of this Statement are effective for financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years, with early adoption permitted. Adoption of this Statement did not have a material effect on our financial statements.

RISK FACTORS

There are a number of important factors that could affect our business and future operating results, including, without limitation, the factors set forth below,
and the information contained in this Quarterly Report on Form 10-Q should be read in light of such factors. Any of the following factors could have a material adverse effect on our
business and our future operating results.

Risk Relating to Our Financial Situation

Our ability to continue as a "going concern" is uncertain.

To date, we have funded our operations through both private and public debt and equity offerings. We have experienced significant net losses throughout our
history and are currently experiencing cash flow problems. As a result, we will need additional financing in order to fund our operations and carry out our business plan. As discussed in "Liquidity
and Capital Resources," we have been in discussions with
our debt holders regarding additional funding as well as a restructuring of our debt. Any such restructuring will likely be pursued in bankruptcy in order to bind all debt holders to the terms of the
restructuring plan.

We
have incurred cumulative net losses since our inception of approximately $291,400,000, including a one-time non-cash charge of $60,000,000 recorded in the
third quarter of 2001and a one-time non-cash charge of approximately $72,300,000 in the first quarter of 2002. As of March 31, 2002, we had approximately $7,400,000 in
unrestricted cash and cash equivalents. We are currently in default under the terms of NEON Optica's 15% equipment note. As a result, the note holders have the option to demand immediate payment of
the remaining principal and accrued interest due under the note, which total approximately $43.5 million. If the note holders elect to accelerate such payments, this action would also trigger a
cross-acceleration provision under NEON Optica's $180 million 123/4% Senior Notes. We have not received a waiver for non-payment of amounts due under the note, but to
date, the note holders have not sought to accelerate the outstanding note balance. If the note holders choose to accelerate the note balance, we could be forced to file for protection under federal
bankruptcy laws. In addition, one or more of these holders could take action to pursue their contractual and legal rights against us, including, for example, filing a lawsuit against us, initiating an
action to foreclose on the collateral securing such debt or filing an involuntary petition for bankruptcy. If any of these actions are taken, there can be no assurance that we will be able to achieve
a satisfactory restructuring of our capital structure or that we will be able to continue as a going concern.

Upon
completion of the restructuring of our debt and receipt of the additional financing discussed above, we expect to have funds sufficient to finance our operations and capital
expenditures for the foreseeable future based on our improving results from operations, our ability to manage capital

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expenditures and our available cash and other sources of funding. Management believes that these transactions will be completed. However, we cannot assure you that we will complete the restructuring
of our debt and financing discussed above. If we are unable to complete these transactions, we would be forced to downsize our operations and capital expenditures, delay our network expansion and
customer growth plans and obtain alternative financing in order to be able to continue our operations. If we are unable to obtain such alternative financing, we will be required to file for bankruptcy
protection, which would have a material adverse effect on our financial results.

Risks Relating to Our Business Strategy

Our business strategy depends upon anticipated customer demand for our services, and our failure to obtain customers for our services at profitable rates would
adversely affect our business results.

Our
ability to become profitable depends upon our ability to secure a market for our services and obtain service contracts with our communications customers. Many of our targeted
customers may also be our potential competitors. If our services are not satisfactory or cost competitive, our targeted customers may utilize other providers where available, or construct their own
networks, which would reduce their need for our services and create future sources of competition for us.

Intense competition in the telecommunications industry from a broad range of competitors may prevent us from obtaining customers and require us to lower
prices.

The
telecommunications industry is highly competitive. We face substantial competition from companies with significantly greater financial and other resources whose capacity is
interchangeable with the capacity we offer, including incumbent local telephone companies, national long-haul and regional carriers, dark fiber providers and metro carriers. In addition,
potential competitors capable of offering services similar to those offered by us include other communications service providers that own and operate their own networks and equipment, including cable
television companies, electric utilities, microwave carriers, satellite carriers, wireless communication system operators and end-users with private communications networks. Three of our
principal stockholders, Northeast Utilities, New England Business Trust (an affiliate of Energy East Corporation) and Consolidated Edison Communications, Inc., each own or have rights, through
one or more affiliates, to fibers in the cable that includes a portion of our network, which permits each of them to compete directly with us in the future if they use these fibers for purposes other
than their corporate requirements. Our rights-of-way are non-exclusive so that other service providers (including the utilities themselves) could install competing
networks using the same rights-of-way.

Because we offer a relatively narrow range of services in comparison to some of our competitors, we cannot achieve revenues comparable to companies offering a
broader array of services and may be at a competitive disadvantage with respect to the services we offer.

Unlike
more diversified telecommunications companies, we derive and expect to continue to derive substantially all of our revenues from the leasing of fiber optic capacity on a wholesale
basis to our customers, most of whom are telecommunications companies and Internet service providers serving end-users. The limited nature of our current services could limit our potential
revenues and result in our having lower revenues than competitors which provide a wider array of services. While we are currently attempting to expand the breadth of our product offering, we cannot
assure you that any new product offerings will achieve market acceptance.

Due to rapidly evolving technologies in our industry and the uncertainty of future government regulation, our current business plan may become obsolete and we may
be unable to maintain a competitive position if we are unable to successfully adjust our products, services and business strategies as required.

In
the future, we may become subject to more intense competition due to the development of new technologies, an increased supply of domestic and international transmission capacity, the
consolidation

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in the industry among local and long distance service providers and the effects of deregulation resulting from the Telecommunications Act of 1996. The introduction of new services and products or the
emergence of new technologies may change the cost or increase the supply of services and products similar to those that we provide. We cannot predict which of many possible future product and service
offerings will be crucial to maintain our competitive position or what expenditures will be required to develop profitably and provide such products and services. Prices for our services to carriers
specifically, and interstate services in general, may decline over the next several years due primarily to price competition to the extent that network providers continue to install networks that
compete with our network. We also believe that there will be technological advances that will permit substantial increases in the transmission capacity of both new and existing fiber.

A limited number of customers has accounted for a significant percentage of our revenues and accounts receivable.

Historically,
a limited number of customers has accounted for a significant percentage of our revenues and accounts receivable. In 1999, three customers accounted for 18%, 16% and 13% of
revenues, respectively. In 2000, two customers accounted for 16% and 10% of revenues, respectively. In 2001, one customer accounted for 10% of revenues. For the three months ended March 31,
2001 and 2002, one customer at the end of each period represented 13% and 12%, respectively of our revenues. At December 31, 2001 and March 31, 2002, two customers at the end of each
period represented 46% and 24%, respectfully, of our accounts receivable. We anticipate that our results of operations in any given period will continue to depend to a significant extent upon revenues
from a relatively small number of customers.

Our success depends on our retention of certain key personnel, our ability to hire additional qualified personnel and the maintenance of good labor
relations.

We
depend on the performance of our executive officers and key employees. In particular, our senior management has significant experience in the telecommunications industry and the loss
of any of them could negatively affect our ability to execute our business strategy. Our future success also depends on our continuing ability to identify, hire, train and retain other highly
qualified technical, operations, sales, marketing, financial, legal, human resource, and managerial personnel as we expand our network. Competition for such qualified personnel is high. The recent
significant drop in our stock price has greatly reduced or eliminated the value of stock options held by our employees, making it more difficult to motivate and retain employees. Our business will be
harmed if we cannot attract and retain the necessary qualified personnel.

Risks Relating to the Expansion and Operation of Our Fiber Optic Network

The successful, timely and cost-effective expansion of our fiber optic network within the Northeast and
Mid-Atlantic regions is crucial to our business plan, and depends upon numerous factors beyond our control.

Our
ability to achieve our strategic objectives depends in large part upon the successful, timely and cost-effective expansion of our fiber optic network within the Northeast
and Mid-Atlantic regions. Among the major factors that could affect our success are:



Either
of these factors, or other factors, over which we have little control, could significantly hinder our ability to complete our network and execute our business plan. To date,
Consolidated

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Edison Communications has not delivered certain network assets in a timely fashion under our original agreements with them. Furthermore, the September 11, 2001 terrorist attacks on the World
Trade Center buildings in New York City resulted in massive damage to the utility infrastructure in southern Manhattan. As a result, we expect that Consolidated Edison will be required to divert
resources from the construction of Consolidated Edison Communication's network in New York City to the repair and reconstruction of the utility infrastructure in the vicinity of the disaster site. The
construction of Consolidated Edison Communication's network has already been substantially delayed, and any further delay could harm our business.

The expenditures necessary to sufficiently expand our fiber optic network and develop our services in order to satisfy the current and forecasted demands of our
customers may surpass our available cash, and we may be unable to obtain additional capital to develop our services on a timely basis and on acceptable terms.

Although
we have expended significant resources in building our network and the development of our customer base, we will require significant additional cash in order to expand our
geographic coverage and the range of services which we can offer throughout our service area in order to be competitive in our market. These expenditures for expansion and for more services, together
with associated operating expenses, will reduce our cash flow and profitability until we establish an adequate customer base throughout all of our coverage areas. To date, we have expended substantial
amounts on construction
of our network from the proceeds of our financing activities and, accordingly, we have generated negative cash flow. If we are unable to complete our financing transactions with the group of note
holders, we will need to obtain additional capital to carry out our planned expansion of our services and to increase our service territory, and we cannot assure you that additional financing will be
available to us or, if available, that we can obtain it on a timely basis and on acceptable terms.

We obtain some of the key components used in our fiber optic network from a single source or a limited group of suppliers, and the partial or complete loss of one
of these suppliers could disrupt our operations and result in a substantial loss of revenues.

We
depend upon a small group of suppliers for some of the key components and parts used in our network. In particular, we purchase cable from OFS Fitel Cable and from Corning Cable
Systems, and we purchase fiber optic equipment from Nortel Networks, Cisco Systems and Sycamore Networks. Any delay or extended interruption in the supply of any of the key components, changes in the
pricing arrangements with our suppliers and manufacturers or delay in transitioning a replacement supplier's product into our network could disrupt our operations.

Our fiber optic network, which is our sole source of revenue, is vulnerable to physical damage, catastrophic outages, power loss and other disruptions beyond our
control, and the occurrence of any of these failures could result in immediate loss of revenues, payment of outage credits to our customers and, more importantly, the loss of our customers' confidence
and our business reputation.

Our
success in marketing our services to our customers requires that we provide high reliability, high bandwidth and a secure network. Our network and the infrastructure upon which it
depends are subject to physical damage, power loss, capacity limitations, software defects, breaches of security and other disruptions beyond our control that may cause interruptions in service or
reduced capacity for customers. Our agreements with our customers typically provide for the payment of outage related credits (a predetermined reduction or offset against our lease rate when a
customer's leased facility is non-operational or otherwise does not meet certain operating parameters) or damages in the event of a disruption in service. These credits or damages could be
substantial and could significantly decrease our net revenues. Significant or lengthy outages would also undermine our customers' confidence in our fiber optic network and injure our business
reputation.

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Risks Relating to Our Rights-of-Way

We could lose the contract rights upon which we rely to operate and maintain our network in the event of bankruptcy proceedings relating
to one or more of the third parties that have granted to us the right to build and operate our network using their rights-of-way.

The
construction and operation of significant portions of our fiber optic network depend upon contract rights known as indefeasible rights-of-use. Indefeasible
rights-of-use are commonly used in the telecommunications industry, but remain a relatively new concept in property law. Although indefeasible
rights-of-use give the holder a number of rights to control the relevant rights-of-way or fiber optic filaments, legal title remains with the grantor of
the rights. Therefore, the legal status of indefeasible rights-of-use remains uncertain, and our indefeasible rights-of-use might be voidable in the
event of bankruptcy of the grantor. If we were to lose an indefeasible right-of-use in a key portion of our network, our ability to service our customers could become seriously
impaired and we could be required to incur significant expense to resume the operation of our fiber optic network in the affected areas.

Despite our existing rights-of-way, we may be forced to make substantial additional payments to the affected landowners or remove our
network from their property, which would significantly harm our business and our results of operations.

Our
indefeasible rights-of-use depend on the grantor's interest in the property on which our network is located. To the extent that a grantor of an indefeasible
right-of-use has a limited easement in the underlying property and not full legal title, the adequacy of our indefeasible rights-of-use could be
challenged in court. For example, in May 1999, AT&T entered into a costly settlement of a class action suit brought by landowners who asserted that the railroad-based
rights-of-way upon which AT&T had relied to build portions of its fiber optic network were insufficient to permit AT&T to use these rights-of-way for
telecommunications purposes.

We
believe that it is possible that a number of landowners could make similar claims against us based on our use of utility rights-of-way for our
telecommunications purposes. We believe that the easements granted by a substantial number of landowners to grantors of our indefeasible rights-of-use are similar in scope to
those with respect to which claims have been asserted, and we cannot guarantee that claims will not be made in the future.

Because significant portions of our fiber optic network are constructed upon rights-of-way controlled by electric utility companies which
generally place the operation of their electrical facilities ahead of the operation of our fiber optic network, we may be unable to construct and operate our fiber optic network in the affected areas
without periodic interruptions and delays caused by the day-to-day operations of these utility companies.

Our
rights-of-way agreements with Northeast Utilities, Central Maine Power and Consolidated Edison Communications, Inc. contain provisions which
acknowledge the right of these companies to make the provision of electrical services to their own customers their top priority. These companies are required only to exercise "reasonable care" with
respect to our facilities and are otherwise free to take whatever actions they deem appropriate with respect to ensuring or restoring service to their electricity customers, any of which actions could
impair operation of our network. In addition, some of our ongoing operational efforts are constrained by the limited ability of the utilities to de-energize segments of their transmission
and distribution facilities in order to permit construction crews to work safely. We have experienced construction delays in the past as a result of such inability to timely de-energize
certain segments and we may experience such delays in the future.

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Risks Relating to Government Regulation

Federal regulation of the telecommunications industry is changing rapidly and we could become subject to unfavorable new rules and
requirements which could impose substantial financial and administrative burdens on us and interfere with our ability to successfully execute our business strategies.

Regulation
of the telecommunications industry is changing rapidly. Existing and future federal, state, and local governmental regulations will greatly influence our viability.
Consequently, undesirable regulatory changes could adversely affect our business, financial condition and results of operations.

Revenues from telecommunications provided to end-users, which represent a portion of our revenues, are subject to contributions to the FCC's universal
service fund.

While
we generally do not deal directly with end-users of telecommunications and are therefore generally exempt from contributing to the FCC's Universal Service Fund, the FCC
treats certain Internet service providers purchasing telecommunications as end-users. Our revenues from providing telecommunications to end-users, which represent a portion of
our revenues, are therefore subject to an assessment of 6.9% for the fourth quarter of 2001 and 6.8% in the first quarter of 2002. Such assessments vary and may increase from quarter to quarter. If
the annual contribution amount would be less than $10,000, we would qualify for ade minimusexemption from contribution to the Fund. Our required
contributions to the Universal Service Fund for the quarters ended March 31, 2001 and 2002 were approximately $13,000 and $15,000, respectively.

If we become subject to regulation as a common carrier in the future, we would be subject to additional regulatory requirements.

We
do not believe that we are currently a "common carrier," but that status could change based on differing interpretations of current regulations, regulatory changes and changes in the
way we conduct our business. If we become regulated as a common carrier by the FCC, we would have to publicize the rates for our services and submit other reports, and would be required to contribute
to federal funds including, but not limited to, those established for Telecommunications Relay Services, for the management of the North American Numbering Plan and for Local Number Portability. These
regulatory requirements could impose substantial burdens on us. The Telecommunications Act of 1996 requires incumbent local telephone companies to provide elements of their networks to competitors on
an unbundled basis. The FCC determined that dark fiber is a network element that incumbent local telephone companies must provide to others. The availability of this alternative source of supply may
increase competition among providers of dark fiber services and could decrease the demand for our dark fiber.

Regulatory changes could affect relationships between us, our competitors and customers in unforeseeable ways that could reduce our business
opportunities.

Our
relationships with the telecommunications companies with whom we deal are all affected by our respective positions in the FCC's regulatory scheme. Accordingly, changes in federal
telecommunications law may affect our business by virtue of the interrelationships that exist among us and many of these regulated telecommunications entities. It is difficult for us to forecast at
this time how these changes will affect us in light of the complex interrelationships that exist in the industry and the different levels of regulation.

State regulation of companies providing telecommunications services varies substantially from state to state and we may become subject to burdensome and
restrictive state regulations as we expand our fiber optic network into a broader geographic area, which could interfere with our operations and our ability to meet our strategic
objectives.

We
may be subject to state regulation, which can vary substantially from state to state. NEON Optica's subsidiaries in New York and Connecticut have obtained authority to provide
intrastate

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telecommunications services on a competitive common carrier basis. Therefore, these subsidiaries are subject to the obligations that applicable law places on all similarly certificated common
carriers including the filing of tariffs, state regulation of certain service offerings, pricing, payment of regulatory fees and reporting requirements. The costs of compliance with these regulatory
obligations, or any of the regulatory requirements of other states to which we might become subject, could have a material adverse effect on our operations. Moreover, some of our
rights-of-way depend on our status as a common carrier in these states, and if that status were to be successfully challenged, those rights-of-way could
be terminated.

Municipal regulation of our access to public rights-of-way is subject to change and could impose administrative burdens that would
adversely affect our business.

Local
governments typically retain the ability to license public rights-of-way, subject to the federal requirement that local governments may not prohibit the
provision of telecommunications services. Changes in local government regulation could impose additional costs on our business and limit our operations. Local authorities affect the timing and costs
associated with our use of public rights-of-way.

Risks Relating to Our Capitalization

Because we have a large amount of debt, we will be required to devote a significant portion of our cash flow to pay interest and we may
not have sufficient remaining cash flow to meet our other obligations and execute our business strategies.



Our
high degree of debt could have adverse consequences to the holders of NEON Communications' equity securities or NEON Optica's debt securities. If we are unable to restructure such
debt, a substantial portion of our cash flow will be dedicated to the payment of interest associated with our debt, and such cash flow may be insufficient to meet our payment obligations on our debt
in addition to paying other obligations as they become due. In addition, due to our leverage ratio, our ability to obtain any necessary financing in the future for completion of our network or other
purposes may be impaired. Also, certain of our future borrowings may be at variable rates of interest that could cause us to be vulnerable to increases in interest rates. Because we are highly
leveraged, we may be at a competitive disadvantage to our competitors and may be especially vulnerable to a downturn in our business or the economy generally, or to delays in or increases in the costs
of operating and constructing our network.

On
December 6, 2001, we announced that we had retained the services of Credit Suisse First Boston ("CSFB") as our financial advisor to explore potential financing options and to
evaluate other strategic alternatives, including debt restructuring, in order to position us for growth in the year 2002 and beyond. We have been in discussions with the holders of NEON
Communications' and NEON Optica's
debt securities regarding the restructuring of their debt. Any such restructuring will likely be pursued in bankruptcy in order to bind all debt holders to the terms of the restructuring plan. Any
such restructuring could result in our outstanding equity securities being rendered worthless. Management believes that it will be able to complete its restructuring activities during 2002. However,
there can be no assurance that these activities will be successful.

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In connection with NEON Optica's substantial public debt and our high degree of debt, we and NEON Optica have agreed to significant restrictions on our operations
that limit our ability to enter into major corporate transactions, and as a result we may be unable to pursue potential corporate opportunities which would benefit us and our
stockholders.

The
indenture under which NEON Optica's debt was issued imposes significant operating and financing restrictions on us and our present and future subsidiaries. These restrictions affect,
and in certain cases significantly limit or prohibit, among other things, our ability to incur indebtedness, pay dividends and make other restricted payments, create liens, issue and sell capital
stock of subsidiaries, guarantee indebtedness, sell assets or consolidate, merge or transfer all or substantially all of our assets. Furthermore, our subordinated convertible debt with Exelon and Mode
1 limit our ability to incur additional indebtedness. These limitations could prevent us from exploiting corporate opportunities as they arise, which could be detrimental to the interests of our
stockholders.

As
discussed above, NEON Optica's debt would be included in our debt restructuring efforts.

Our public debt is thinly traded and is currently trading substantially below its face amount. As a result, we are currently pursing a restructuring plan for this
debt in order to reduce future cash interest and principal payments.

We
are aware that our 123/4% Senior Notes due 2008 issued by NEON Optica are thinly traded and are currently trading substantially below their face amount. As discussed
above, we retained the services of CSFB as our financial advisor to explore strategic alternatives, including debt restructuring, in order to position us for growth in the year 2002 and beyond. We
have been in discussions with the holders of NEON Communications' and NEON Optica's debt securities regarding the restructuring of their debt. Any such restructuring will likely be pursued in
bankruptcy in order to bind all debt holders to the terms of the plan. Management believes that it will be able to complete its restructuring activities during 2002. However, there can be no assurance
that these activities will be successful.

Our stock price is volatile.

The stock market in general, and the stock prices of telecommunications companies and other technology-based companies in particular, have experienced significant
volatility that often has been unrelated to the operating performance of any specific public companies. The market price of our common stock has fluctuated widely in the past year and is likely to
continue to fluctuate in the future. Factors that may have a significant impact on the market price of our common stock include:



Our
future earnings and stock price may be subject to significant volatility. Shortfalls in our revenues or earnings or delays in network build-out in any given period
relative to the levels and schedule expected by securities analysts could immediately, significantly and adversely affect the trading price of our common stock. In the past, following periods of
volatility in the market price of a company's securities, class action litigation has often been instituted against the subject company. Litigation of this type could result in substantial costs and a
diversion of our management's attention

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and resources which could, in turn, have a material adverse effect on our business and financial condition.

The liquidity of our common stock could be adversely affected if we are de-listed from the Nasdaq National Market.

From
time to time, our common stock has failed to maintain a minimum bid price of $3.00 per share. On March 1, 2002, we received a standard notification from the Nasdaq National
Market that we have failed to meet its requirements for continued listing. We have 90 days from the notice date to regain compliance by having a minimum bid price for our common stock at $3.00
or greater for a minimum period of 10 consecutive business days during the 90-day compliance period. We do not expect to maintain a minimum bid price above $3.00 and therefore expect that
our common stock will be de-listed from the Nasdaq National Market.

In
the event that we are de-listed from the Nasdaq National Market, shares of our common stock may trade in the over-the-counter market in the
so-called "pink sheets" or the OTC Bulletin Board. Consequently, selling our common stock would be more difficult because smaller quantities of shares would likely be bought and sold,
transactions could be delayed, and security analysts' coverage of us may be reduced. These factors could result in lower prices and larger spreads in the bid and ask prices for shares of our common
stock.

A
delisting from the Nasdaq National Market may have a material adverse effect on our stock price and our ability to raise capital through the issuance of additional equity. A delisting
from the Nasdaq National Market may also make us ineligible to use Form S-3 to register shares of our common stock with the SEC, therefore, making it more expensive to register
shares of our common stock.

If our common stock is de-listed from the Nasdaq National Market, it may be subject to the "penny stock" regulations which may affect the ability of
our stockholders to sell their shares.

If
Nasdaq de-lists our common stock, it could become subject to Rule 15g-9 under the Exchange Act, which imposes additional sales practice requirements on
broker-dealers that sell such securities to persons other than established customers and "accredited investors" (generally, an individual with a net worth in excess of $1,000,000 or an annual income
exceeding $200,000, or $300,000 together with his or her spouse's income). For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and
receive the purchaser's written consent to the transaction prior to the sale. Consequently, the rule may adversely affect the ability of the holders of our common stock to sell their shares in the
secondary market. Regulations of the SEC define "penny stock" to be any non-Nasdaq equity security that has a market price (as therein defined) of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction of penny
stock, of a disclosure schedule prepared by the SEC relating to the penny stock market. The SEC also requires disclosure about commissions payable to both the broker-dealer and its registered
representative and information regarding current quotations of the securities. Finally, the SEC requires that monthly statements be sent disclosing recent price information for the penny stock held in
the account and information on the limited market in penny stocks. If our common stock were
subject to the rules on penny stocks, the market liquidity for our common stock could be severely and adversely affected.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk related to changes in interest rates, but do not believe that this exposure is material. We do not use derivative financial
instruments for speculative or trading purposes.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Certain claims arising in the ordinary course of business are pending against us. In the opinion of management, these claims are not expected to have a material
effect on operations.

Item 3. Defaults Under Senior Securities

As described elsewhere in this Report, NEON Optica has elected not to make its December 31, 2001 and March 31, 2002 payments under its
$46.3 million 15% equipment note, which would have totaled approximately $14.6 million. The Company has not received a waiver of these payments and has been declared in default. As a
result, the note holders have the option to demand immediate payment of the remaining principal and interest due under the note, which total approximately $43.5 million.

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

|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1         |  | Amended and Restated Certificate of Incorporation of NEON Communications, Inc. (incorporated by reference to Exhibit 3.1 to the Quarterly Report of NEON Communications, Inc. and NEON Optica, Inc. on Form 10-Q for the
quarter ended September 30, 2000).                                
|3.2         |  | Restated Certificate of Incorporation of NEON Optica, Inc. (formerly known as "NorthEast Optic Network, Inc.") (incorporated by reference to Exhibit 3.2 to the Quarterly Report of NEON Communications, Inc. and NEON
Optica, Inc. on Form 10-Q for the quarter ended September 30, 2000).
|3.3         |  | By-Laws of NEON Communications, Inc. (incorporated by reference to Exhibit 3.02 to NEON Communications, Inc.'s Registration Statement on Form S-4, Registration No. 333-38600).                                                                                                            
|3.4         |  | Amended and Restated Bylaws of NEON Optica, Inc. (incorporated by reference to Exhibit 3.4 to NEON Optica, Inc.'s Registration Statement on Form S-1, Registration No. 333-53441).                                                                                                         
|4.1         |  | Specimen certificate for the Common Stock of NEON Communications, Inc. (incorporated by reference to Exhibit 4.01 to the NEON Communications, Inc.'s Registration Statement on Form S-4, Registration No.
333-38600).                                                                      
|4.2         |  | Form of Indenture Agreement relating to NEON Optica, Inc.'s 123/4% Senior Notes due 2008 (incorporated by reference to Exhibit 4.2 to NEON Optica, Inc.'s Registration Statement on Form S-1,
Registration No. 333-53441).                                                                 
|4.3         |  | Form of NEON Optica, Inc.'s 123/4% Senior Notes due 2008 (incorporated by reference to Exhibit 4.3 to NEON Optica, Inc.'s Registration Statement on Form S-1, Registration No.
333-53441).                                                                                                 
|4.4         |  | Form of Collateral Pledge and Security Agreement relating to NEON Optica, Inc.'s 123/4% Senior Notes due 2008 (incorporated by reference to Exhibit 4.4 to NEON Optica, Inc.'s Registration
Statement on Form S-1, Registration No. 333-53441).                                            

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 15th day of May, 2002.

|NEON COMMUNICATIONS, INC. |  |                                                                                                              
|------------------------- |  | -------------------------------------------------------------------------------------------------------------
|By:                       |  | /s/STEPHEN E. COURTERStephen E. Courter Chairman and Chief Executive Officer                                 
|By:                       |  | /s/WILLIAM A. MARSHALLWilliam A. Marshall Chief Financial Officer and Treasurer (Principal Financial
Officer)

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