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

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FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001

OR

|/ / | 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 000-31531

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NEON Communications, Inc.(a Delaware corporation)

Exact Name of Registrant as Specified in Its Charter

MassachusettsState of Incorporation

04-3523408IRS Employer Identification Number2200 West Park Drive
Westborough, MassachusettsAddress of principal executive offices

01581Zip Code


(508) 616-7800Telephone Number, Including Area Code, of Registrant's Principal Executive Offices

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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 registrants: (1) have 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) have been subject to such filing requirements for the past
90 days. Yes /x/  No / /

At
August 1, 2001 there were 21,335,061 shares of NEON Communications, Inc. common stock outstanding.

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TABLE OF CONTENTS

|                                                                                               |  | Page
|---------------------------------------------------------------------------------------------- |  | ----
|PART I. FINANCIAL INFORMATION                                                                 
|Item 1.  Financial Statements                                                                  |  |     
|NEON Communications, Inc. Condensed Consolidated Balance Sheets (Unaudited)                    |  | 3   
|NEON Communications, Inc. Condensed Consolidated Statements of Operations (Unaudited)          |  | 4   
|NEON Communications, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited)          |  | 5   
|NEON Communications, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited)     |  | 6   
|Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 13  
|Item 3.  Quantitative and Qualitative Disclosures about Market Risk                            |  | 23  
|PART II. OTHER INFORMATION                                                                    
|Item 1.  Legal Proceedings                                                                     |  | 24  
|Item 2.  Changes in Securities and Use of Proceeds                                             |  | 24  
|Item 4.  Submission of Matters to a Vote of Security Holders                                   |  | 24  
|Item 5.  Other Information                                                                     |  | 24  
|Item 6.  Exhibits and Reports on Form 8-K                                                      |  | 25  
|Signatures                                                                                     |  | 26  
|Exhibit Index                                                                                  |  | 27  

2

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PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

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

|                                                                            |                                              | December 31,
2000                                                                                                                              |                           | June 30,
2001 |        
|--------------------------------------------------------------------------- | -------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | ------------- | -------
|Assets                                                                      |                                              |                                                                                                                                                |                           |               |        
|Current Assets:                                                             |                                              |                                                                                                                                                |                           |               |        
|                                                                            | Cash and cash equivalents                    |                                                                                                                                                | $                         | 20,650,158    |        
|                                                                            | Short-term investments                       |                                                                                                                                                |                           |              |        
|                                                                            | Short-term restricted investments            |                                                                                                                                                |                           | 24,452,374    |        
|                                                                            | Accounts receivable, net                     |                                                                                                                                                |                           | 2,725,732     |        
|                                                                            | Prepaid expenses and other current assets    |                                                                                                                                                |                           | 413,764       |        
|                                                                            |                                              |                                                                                                                                                |                           |               |        
|                                                                            |                                              |                                                                                                                                                | Total current assets      |               |        
|                                                                            |                                              |                                                                                                                                                |                           |               |        
|Property and Equipment, net                                                 |                                              |                                                                                                                                                | 161,425,167               |               |        
|Restricted Investments                                                      |                                              |                                                                                                                                                | 10,851,258                |               |        
|Intangible and Other Assets, net                                            |                                              |                                                                                                                                                | 61,418,238                |               |        
|                                                                            |                                              |                                                                                                                                                |                           |               |        
|                                                                            |                                              | $                                                                                                                                              | 281,936,691               |               | $      
|                                                                            |                                              |                                                                                                                                                |                           |               |        
|Liabilities                                                                 |                                              |                                                                                                                                                |                           |               |        
|Current Liabilities:                                                        |                                              |                                                                                                                                                |                           |               |        
|                                                                            | Accounts payable                             |                                                                                                                                                | $                         | 21,559,425    |        
|                                                                            | Accounts payable  Communications network    |                                                                                                                                                |                           | 11,874,368    |        
|                                                                            | Accrued expenses                             |                                                                                                                                                |                           | 13,526,077    |        
|                                                                            | Accrued right-of-way fees, related party     |                                                                                                                                                |                           | 679,531       |        
|                                                                            | Deferred revenue                             |                                                                                                                                                |                           | 735,105       |        
|                                                                            |                                              |                                                                                                                                                |                           |               |        
|                                                                            |                                              |                                                                                                                                                | Total current liabilities |               |        
|                                                                            |                                              |                                                                                                                                                |                           |               |        
|Deferred revenue, net of current portion                                    |                                              |                                                                                                                                                | 3,989,670                 |               |        
|Long-term accounts payable  Communications network, net of current portion |                                              |                                                                                                                                                | 13,650,642                |               |        
|Long-term obligations                                                       |                                              |                                                                                                                                                | 180,000,000               |               |        
|Contingencies (Note 7)                                                      |                                              |                                                                                                                                                |                           |               |        
|Stockholders' Equity:                                                       |                                              |                                                                                                                                                |                           |               |        
|                                                                            | Unrestricted Common stock, $0.01 par value  |                                                                                                                                                |                           |               |        
|                                                                            |                                              | Authorized  60,000,000 shares; Issued and outstanding  18,753,870 and 18,754,649 shares at December 31, 2000 and June 30, 2001, respectively |                           |               | 187,539
|                                                                            | Restricted common stock (Note 2)             |                                                                                                                                                |                           | 25,804        |        
|                                                                            | Subscription receivable (Note 2)             |                                                                                                                                                |                           | (167,431,217  | )      
|                                                                            | Additional paid-in capital                   |                                                                                                                                                |                           | 289,445,281   |        
|                                                                            | Accumulated deficit                          |                                                                                                                                                |                           | (86,305,534   | )      
|                                                                            |                                              |                                                                                                                                                |                           |               |        
|Total stockholders' equity                                                  |                                              |                                                                                                                                                | 35,921,873                |               |        
|                                                                            |                                              |                                                                                                                                                |                           |               |        
|                                                                            |                                              | $                                                                                                                                              | 281,936,691               |               | $      
|                                                                            |                                              |                                                                                                                                                |                           |               |        

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

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

|                                                      |                                     | Three Months Ended
June 30, |            | Six Months Ended
June 30, |  
|----------------------------------------------------- | ----------------------------------- | --------------------------- | ---------- | ------------------------- | -
|
|Revenues:                                             |                                     |                             |            |                           |  
|                                                      | Network service                     |                             | $          | 2,309,920                 |  
|                                                      | Other service                       |                             |            | 532,640                   |  
|                                                      |                                     |                             |            |                           |  
|                                                      | Total revenues                      |                             |            | 2,842,560                 |  
|                                                      |                                     |                             |            |                           |  
|Expenses:                                             |                                     |                             |            |                           |  
|                                                      | Cost of revenues                    |                             |            | 2,557,998                 |  
|                                                      | Selling, general and administrative |                             |            | 3,054,676                 |  
|                                                      | Depreciation and amortization       |                             |            | 2,882,130                 |  
|                                                      |                                     |                             |            |                           |  
|                                                      | Total expenses                      |                             |            | 8,494,804                 |  
|                                                      |                                     |                             |            |                           |  
|                                                      | Loss from operations                |                             |            | (5,652,244                | )
|                                                      |                                     |                             |            |                           |  
|Other Income (Expense):                               |                                     |                             |            |                           |  
|                                                      | Interest and other income           |                             |            | 1,358,036                 |  
|                                                      | Interest expense                    |                             |            | (5,304,200                | )
|                                                      |                                     |                             |            |                           |  
|                                                      | Total other expense, net            |                             |            | (3,946,164                | )
|                                                      |                                     |                             |            |                           |  
|Net Loss                                              |                                     | $                           | (9,598,408 | )                         | $
|                                                      |                                     |                             |            |                           |  
|Basic and Diluted Loss per Share                      |                                     |                             | $(0.58     | )                         |  
|                                                      |                                     |                             |            |                           |  
|Basic and Diluted Weighted Average Shares Outstanding |                                     |                             | 16,655,581 |                           |  
|                                                      |                                     |                             |            |                           |  

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)

|                                                  |                                                                                            | Six Months Ended
June 30,                             |                                          
|------------------------------------------------- | ------------------------------------------------------------------------------------------ | ----------------------------------------------------- | -----------------------------------------
|
|Cash Flows from Operating Activities:             |                                                                                            |                                                       |                                          
|                                                  | Net loss                                                                                   |                                                       | $                                        
|                                                  | Adjustments to reconcile net loss to net cash provided by (used in) operating activities  |                                                       |                                          
|                                                  |                                                                                            | Depreciation and amortization                         |                                          
|                                                  |                                                                                            | Amortization of deferred financing and interest costs |                                          
|                                                  |                                                                                            | Gain on sale of property and equipment                |                                          
|                                                  |                                                                                            | Changes in assets and liabilities                    |                                          
|                                                  |                                                                                            |                                                       | Accounts receivable                      
|                                                  |                                                                                            |                                                       | Prepaid expenses and other current assets
|                                                  |                                                                                            |                                                       | Accounts payable                         
|                                                  |                                                                                            |                                                       | Accrued expenses                         
|                                                  |                                                                                            |                                                       | Deferred revenue                         
|                                                  |                                                                                            |                                                       |                                          
|                                                  |                                                                                            |                                                       |                                          
|                                                  |                                                                                            |                                                       |                                          
|Cash Flows from Investing Activities:             |                                                                                            |                                                       |                                          
|                                                  | Sales (purchases) of short-term investments, net                                           |                                                       |                                          
|                                                  | Proceeds from sale of property and equipment                                               |                                                       |                                          
|                                                  | Purchases of property and equipment                                                        |                                                       |                                          
|                                                  | (Increase) decrease in intangible and other assets                                         |                                                       |                                          
|                                                  |                                                                                            |                                                       |                                          
|                                                  |                                                                                            |                                                       |                                          
|                                                  |                                                                                            |                                                       |                                          
|Cash Flows from Financing Activities:             |                                                                                            |                                                       |                                          
|                                                  | (Decrease) increase in accounts payable  communications network                           |                                                       |                                          
|                                                  | Decrease in restricted cash and investments                                                |                                                       |                                          
|                                                  | Proceeds from issuance of convertible debt                                                 |                                                       |                                          
|                                                  | Proceeds from subscription receivable                                                      |                                                       |                                          
|                                                  | Payment of common stock issuance costs                                                     |                                                       |                                          
|                                                  | Proceeds from exercise of common stock options                                             |                                                       |                                          
|                                                  |                                                                                            |                                                       |                                          
|                                                  |                                                                                            |                                                       |                                          
|                                                  |                                                                                            |                                                       |                                          
|Net Decrease in Cash and Cash Equivalents         |                                                                                            |                                                       | (4,132,793                               
|Cash and Cash Equivalents, beginning of period    |                                                                                            |                                                       | 4,768,389                                
|                                                  |                                                                                            |                                                       |                                          
|Cash and Cash Equivalents, end of period          |                                                                                            | $                                                     | 635,596                                  
|                                                  |                                                                                            |                                                       |                                          
|Supplemental Disclosure of Cash Flow information: |                                                                                            |                                                       |                                          
|                                                  | Cash paid during the period for                                                           |                                                       |                                          
|                                                  |                                                                                            | Interest                                              |                                          
|                                                  |                                                                                            |                                                       |                                          
|                                                  |                                                                                            | Taxes                                                 |                                          
|                                                  |                                                                                            |                                                       |                                          

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

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NEON COMMUNICATIONS, INC.        Notes to Condensed Consolidated Financial Statements        June 30, 2001

(1)  Operations and Reorganization

NEON Communications, Inc. (the Company or NEON) and its subsidiaries are engaged in the ownership, management, operation and installation of fiber optic
telecommunication networks in the Northeast and Mid-Atlantic regions of the United States.

To
date, the Company has recorded revenues principally from network transport contracts and related services and has incurred cumulative operating losses of approximately
$112,800,000. 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.

In
September 2000, the Company completed its second reorganization, under the terms of which NEON Communications, Inc. became the parent holding company of Northeast
Optic Network, Inc. At the same time, Northeast Optic Network, Inc. changed its name to NEON Optica, Inc. The common stock of NEON Communications, Inc. is traded on the
Nasdaq National Market under the symbol "NOPT", with NEON Optica, Inc., the operating entity, as a wholly owned subsidiary of NEON Communications, Inc. The names were changed to reflect
the fact that NEON is now doing business in both the Northeast and the Mid-Atlantic regions.

(2)  Network Connectivity Purchase in Exchange for Stock

On September 14, 2000, the Company closed an agreement with Consolidated Edison Communications, Inc. (CEC) under which the Company will receive
an indefeasible right to use (IRU) in 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 will also provide connectivity from NEON's backbone system to its local distribution facilities in its service area. This communications network will operate
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 has also 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 the related optronic equipment and for the cost of POP rental, POP operating expenses, optronic equipment maintenance and sales and marketing expenses.

On
September 14, 2000, the Company also closed an agreement with Exelon Capital Partners (Exelon). Under the terms of the agreement with Exelon, the Company was to receive an
IRU in fiber optic facilities on Exelon's network. The agreement also provided that Exelon would deliver connectivity from NEON's backbone system to its local distribution facilities in its service
area. In addition to the IRUs and intangible assets, Exelon was to contribute to the Company cash totaling $8,050,000 over the period from September 14, 2000 to April 15, 2005 for the
build-out of local POPs and the related optronic equipment and for the cost of POP rental, POP operating expenses, optronic equipment maintenance and sales and marketing expenses. As of
June 30, 2001, the Company has received approximately $3,300,000 from Exelon under this agreement. As discussed below, on August 10, 2001, as part of its recent financing transaction,
the Company released Exelon from its remaining unfulfilled obligations under the September 2000 agreement, including the obligation to deliver the IRUs.

As
part of the agreements with CEC and Exelon, the Company has issued 2,476,735 shares of common stock to CEC and 2,131,143 shares of common stock to Exelon, of which all but 44% of
this

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stock was restricted as of June 30, 2001, with such restrictions to lapse upon the completion of certain milestones over the terms of the agreements, as detailed in the contracts with CEC and
Exelon. This transaction has resulted in CEC and Exelon owning approximately 10.5% and 9.1%, respectively, of NEON's fully diluted common stock. Pursuant to a stockholders' agreement entered into
among the Company, CEC, Exelon and a subsidiary of Northeast Utilities, CEC and Exelon have each nominated a member of the Company's Board of Directors.

As
of June 30, 2001, the Company had not yet received all of the assets to be provided by CEC and Exelon under the agreements and, therefore, has recorded a subscription
receivable on the accompanying consolidated balance sheets for the value of these assets. The Company has received an appraisal of the value of the tangible and intangible assets received in
consideration for the stock provided under these agreements. 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 IRUs granted under these agreements.

On
August 10, 2001, the Company closed a financing of $11,500,000 in the form of an 18% subordinated convertible note with Exelon Enterprises Management ("Exelon Enterprises")
(see Note 4(b)). The subordinated note purchase agreement provides for an additional $10,000,000 from Exelon Enterprises, payable either in cash or forgiveness of indebtedness represented by
the note, on or before April 2002 in lieu of providing the IRUs, services and other cash proceeds required under the September 2000 agreements with Exelon. As a condition to the
financing, the Company agreed to release all restrictions on the common stock issued to Exelon in September 2000. The Company has evaluated the impact of this transaction on its accounting for
the agreements and related issuances of common stock to Exelon in September 2000 and determined that it would result in a one-time, non-cash charge to the Company's
consolidated statement of operations of approximately $60,000,000 and a
writedown of the subscription receivable upon closing of the transaction. This charge will be reflected in the Company's third quarter financial statements.

(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., its wholly owned subsidiary, NEON
Optica, Inc. ("NEON Optica") and NEON Optica's wholly owned subsidiaries. All significant intercompany 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

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Financial Condition and Results of Operation and the financial statements and footnotes for the year ended December 31, 2000 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 long-term leases of dark fiber (fiber optic transmission lines leased without optronics equipment
installed by the Company) and shorter-term leases of lit fiber (fixed amounts of capacity on fiber optic transmission lines that use 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 (see Note 3(e)). The Company also leases space at its
facilities (collocation services). Other service revenues includes these collocation service revenues as well as revenues from nonrecurring installation charges and design, engineering and
construction services.

In
December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101,Revenue
Recognition, which provides guidance on applying generally accepted accounting principles to recognition of revenues. The Company adopted SAB No. 101 in the fourth
quarter of 2000. Under the guidance of 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. Prior to the issuance of SAB
No. 101, revenues for these nonrecurring services were generally recognized as services were performed because the Company had no further obligations. The Company adopted this new accounting
guidance as of January 1, 2000 and all periods presented have been restated to reflect the effects of SAB No. 101.

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.

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(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 and six months ended June 30, 2001 excludes 2,580,412 shares of restricted common stock and 2,541,480 and 2,286,980 shares
issuable from the assumed exercise of stock options, respectively, as their effect would be antidilutive. Diluted net loss per share in the three and six months ended June 30, 2000 excludes
1,559,013 and 1,473,302 shares issuable from the assumed exercise of stock options, respectively, as their effect would be antidilutive.

(h)  Reclassifications

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

(i)  New Accounting Standards

In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141,Business
Combinations. SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. This statement is
effective for all business combinations initiated after June 30, 2001. This standard is not expected to impact the Company upon implementation.

In
July 2001, the FASB issued SFAS no. 142,Goodwill and Other Intangible Assets. This statement applies to goodwill and
intangible assets acquired after June 30, 2001, as well as goodwill and intangible assets previously acquired. Under this statement goodwill as well as certain other intangible assets,
determined to have an infinite life, will no longer be amortized, instead these assets will be reviewed
for impairment on a periodic basis. This statement is effective for the Company for the first quarter in the fiscal year ended December 2002. As of June 30, 2001, the Company has
approximately $43,100,000 of goodwill and other intangible assets. Management is currently evaluating the impact that this statement will have on the Company's financial statements.

(4)  Long-Term Obligations

(a)  123/4% Senior Notes

In August 1998, the Company closed a financing of $180,000,000 in the form of 123/4% Senior Notes due 2008 with the public through a 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, 2000. Upon
closing of the sale of the Senior Notes, the Company purchased approximately $72,000,000 in U.S. Government obligations with an average maturity of 645 days to provide for payment in full of
the first seven scheduled interest payments on the Senior Notes. Such securities are pledged as security for the benefit of the holders of the Senior Notes, are classified as

9

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held-to-maturity and reported at amortized cost and are included as restricted investments in the accompanying consolidated balance sheets. The Senior Notes are redeemable in
whole or in part at the option of the Company 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 the Company 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 rank pari passuin right of payment with all existing and future indebtedness of the Company 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 the Company.

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

(b)  18% Subordinated Convertible Notes

On June 15, 2001, the Company closed a 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 will mature on August 15, 2008, and scheduled interest payments will be 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.

On
August 10, 2001, the Company closed a financing of $11,500,000 in the form of an 18% subordinated convertible note ("Exelon Convertible Note") with Exelon Enterprises. The
Exelon Convertible Note will mature on August 15, 2008, and scheduled interest payments will be due semi-annually commencing August 15, 2001. Exelon Enterprises will have the
option to receive the interest in cash, common stock at a price per share of $5.00 or an additional subordinated convertible note. The Exelon Convertible Note is convertible at any time into common
stock, at Exelon Enterprises' option, at a price of $5.00 per common share, which represents 2,300,000 shares, subject to certain anti-dilution provisions. The Exelon Convertible Note
purchase agreement provides for an additional $10,000,000 from Exelon Enterprises payable in either cash or forgiveness of the indebtedness represented by the note on or before April 15, 2002
in lieu of providing the IRUs, services and other cash proceeds required under its September 2000 agreements with the Company. As a condition to the financing, the Company agreed to release all
restrictions on the common stock issued to Exelon in September 2000.

10

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(5)  Preferred Stock

The Restated Certificate of Incorporation authorizes the issuance of up to 2,000,000 shares of preferred stock, $0.01 par value per share. Under the terms of
the Certificate of Incorporation, the Board of Directors is authorized, subject to any limitations prescribed by law, without stockholder approval, to issue such shares of preferred stock in one or
more series. Each series of preferred stock shall have rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights,
redemption privileges and liquidation preferences, as shall be determined by the Board of Directors. At June 30, 2001, no such shares are issued and outstanding.

(6)  Sale of IRU to CEC

In January 2001, the Company entered into an agreement with CEC in which the Company granted CEC a 20-year IRU in certain fibers and a
36-month lease of certain other fibers along a route segment between White Plains, NY and New York City. The 36-month lease will convert into a 17-year IRU at the
end of the lease period upon a one-time payment of $1. The agreement provides for an up-front payment from CEC of $4,000,000 and an additional $3,172,000 payable monthly over
the 36-month lease period. A portion of the fibers provided to CEC will be included in the IRU granted from CEC to the Company under the September 2000 stock transaction (see
Note 2). The Company provided the fiber under this agreement to CEC in May, 2001. The Company has accounted for this transaction as a fixed asset sale and sales-type lease and has
recorded a gain in the second quarter of 2001 of approximately $1,515,000, which is included in other income in the condensed consolidated statement of operations.

(7)  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.

(8)  Concentration of Credit Risk and Significant Customers

SFAS No. 105,Disclosure of Information about Financial Instruments with Off Balance Sheet Risk and Financial Instruments with
Concentration of Credit Risk, requires disclosure of any significant off-balance sheet and credit risk concentration. 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, no additional credit risk is believed by management to be inherent in the Company's accounts
receivable. For the three months ended June 30, 2000 and 2001, two customers and two customers, respectively, represented 35% and 22% of revenues, respectively. At December 31, 2000 and
June 30, 2001, one customer and one customer, respectively, represented 21% and 10% of accounts receivable, respectively.

(9)  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

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assessing performance. The Company's chief operating decision maker is the Chief Executive Officer of the Company.

The
Company analyzes segment reporting based on dark fiber, lit fiber, collocation and other services. Dark fiber, lit fiber, collocation and other services are reported as revenue
only. 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,
communications network and equipment that support each segment. Similarly, selling, general and administrative expenses are not allocated to the segments 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.

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

|          |                      | Three Months Ended
June 30, |                | Six Months Ended
June 30,
|--------- | -------------------- | --------------------------- | -------------- | -------------------------
|
|Revenues: |                      |                             |                |                          
|          | Dark fiber leases    |                             | $              | 813,532                  
|          | Lit fiber leases     |                             |                | 1,496,388                
|          | Collocation services |                             |                | 328,743                  
|          | Other services(1)    |                             |                | 203,897                  
|          |                      |                             |                |                          
|          |                      |                             | Total revenues |                          
|          |                      |                             |                |                          

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(10)  Subsequent Event

In August, the Company signed an agreement with Nortel Networks, Inc. ("Nortel"), one of its primary optical equipment providers, whereby Nortel will
refinance the Company's existing obligations to Nortel through the issuance of a promissory note for $46,250,000, which will accrue interest at 15% annually. Interest and principle payments will be
made quarterly beginning September 30, 2001. All future purchases from Nortel will be made under normal credit terms.

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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 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, is the wholly owned
subsidiary of NEON Communications and 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") which was consummated on September 14, 2000, NEON Communications will be 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 their agreement.

The
services the Company provides include long-term leases of dark fiber (fiber optic transmission lines leased without optronics equipment installed by the Company) and
shorter-term leases of lit fiber (fixed amounts of capacity on fiber optic transmission lines that use optronics equipment) at fixed-cost pricing over multi-year
terms. NEON Optica also leases space at our facilities (collocation services). Other service revenue includes nonrecurring design, engineering and construction services. NEON Optica generally receives
fixed monthly payments from its customers for the leasing of capacity on its network and recognizes revenues ratably over the term of the applicable customer agreement.

The
Company owns and operates 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 New York City, and, under our agreement
with CEC, which was consummated on September 14, 2000, we are working to expand our network in and around New York City. 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. From our inception to present, our principal activities included building our network,
developing our business

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plans, hiring management and other key personnel and negotiating and executing customer contracts. We expect to continue to generate net losses and negative cash flow as we expand our operations.
Whether or when we will generate positive cash flow from operating activities will depend on a number of financial, competitive, regulatory, technical, and other factors. See "Liquidity and Capital
Resources".

Our
network service revenues include long-term leases of dark fiber and short-term leases of lit 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 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 and
operations infrastructure, including personnel, advertising costs and promotional activities and management and information technology. Depreciation and amortization expense is associated with the
build-out of our network, as well as goodwill from our reorganization on July 8, 1998. Interest expense relates to interest on our $180,000,000 123/4% Senior Notes
Due 2008 as described in Note 4(a) to the financial statements included in this Quarterly Report.

Results of Operations

Revenues increased by $3,535,188, or 124%, to $6,377,748 in the quarter ended June 30, 2001, compared to $2,842,560 in the quarter ended June 30,
2000. Revenues in the second quarter of 2001 were generated by recurring lease services of $5,876,979 and other service revenue of $500,769, which consists of collocation revenues and nonrecurring
revenues related to design, engineering, and construction. Revenues increased by $6,819,108, or 138%, to $11,772,315 for the six months ended June 30, 2001, compared to $4,953,207 for the six
months ended June 30, 2000. The primary reason for the increase was the growth in demand for our lit services, revenues from which increased by $3,198,748, or 214%, to $4,695,136 in the quarter
ended June 30, 2001, compared to $1,496,388 in the quarter ended June 30, 2000. Lit services represented 53% and 74%, respectively, of recurring lease revenues during the quarters ended
June 30, 2000 and 2001. Dark services revenue grew by 45% to $1,181,843 in the quarter ended June 30, 2001, compared to $813,532 in the quarter ended June 30, 2000.

In
December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101,Revenue
Recognition, which provides guidance on applying generally accepted accounting principles to recognition of revenues. We adopted SAB No. 101 in the fourth quarter of
2000. Under the guidance of SAB No. 101, we recognize revenues from nonrecurring installation charges and design, engineering and construction services ratably over the multi-year
network services terms to which the nonrecurring charges ultimately relate. Prior to the issuance of SAB No. 101, revenues for these nonrecurring services were generally recognized as services
were performed because the Company had no further obligations. We adopted this new accounting guidance as of January 1, 2000 and all periods presented in the condensed consolidated financial
statements have been restated to reflect the effects of SAB No. 101.

Total
cost of revenues for the quarter ended June 30, 2001 was $4,285,318, an increase of 68% as compared to the $2,557,998 in the quarter ended June 30, 2000. This
increase was primarily due to

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additional fiber optic facilities leases and increased network surveillance cost, operations and maintenance costs and property taxes resulting from network expansion in our service territory in the
Northeast and the Mid-Atlantic regions. Total cost of revenues for the six months ended June 30, 2001
was $8,343,683, an increase of 80% as compared to the $4,642,763 in the six months ended June 30, 2000.

Selling,
general and administrative expenses increased 124% to $6,848,162 for the quarter ended June 30, 2001, compared to $3,054,676 in the quarter ended June 30, 2000,
reflecting increased investment in our sales and marketing and operations infrastructure, including personnel, advertising costs and promotional activities, as well as an increase in management and
information technology. Selling, general and administrative expenses increased 150% to $13,896,037 for the six months ended June 30, 2001, compared to $5,563,292 in the six months ended
June 30, 2000. Our headcount increased by 92% from June 30, 2000 to June 30, 2001, from 98 employees as of June 30, 2000 to 188 employees as of June 30, 2001.

Depreciation
and amortization expense increased 51% to $4,356,750 for the quarter ended June 30, 2001, compared to $2,882,130 for the quarter ended June 30, 2000.
Depreciation and amortization expense increased 58% to $8,451,023 for the six months ended June 30, 2001, compared to $5,341,071 for the six months ended June 30, 2000. This increase
resulted from increased capital expenditures related to the expansion of our communications network in our Northeast and Mid-Atlantic service areas.

Interest
and other income increased 49% to $2,024,749 for the quarter ended June 30, 2001, compared to $1,358,036 for the quarter ended June 30, 2000. This increase was
due primarily to a gain on the sale of fixed assets of approximately $1,515,000. Interest and other income decreased 10% to $2,601,162 for the six months ended June 30, 2001, compared to
$2,893,445 for the six months ended June 30, 2000, due to lower cash and investment balances in 2001 compared to 2000.

Interest
expense decreased by seven percent to $4,964,067 in the quarter ended June 30, 2001 from $5,304,200 in the quarter ended June 30, 2000 due to the capitalization
of interest on network expansion projects, which increased from the first quarter of 2000 to the first quarter of 2001. Interest expense decreased by five percent to $10,171,845 for the six months
ended June 30, 2001 from $10,688,475 for the six months ended June 30, 2000. Interest expense primarily relates to our 123/4% Senior Notes Due 2008.

For
the quarter ended June 30, 2001, we recorded a net loss of $12,051,800 compared to a net loss of $9,598,408 for the quarter ended June 30, 2000. For the six months
ended June 30, 2001, we recorded a net loss of $26,489,111 compared to $18,388,949 for the six months ended June 30, 2000. The increase in net loss is primarily attributable to the
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. Capital expenditures during the six months ended June 30, 2000 and 2001 totaled approximately $31,800,000 and $29,500,000, respectively. 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.

We
have funded a substantial portion of these 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 and before deducting $72,000,000 in escrowed funds to cover the first seven semi-annual interest payments on our 123/4%
Senior Notes due 2008).

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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. We expect to continue to experience negative cash
flow after investing activities for the current year due to the continuous expansion and development of our network. Unless we seek and are able to obtain additional capital, our ability to continue
this expansion will be limited by our current capital resources until sufficient cash flow after investing activities is generated.

Net
cash provided by (used in) operating activities was $1,631,227 and $(3,203,284) for the six months ended June 30, 2000 and 2001, respectively. Net cash used in operations
for the six months ended June 30, 2001 was due primarily to additional fiber optic facilities leases and other costs of revenues resulting from network expansion in our service territory, as
well as an investment in network design, operations and administrative personnel to support our network expansion and the provisioning of our growing sales backlog.

Cash
used in investing activities totaled $5,393,070 and $27,838,086 in the six months ended June 30, 2000 and 2001, respectively. This decrease has been due to the uses of
cash described above. Our uses of cash have consisted primarily of payment of the cost of construction and deployment of telecommunications equipment to build and expand our communications network.

Cash
flow (used in) provided by financing activities was $(370,950) and $26,463,485 in the six months ended June 30, 2000 and 2001, respectively. Cash flow from financing
activities in the first six months of
2001 was generated from the issuance of $15,000,000 of subordinated convertible notes from us to Northeast Utilities bearing interest at a rate of 18% and due 2008, cash received under our agreements
with CEC and Exelon, and the release of the restricted cash placed in escrow in connection with the initial public offering of our 123/4% Senior Notes Due 2008. All proceeds from the
release of the restricted cash were used to pay our interest payments due under our 123/4% Senior Notes Due 2008. Cash flow used in financing activities in the first six months of 2000
related primarily to the payment for optical equipment necessary to expand our communications network.

We
anticipate that we will continue to experience negative cash flow as we expand our network, construct networks, deploy telecommunications electronic equipment and market our
services to an expanding customer base. Cash provided by operations will not be sufficient to fund the expansion and development of our system in the Northeast and Mid-Atlantic regions. As
a result, we intend to use our cash on hand and the remaining net proceeds of our 1998 public offerings, and will have to raise 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 June 30, 2001, we had
approximately $16,072,000 in unrestricted cash on hand, compared to approximately $20,650,000 in unrestricted cash on hand as of December 31, 2000.

On
June 15, 2001, we closed a financing of $15,000,000 in the form of a subordinated convertible note, which bears interest at 18% ("NU Convertible Note"), with Mode 1
Communications, Inc., a subsidiary of Northeast Utilities ("NU"). The NU Convertible Note will mature on August 15, 2008, and scheduled interest payments will be due semi-annually
commencing August 15, 2001. We have 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.

On
August 10, 2001, we closed a financing of $11,500,000 in the form of a subordinated convertible note, which also bears interest at 18% ("Exelon Convertible Note"), with
Exelon Enterprises Management ("Exelon Enterprises"). The Exelon Convertible Note will mature on August 15, 2008, and scheduled interest payments will be due semi-annually
commencing August 15, 2001. Exelon Enterprises will have the option to receive the interest in cash, common stock at a price

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per share of $5.00 or an additional subordinated convertible note. The Exelon Convertible Note is convertible at any time into common stock, at Exelon Enterprises' option, at a price of $5.00 per
common share, which represents 2,300,000 shares, subject to certain anti-dilution provisions. The Exelon Convertible Note purchase agreement provides for an additional $10,000,000 from
Exelon Enterprises payable in either cash or forgiveness of the indebtedness represented by the note on or before April 15, 2002 in lieu of providing the IRUs, services and other cash proceeds
required under its September 2000 agreements with us. As a condition to the financing, the Company agreed to release all restrictions on the common stock issued to Exelon in
September 2000. We have evaluated the impact of this transaction on our accounting for the agreements and related issuances of common stock to Exelon in September 2000 and determined
that it would result in a one-time, non-cash charge to our consolidated
statement of operations of approximately $60,000,000 and a writedown of the subscription receivable upon closing of the transaction. This charge will be reflected in our third quarter financial
statements.

In
August, we also signed an agreement with Nortel Networks, Inc., one of our primary optical equipment providers, whereby Nortel will refinance our existing obligations to
them through the issuance of a promissory note for $46,250,000, which will accrue interest at 15% annually. Interest and principle payments will be made quarterly beginning September 30, 2001.
All future purchases from Nortel will be made under normal credit terms.

On
April 12, 2001, we filed a registration statement with the Securities and Exchange Commission relating to the possible offering from time to time of up to $25,000,000 of our
common stock, preferred stock, debt securities or warrants to purchase any of the foregoing. On August 1, 2001, we filed an amendment to this registration statement naming Ramius Securities LLC
as underwriter, relating to the sale by us from time to time of shares of common stock that could result in maximum gross proceeds to us of $7,552,998, provided that the number of shares of our common
stock to be sold pursuant to this arrangement will not exceed 1,875,000 shares. This registration statement has not yet been declared effective by the Securities and Exchange Commission.

After
giving effect to a reduction in capital expenditures, we will have funds sufficient to finance our operations into the second quarter of 2002.

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.

New Accounting Standards

In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141,Business
Combinations. SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. This statement is
effective for all business combinations initiated after June 30, 2001. This standard is not expected to impact us upon implementation.

In
July 2001, the FASB issued SFAS no. 142,Goodwill and Other Intangible Assets. This statement applies to goodwill and
intangible assets acquired after June 30, 2001, as well as goodwill and intangible assets previously acquired. Under this statement goodwill as well as certain other intangible assets,
determined to have an infinite life, will no longer be amortized, instead these assets will be reviewed for impairment on a periodic basis. This statement is effective for the first quarter in the
fiscal year
ended December 2002. We are currently evaluating the impact that this statement will have on our financial statements.

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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

We have experienced significant net losses throughout our history, and are currently experiencing cash flow problems. As a result, we
may need additional financing in order to fund our operations and carry out our business plan, and if we are unable to obtain this financing, our business may be severely harmed and we may be required
to seek protection from our creditors under the federal bankruptcy laws.

We
have incurred cumulative net losses since our inception of approximately $112,800,000. As of June 30, 2001, we had approximately $16,100,000 in unrestricted cash on hand.

After
giving effect to a reduction in capital expenditures, we will have funds sufficient to finance our operations into the second quarter of 2002. If we are unable to obtain
additional financing, we may be forced to suspend capital expenditures, downsize our operations and delay our network expansion and customer growth plans. As a result, our rate of revenue growth could
cease or slow materially and the fulfillment of our business plan and the date when we might achieve profitability may be substantially delayed.

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, competitive local telephone companies and major long distance companies. 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, or NU, 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.

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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 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 which 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.

Historically,
a limited number of customers has accounted for a significant percentage of our revenues. 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. We anticipate that our results of operations in any given period will continue to depend to a significant
extent upon revenues of a small number of customers.

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 Edison Communications has failed to deliver certain network assets in a timely fashion under our original agreement with it.

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

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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, may 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. We may 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 Lucent-Fitel and from Corning, 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.

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

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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 likely that a number of landowners may make similar claims against us based on our use of utility rights-of-way for our
telecommunications purposes. In fact, some landowners have already asserted claims against us on this basis, and, to date, in two cases, rather than electing to contest the landowners' interpretation
of the scope of the easement, we have made a payment to such landowners to acquire rights-of-way meeting our requirements. 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 additional 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 NU, Central Maine Power Company (a subsidiary of Energy East Corporation) 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.

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.

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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 6.8% for the second and third quarter of 2001. 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.

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, we would have to file tariffs for our services with the FCC 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
Communications Act of 1934 requires incumbent local telephone companies to provide elements of their networks to competitors on an unbundled basis. In a recent decision, 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 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.

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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.

We
are highly leveraged. Our high degree of debt, including our $15,000,000 and $11,500,000 18% subordinated convertible notes due August 15, 2008 and NEON Optica's
$180,000,000 123/4% Senior Notes Due 2008, could have adverse consequences to the holders of NEON Communications' equity securities. Commencing on August 15, 2002, a substantial
portion of our cash flow will be dedicated to
the payment of the $22,950,000 per annum of interest expense associated with our 123/4% Senior Notes Due 2008. Our cash flow may be insufficient to meet our payment obligations on our
debt in addition to paying our 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.

In connection with NEON Optica's substantial public debt, NEON Optica has agreed to significant restrictions on its 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 NEON Communications and its 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. These limitations could prevent us from exploiting
corporate opportunities as they arise, which could be detrimental to the interests of our stockholders.

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.

We
maintain a short-term investment portfolio consisting mainly of corporate debt securities and U.S. government agency discount notes with an average maturity of less
than six months. These held-to-maturity securities are subject to interest rate risk and will fall in value if market interest rates increase. If market interest rates were to
increase immediately and uniformly by 10% from levels that existed at June 30, 2001, the fair value of the portfolio would decline by an immaterial amount. Because we have the ability to hold
our fixed income investments until maturity, we would not expect our operating results or cash flows to be materially affected.

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PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

None.

Item 2.  Changes in Securities and Use of Proceeds

On June 15, 2001, we and Mode 1 Communications, Inc., one of our principal stockholders and a subsidiary of Northeast Utilities ("NU"), entered
into a purchase agreement pursuant to which NU purchased from us an 18% subordinated convertible note due 2008 in the principal amount of $15,000,000 (the "NU Note"). NU may convert the NU Note at any
time into shares of our common stock at a conversion price of $6.00 per share, or 2,500,000 shares, subject to certain anti-dilution provisions. The interest payments under the NU Note may
be paid in cash, shares of common stock or additional 18% subordinated convertible notes, at our option. As part of this transaction, we have granted NU certain registration rights with respect to the
shares of our common stock issuable upon conversion of the NU Note.

NU
is an accredited investor as defined in Rule 501 of the Securities Act of 1933. The NU Note was issued in reliance on the exemption from registration set forth under
Rule 506 of the Securities Act of 1933. No underwriters were involved in the foregoing sale of securities.

Item 4.  Submission of Matters to a Vote of Security Holders

At NEON's 2001 Annual Meeting of Stockholders held on July 31, 2001, the following proposals were adopted by the stockholders of NEON by the votes
specified below:

|   |  | Proposal                                                                                                                                                                                                                               |  | For        |  | Against or Withheld |  | Abstain
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------- |  | ------------------- |  | -------
|1. |  | To elect the following nine (9) nominees as directors of NEON: Stephen E. Courter, Victor Colantonio, Katherine E. Dietze, John H. Forsgren, Michael I. German, F. Michael McClain, Donald S. Parker, Peter A. Rust and Gary
D. Simon. |  | 15,074,250 |  | 152,261             |  | 8,073  
|2. |  | To ratify the selection of Arthur Andersen LLP as NEON's independent public accountants for the current fiscal year.                                                                                                                   |  | 15,178,687 |  | 49,537              |  | 6,360  

Item 5.  Other Information

On August 10, 2001, we and Exelon Enterprises Management, or Exelon Enterprises, one of our principal stockholders, entered into a purchase agreement
pursuant to which Exelon Enterprises purchased from us an 18% subordinated convertible note due 2008 in the principal amount of $11,500,000 (the "Exelon Note"). Exelon Enterprises may convert the
Exelon Note at any time into common stock of the Registrant at a conversion price of $5.00 per share, or 2,300,000 shares, subject to certain anti-dilution provisions. The interest
payments under the Exelon Note may be paid in cash, shares of common stock or an additional convertible note, at the option of Exelon Enterprises. The terms of the Exelon Note and the purchase and
sale thereof are more fully set forth in the Subordinated Convertible Note Purchase Agreement attached hereto as Exhibit 10.4 and the form of 18% Subordinated Convertible Note Due 2008 attached
hereto as Exhibit 10.5. Pursuant to a Registration Rights Agreement, attached hereto as Exhibit 10.6, we have granted Exelon Enterprises certain registration rights with respect to the
shares of our common stock issuable upon conversion of the Exelon Note and the shares of our common stock issued to Exelon in September 2000.

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Item 6.  Exhibits and Reports on Form 8-K

|Exhibit No. |  | Description                                                                                                                                                                   
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1*       |  | Subordinated Convertible Note Purchase Agreement by and between the Registrant and Mode 1 Communications, Inc., a subsidiary of Northeast Utilities, dated as of June 15, 2001
|10.2*       |  | Form of 18% Subordinated Convertible Note Due 2008                                                                                                                            
|10.3*       |  | Registration Rights Agreement by and between the Registrant and Mode 1 Communications, Inc., a subsidiary of Northeast Utilities, dated as of June 15, 2001                   
|10.4        |  | Subordinated Convertible Note Purchase Agreement by and between the Registrant and Exelon Enterprises Management, dated as of August 10, 2001                                 
|10.5        |  | Form of 18% Subordinated Convertible Note Due 2008                                                                                                                            
|10.6        |  | Registration Rights Agreement by and between the Registrant and Exelon Enterprises Management, dated as of August 10, 2001                                                    

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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 14th day of August, 2001.

| |  | NEON COMMUNICATIONS, INC.
| |  | -------------------------
| |  | By:                      
| |  | By:                      

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Exhibit Index

|Exhibit No. |  | Description                                                                                                                                                                   
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1*       |  | Subordinated Convertible Note Purchase Agreement by and between the Registrant and Mode 1 Communications, Inc., a subsidiary of Northeast Utilities, dated as of June 15, 2001
|10.2*       |  | Form of 18% Subordinated Convertible Note Due 2008                                                                                                                            
|10.3*       |  | Registration Rights Agreement by and between the Registrant and Mode 1 Communications, Inc., a subsidiary of Northeast Utilities, dated as of June 15, 2001                   
|10.4        |  | Subordinated Convertible Note Purchase Agreement by and between the Registrant and Exelon Enterprises Management, dated as of August 10, 2001                                 
|10.5        |  | Form of 18% Subordinated Convertible Note Due 2008                                                                                                                            
|10.6        |  | Registration Rights Agreement by and between the Registrant and Exelon Enterprises Management, dated as of August 10, 2001                                                    

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