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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10-Q



(Mark One)



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



For the quarterly period ended September 30, 2005



OR



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



For the transition period from
 to
.



Commission file number 000-24661



FiberNet Telecom Group, Inc.

(Exact
Name of Registrant as Specified in its Charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 52-2255974                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)



570 Lexington
Avenue, New York, NY 10022

(Address of Principal Executive Offices)



(212) 405-6200

(Issuers Telephone Number, Including Area Code)



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



The number
of shares outstanding of the registrants common stock, as of November 8, 2005, was 5,280,850 shares of Common Stock, $0.001 par value.



Check whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes ̈No  x



Check whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).  Yes ̈No  x



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INDEX



|         |  |                                                                                                        |  |     
|-------- |  | ------------------------------------------------------------------------------------------------------ |  | ----
|         |  |                                                                                                        |  | Page
|PART I.  |  | FINANCIAL INFORMATION                                                                                  |  |     
|Item 1.  |  | Condensed Consolidated interim financial Statements (unaudited)                                        |  | 3   
|         |  | Condensed Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004                   |  | 17  
|         |  | Condensed Consolidated Statements of Operations for the nine months ended September 30, 2005 and 2004  |  | 18  
|         |  | Condensed Consolidated Statements of Operations for the three months ended September 30, 2005 and 2004 |  | 19  
|         |  | Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004  |  | 20  
|         |  | Notes to Condensed Consolidated interim financial Statements                                           |  | 21  
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                  |  | 3   
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                             |  | 13  
|Item 4.  |  | Controls and Procedures                                                                                |  | 13  
|PART II. |  | OTHER INFORMATION                                                                                      |  |     
|Item 1.  |  | Legal Proceedings                                                                                      |  | 14  
|Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds                                            |  | 14  
|Item 3.  |  | Defaults Upon Senior Securities                                                                        |  | 14  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                    |  | 14  
|Item 5.  |  | Other Information                                                                                      |  | 14  
|Item 6.  |  | Exhibits                                                                                               |  | 15  



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PART I



FINANCIAL INFORMATION



|Item 1. | Condensed consolidated interim financial statements
|------- | ---------------------------------------------------



See attached.



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



This report contains certain forward-looking statements as that term is defined in the
Private Securities Litigation Reform Act of 1995. Such statements are based on managements current expectations and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described
in the forward-looking statements. Investors are cautioned that there can be no assurance that actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of
various factors, including, but not limited to, those described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2004. As a result, our future operations involve a high degree of risk. Except as required by law, we
undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.



Our operations and ability to grow may be affected by numerous factors, including: the difficulty inherent in operating a company in a rapidly evolving market; our
history of operating losses and cash flow deficits; our limited financial resources and uncertainty as to the availability of additional capital, if necessary, to fund our operations on acceptable terms, if at all; our success in maintaining carrier
hotel lease agreements and license agreements with building owners and in obtaining additional agreements; the financial difficulties and instability that some of our customers and vendors are experiencing; the lack of growth in demand for our
services or the failure to manage the growth of our operations; the frequency of service interruptions on our networks and the scalability and reliability of our networks; the potential occurrence of a natural disaster or act of terrorism that could
impact our networks; the potential loss of key personnel, information support systems or key software licenses; the potential for litigation from stockholders, customers, vendors or other third parties; continued pricing pressure and price
competition for our services; the potential development by competitors of competing products and technologies; restrictions imposed on us as a result of our debt; and changes in the regulatory environment. Our failure to achieve certain operational
results would violate certain debt covenants thereby potentially accelerating the outstanding balance under our credit facility for immediate payment.



Overview



We deploy, own and operate integrated interconnection facilities and diverse transport routes in the two gateway markets of New York/New Jersey and Los Angeles, designed to provide comprehensive broadband
interconnectivity enabling the exchange of traffic over multiple networks. We have experienced significant operating losses, net losses and negative cash flows from operating activities. We expect to continue to experience such losses as we continue
to operate our business. We also have a limited operating history. Consequently, prospective investors have limited operating history and financial data upon which to evaluate our performance.



The telecommunications industry continues to experience a period of uncertainty and
rationalization. We have been negatively impacted by the general economic environment and by the difficulties that are impacting our industry. Expectations for growth in demand for broadband services have not materialized, resulting in significant
excess capacity in existing communications networks. This excess supply of bandwidth and the intense competition among industry participants has produced substantial pressure on the pricing of our services with decreases of up to 50% in recurring
monthly charges. In addition, customer contracts and services have been cancelled, resulting in a loss of recurring revenues to us. We are unable to determine the extent to which additional contracts or services that we provide to our customers will
be cancelled, and we cannot forecast our ability to replace those cancelled contracts with new contracts. As a result, our revenues, business operations and liquidity may continue to be negatively affected by the market environment.



Factors Affecting Future Operations



Revenues.We generate revenues from selling network capacity and related services to
other communications service providers. Revenues are derived from four general types of services:



| |  |  | On-net transport services.Our transport services include the offering of broadband circuits on our metropolitan transport networks and FiberNet in-building networks
(FINs). Over our metropolitan transport networks, we can provision circuits from one of our carrier point facilities to another carrier point facility or to an on-net building via an interconnection with our FIN in that building. We can
also provision circuits vertically between floors in a carrier point facility or an on-net building.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Off-net transport services.We provide our customers with circuits on networks that we do not own. We sell this connectivity to our customers by purchasing the underlying
circuits from other wholesale telecommunications carriers.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Colocation services.Our colocation services include providing customers with the ability to locate their communications and networking equipment at our carrier point
facilities in a secure technical operating environment. We can also provide our customers with colocation services in the central equipment rooms of certain of our on-net and off-net buildings.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Communications access management services.Our access management services include providing our customers with the non-exclusive right to market and provide their retail
services to tenants in our on-net and off-net buildings.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our
revenues are typically generated on a monthly recurring basis under contracts with our customers. The terms of these contracts can range from month-to-month to fifteen years in length. Throughout 2004 and in 2005, we continued to experience a trend
of entering into shorter term contracts with our customers. Our customers typically elect to purchase services on a month-to-month basis or for a contracted period of one year. All of our revenues are generated in the United States of America.



Our services are typically sold under fixed price agreements. In the case of
transport services, we provide an optical circuit or other means of connectivity for a fixed price. Revenues from transport services are not dependent on customer usage or the distance between the origination point and termination point of a
circuit. The pricing of colocation services is based upon the size of the colocation space or the number of colocation units, such as cabinets, provided to the customer. Revenues from access management services are typically determined by the square
footage of the commercial office properties to which a customer purchases access. We have experienced price declines for some of our services over the past year due to industry trends, with transport services experiencing the greatest decreases. We
expect our operating results to continue to be impacted by decreases in the prices of our services.



The growth of our revenues is dependent upon our ability to provide additional services in our existing facilities. We also believe that the majority of the growth in our revenues will come from our existing
customers. Consequently, our growth in revenues is dependent on the underlying growth of our customers businesses and their need for our services within the facilities that we already operate. We continue to add additional customers,
particularly domestic subsidiaries of internationally based carriers. However, we believe the number of companies that are potential customers is decreasing, due to the industry rationalization. In addition, we currently do not anticipate expanding
our network infrastructure to other carrier point facilities or on-net buildings and off-net buildings. Within each of our existing facilities, our revenues will depend upon the demand for our services, the competition that we face and our customer
service.



We typically begin our sales cycle by entering into a master services
agreement. This document outlines the operating specifications and commercial standards that are required of us by the customer. Customers can order a specific service, or, alternatively, they can purchase general availability on our networks or in
our facilities on a recurring basis.



Customers primarily purchased services
from us only on an as-needed basis, when their network requirements mandate an immediate need for additional services. They have not elected to purchase general availability on our networks, nor have they purchased services on a speculative basis.
We have also experienced significant disconnections of transport services, as customers groom their networks to eliminate excess capacity. This loss of revenues has had a significantly negative impact on our financial results and may continue.



Our transport services have been negatively impacted by customers
disconnecting higher-bandwidth circuits and replacing them with lower-bandwidth circuits to more efficiently manage the access costs of their networks. The new transport services that we are providing typically are also for lower-bandwidth circuits,
as our customers expand their network connections on a more limited basis. The growth in transport revenues that we have experienced on a quarterly basis in 2004 and 2005 is a result of an increase in the number of circuits we have provisioned,
offsetting our disconnections and price declines. In the future, we anticipate generating significantly more of our revenues from transport services than from any other services we provide. The scalability of our network architecture allows us to
increase transport capacity to a greater degree than is possible with our other services.



Our off-net transport services provide our customers with circuits on networks that we do not own. We purchase circuits from other wholesale telecommunications carriers and sell this connectivity to our customers. We
offer these services in markets that we currently serve, other metropolitan markets that we do not serve with our own networks, and on a long-haul basis to connect metropolitan areas.



Currently our colocation services produce approximately one-quarter of our revenues. Our colocation services have not experienced the same
level of disconnections and price declines as our transport services. The physical constraints of available colocation space in our facilities and our competitors facilities have limited the supply imbalance that has developed in the
connectivity market. In addition, unlike the fluctuations in demand for bandwidth based upon end-user usage, demand for colocation space is more stable because of the consistent need for a location to locate networking equipment. As a result, prices
for colocation have not decreased as much as those of transport, and carriers are less likely to terminate colocation contracts. However, the growth prospects of our colocation services are not as great as those of our transport services, as we are
limited in the amount of colocation space that we can



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sell without making a significant investment in an additional colocation facility. Our ability to expand the capacity of our transport networks is much
greater due to technological advancements in fiber optics, such as dense wave division multiplexing or DWDM.



Our access management services business has been steadily declining, and we expect that trend to continue. The revenues that we are generating from this type of service are from long-term contracts entered into in
prior years. We have experienced a significant decline in these services during 2005. We do not expect to sign any new contracts for access management in the near future. The remaining terms of our existing access management service contracts range
from a month-to-month basis to expiration in 2008.



Cost of Services.
Cost of services is associated with the operation of our networks and facilities. The largest component of our cost of services is the occupancy expenses at our carrier point facilities, on-net buildings and off-net buildings. These occupancy
expenses primarily represent rent expense, utility costs and license fees under direct leases with landlords. They also include charges for colocation space in other carriers facilities and cross connection fees to interconnect our networks
with other carriers networks. Most of our license agreements for our on-net and off-net buildings require us to pay license fees to the owners of these properties. In addition, our two leases at 60 Hudson Street in New York City require us to
pay license fees. These license fees typically are calculated as a percentage of the revenues that we generate in each particular building. In addition, we incur off-net connectivity charges for the costs of purchasing connectivity from other
wholesale telecommunications carriers to provide our customers with transport services on networks that we do not own. As we provide additional off-net transport services, we will purchase more connectivity from other carriers. Other specific costs
of services include maintenance and repair costs. With the exception of off-net connectivity charges and license fees, we do not anticipate that cost of services will change commensurately with any change in our revenues as our cost of services is
generally fixed in nature.



Selling, General and Administrative
Expenses. Selling, general and administrative expenses include all of our personnel costs, occupancy costs for our corporate offices, insurance costs, professional fees, sales and marketing expenses and other miscellaneous expenses. Personnel
costs, including wages, benefits and sales commissions, are our largest component of selling, general and administrative expenses. We do not allocate any personnel cost relating to networks operations or sales activities to cost of services. We had
71 employees as of September 30, 2005 compared to 75 as of December 31, 2004. Prospectively, we believe that our personnel costs will increase moderately. Professional fees, including legal and accounting expenses and consulting fees,
represent the second largest component of our selling, general and administrative expenses. These legal and accounting fees are primarily attributed to our required activities as a publicly traded company, such as SEC filings and financial statement
audits, and could increase prospectively due to the enhanced regulations regarding corporate governance and compliance matters. Other costs included in selling, general and administrative expenses, such as insurance costs, occupancy costs related to
our office space, and marketing costs, may increase due to changes in the economic environment and telecommunications industry.



Stock Related Expense.Stock related expense relates to the granting of stock options and restricted stock to our employees. We make equity grants to our employees
in order to attract, retain and incentivize qualified personnel. These costs are non-cash charges that are amortized over the vesting term of each employees equity agreement, based on the fair value on the date of the grant.



Depreciation and Amortization. Depreciation and amortization expense includes the
depreciation of our network equipment and infrastructure, computer hardware and software, office equipment and furniture, and leasehold improvements, as well as the amortization of certain deferred charges. We commence the depreciation of network
related fixed assets when they are placed into service and depreciate those assets over periods ranging from three to twenty years.



Critical Accounting Policies



Our significant accounting policies are described in Note 2 to the condensed consolidated interim financial statements included in Item 1 of this Form 10-Q. Our
discussion and analysis of financial condition and results from operations are based upon our condensed consolidated interim financial statements, which have been prepared in accordance with accounting principles generally accepted in the United
States of America. The preparation of the financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. On
an on-going basis, we evaluate the estimates that we have made. These estimates have been based upon historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from
these estimates under different assumptions or conditions. We believe our most critical accounting policies include revenue recognition, an allowance for doubtful accounts, the impairment of long-lived assets and the recognition of deferred tax
assets and liabilities.



Revenue Recognition



We recognize revenues when earned as services are provided throughout the life of each sales
order with a customer. The majority of our revenues are invoiced on a monthly recurring basis under sales orders that are typically one year in length. Certain of our contracts require us to invoice our customers for the periods ranging from one
year to the full term of the contract. We record deferred revenue for the amount of an invoice that has not been recognized as revenue.



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We have one reciprocal agreement, whereby we purchase services from one of our customers under a single agreement. The
services provided and obtained through this agreement were priced at fair value as of the date of the agreement. We recognized the transport and colocation revenues from this agreement in accordance with our stated revenue recognition policy, and we
concurrently recorded the expenses for colocation services as cost of services in our condensed consolidated statements of operations. None of the expenses associated with our reciprocal agreement are capitalized. These costs are expensed as
incurred. For the nine months ended September 30, 2005, our reciprocal agreement accounted for $0.4 million, or 1.4%, of revenues and $0.4 million of our cost of services. For the nine months ended September 30, 2004, reciprocal agreements
accounted for $0.4 million, or 1.4%, of revenues and $0.4 million of our cost of services.



For the quarter ended September 30, 2005, our reciprocal agreement accounted for $0.1 million, or 1.4%, of revenues and $0.1 million of our cost of services. For the quarter ended September 30, 2004, our
reciprocal agreement accounted for $0.1 million, or 1.5%, of revenues and $0.1 million of our cost of services.



Allowance for Doubtful Accounts



We continuously monitor collections and payments from our customers and maintain an allowance for doubtful accounts based upon our historical experience and any specific
customer collection issues that we have identified. While such credit losses have historically been within our expectations, there can be no assurance that we will continue to experience the same level of credit losses that we have in the past. A
significant number of our customers have filed for bankruptcy or are otherwise in significant financial distress. A significant change in the liquidity or financial position of any one of these customers or a further deterioration in the economic
environment or telecommunications industry, in general, could have a material adverse impact on the collectability of our accounts receivable and our future operating results, including a reduction in future revenues and additional allowances for
doubtful accounts. If we determine that collection of a receivable is not reasonably assured, we fully reserve the receivable and reverse that reserve only when collection becomes reasonably assured, which is generally upon receipt of payment.



Impairment of Long-Lived Assets



We assess the fair value and recoverability of our long-lived assets, whenever events and
circumstances indicate the carrying value of an asset may not be recoverable from estimated undiscounted future cash flows expected to result from its use and eventual disposition. In doing so, we make assumptions and estimates regarding future cash
flows and other factors to make our determination. The fair value of our long-lived assets is dependent upon the forecasted performance of our business, changes in the telecommunications industry and the overall economic environment. When we
determine that the carrying value of our long-lived assets may not be recoverable, we measure any impairment based upon a forecasted discounted cash flow method. If these forecasts are not met, we may have to record additional impairment charges not
previously recognized.



Recognition of Deferred Tax Assets and Liabilities



We recognize deferred tax assets and liabilities based on the differences
between the financial statement carrying amounts and the tax bases of assets and liabilities. We regularly review our deferred tax assets for recoverability and establish a valuation allowance based upon historical losses, projected future taxable
income and the expected timing of the reversals of existing temporary differences. As a result of this review, we have established a full valuation allowance against our deferred tax assets.



Results of Operations



Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2004



Revenues. Revenues for the nine months ended September 30, 2005 were $25.0
million compared to $26.4 million for the nine months ended September 30, 2004. We increased the number of our customers from 198 as of September 30, 2004 to 225 as of September 30, 2005, primarily with the addition of domestic
subsidiaries of internationally based carriers. We believe that there are greater opportunities to serve domestic subsidiaries of foreign telecommunications companies in our gateway markets, as domestic carriers consolidate and rationalize.



|                               |  |                                         |        |          |   |        |          |   |        |   |  |        |   
|------------------------------ |  | --------------------------------------- | ------ | -------- | - | ------ | -------- | - | ------ | - |  | ------ | --
|                               |  | For the nine months ended September 30, |        | $ Change |   |        | % Change |  
|                               |  | 2005                                    |        | 2004     |   |       
|On-net transport revenue       |  | $                                       | 14,916 |          | $ | 14,688 |          | $ | 228    |   |  | 1.6    | % 
|Off-net transport revenue      |  |                                         | 3,933  |          |   | 2,479  |          |   | 1,454  |   |  | 58.7   | % 
|Colocation revenue             |  |                                         | 5,417  |          |   | 4,707  |          |   | 710    |   |  | 15.1   | % 
|Access revenue                 |  |                                         | 685    |          |   | 1,778  |          |   | (1,093 | ) |  | (61.5  | )%
|Revenue from arbitration award |  |                                         |       |          |   | 2,727  |          |   | (2,727 | ) |  | (100.0 | )%
|                               |  |                                         |        |          |   |        |          |   |        |   |  |        |   
|Total Revenue                  |  | $                                       | 24,951 |          | $ | 26,379 |          | $ | (1,428 | ) |  | (5.4   | )%
|                               |  |                                         |        |          |   |        |          |   |        |   |  |        |   



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During the nine months ended September 30, 2004, we recognized $2.7 million in revenues due to an award from an
arbitration proceeding, in which we were the prevailing claimant. Revenues recognized in connection with this award accounted for 10.3% of revenue for the period. Amounts disputed under the customer contract, which was the subject of the proceeding,
were not recognized in prior periods as the collectability of amounts due under the contract was in doubt. Upon confirmation of the award, we recognized this amount as revenue during the nine months ended September 30, 2004 for services
previously provided and earned. The payment of the award of approximately $2.7 million in cash was received on April 9, 2004. Of the total award payment, $2.4 million related to payment for services previously provided and earned, and we
recognized this amount as revenues in the nine months ended September 30, 2004. The remaining $0.3 million was for the reimbursement of expenses incurred in connection with the proceeding. We have recorded this reimbursement as a reversal
of previously accrued expenses included in selling, general and administrative expenses in 2003. Also, in connection with this arbitration award, we recognized an additional $0.3 million in revenues that were previously deferred. We did not
recognize revenues related to this arbitration proceeding or the disputed contract in prior periods as the collectability of amounts due under the contract was in doubt.



Revenues were generated by providing transport, colocation and communications access management services to our customers. We recognized
$14.9 million in on-net transport service revenues for the nine months ended September 30, 2005, up from $14.7 million for the nine months ended September 30, 2004. Off-net transport service revenues for the nine months ended
September 30, 2005 were $3.9 million, up from $2.5 million for the nine months ended September 30, 2004. Revenues from colocation services were $5.4 million for the nine months ended September 30, 2005 compared to $4.7 million for the
nine months ended September 30, 2004, and revenues from communications access management services declined to $0.7 million for the nine months ended September 30, 2005 from $1.8 million for the nine months ended September 30, 2004. If
we exclude the effect of the arbitration award, revenues of $25.0 million for the nine months ended September 30, 2005 would have increased 5.5% over the $23.7 million in revenues for the nine months ended September 30, 2004.



The vast majority of our transport and colocation services are provided within and between
our carrier point facilities in the New York/New Jersey market. On-net transport revenues increased slightly as we provided a greater number of lower-bandwidth circuits to our customers, offsetting the disconnections and price decreases that we have
experienced due to industry trends. Off-net transport revenues increased significantly over the same period as we leverage our current customer base across a broader addressable market. Colocation revenues were generated as we leased additional
caged space, cabinets and racks in our facilities. Since we are approaching capacity at some of our colocation facilities, we may have to invest in expanding these facilities to offer additional space to our customers. We expect transport services
to grow at a faster rate than colocation. Our network infrastructure has significant capacity to provide additional broadband transport connectivity, and our colocation facilities are approaching more stabilized utilization rates. Our access
management services business has been steadily declining, and we expect that trend to continue. The revenues that we are generating from this type of service are from long-term contracts entered into in prior years. We have experienced a significant
decline in these services during 2005. The remaining terms of our existing access management service contracts range from month-to-month to expiration in 2008. We do not expect to sell any additional access services, and we believe our existing
contracts for access services may not be renewed when they expire.



For the
nine months ended September 30, 2005 and 2004, there were no individual customers that accounted for over 10.0% of our revenues, excluding revenues recognized in connection with the arbitration award. Our reciprocal agreement accounted for $0.4
million, or 1.4%, of revenues for the nine months ended September 30, 2005, and remained flat compared to $0.4 million, or 1.4%, of revenues for the nine months ended September 30, 2004.



Cost of Services. Cost of services, associated with the operation of our networks and
facilities, were $12.2 million for the nine months ended September 30, 2005, compared to $10.0 million for the nine months ended September 30, 2004. The majority of our cost of services is occupancy expenses, consisting of rent, license
fees, and utility costs, for our carrier hotel facilities, on-net buildings and off-net buildings. Other cost of services includes off-net connectivity charges and maintenance and repair costs.



|                                       |  |                                         |        |          |   |          |  |   |       |  |      |  
|-------------------------------------- |  | --------------------------------------- | ------ | -------- | - | -------- |  | - | ----- |  | ---- | -
|                                       |  | For the nine months ended September 30, |        | $ Change |   | % Change | 
|                                       |  | 2005                                    |        | 2004     |   |         
|Occupancy expenses                     |  | $                                       | 8,705  |          | $ | 7,908    |  | $ | 797   |  | 10.1 | %
|Off-net connectivity charges           |  |                                         | 3,048  |          |   | 1,779    |  |   | 1,269 |  | 71.3 | %
|Maintenance and repair and other costs |  |                                         | 449    |          |   | 312      |  |   | 137   |  | 43.7 | %
|                                       |  |                                         |        |          |   |          |  |   |       |  |      |  
|Total Cost of Services                 |  | $                                       | 12,202 |          | $ | 9,999    |  | $ | 2,203 |  | 22.0 | %
|                                       |  |                                         |        |          |   |          |  |   |       |  |      |  



Occupancy expenses, which represented
71.3% of cost of services or $8.7 million for the nine months ended September 30, 2005, increased by $0.8 million as compared to 79.1%, or $7.9 million, for the nine months ended September 30, 2004. This increase was expected, as we
incurred more colocation and cross-connection charges and an increase in utility usage.



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Off-net connectivity charges were 25.0% of cost of services or $3.0 million for the nine months ended September 30,
2005, versus 17.8% of the cost of services or $1.8 million for the nine months ended September 30, 2004. We expect these connectivity charges to increase commensurately with our increase in revenues from off-net transport. Maintenance and
repair costs were 3.7% or $0.4 million of cost of services for the nine months ended September 30, 2005, compared to 3.1% or $0.3 million for the nine months ended September 30, 2004. These costs will continue to represent a relatively
small and fixed component of cost of services.



Our reciprocal agreement
accounted for $0.4 million of our cost of services for the nine months ended September 30, 2005 and 2004.



Selling, General and Administrative Expenses. Selling, general and administrative expenses for the nine months ended September 30, 2005 were $13.0 million compared to $11.7 million for the nine months
ended September 30, 2004. Personnel costs represented 56.3% or $7.3 million of selling, general and administrative expenses for the nine months ended September 30, 2005 compared to 65.4% or $7.8 million for the nine months ended
September 30, 2004. Professional fees for the nine months ended September 30, 2005 were $1.3 million, as compared to $0.9 million for the same period in 2004. During the nine months ended September 30, 2005, we expensed $1.2 million
of transaction costs related to the termination of our stock purchase agreement with Consolidated Edison, Inc., and costs associated with other acquisitions that we are no longer pursuing. During the nine months ended September 30, 2005 we
expensed $0.2 million for fees related to the eighteenth amendment of our credit agreement under the guidelines set forth in Emerging Issues Task Force Issue (EITF) 96-19, Debtors Accounting for a Modification or Exchange of
Debt Instruments. We recorded a one-time termination charge for the nine months ended September 2004 of $0.4 million related to the cancellation of a lease of unutilized space at a carrier hotel facility. We anticipate selling, general and
administrative expenses to increase modestly throughout 2005 with the general growth of our business.



Stock Related Expense. Stock related expense for each of the nine months ended September 30, 2005 and 2004, was $0.4 million. This non-cash expense relates to the amortization of deferred compensation
recorded on restricted stock granted to our employees. The restricted shares that have been granted vest on the tenth anniversary of the grant date, and the related expenses are amortized on a straight-line basis over the ten-year period.



Impairment of Property, Plant and Equipment.During the nine months
ended September 30, 2005, we recorded an impairment of $2.8 million to reflect our revised business plan and forecast of revenues due to the early termination of a significant access agreement as well as other renegotiated building access
service orders with other customers, which significantly reduced our future revenues from access services.



During the nine months ended September 30, 2004, we settled a dispute with a dark fiber provider that had filed for bankruptcy, which resulted in the impairment of previously purchased dark fiber miles. We agreed
to concede our claim to 364 unutilized dark fiber miles, or 36.4% of the total dark fiber acquired from this provider, which was purchased in December 1999 for $34.8 million. We also agreed to pay $750,000 to settle a trade payable dispute with this
provider, for which we had accrued $1.1 million as a liability. As a result, we recorded an impairment of $9.5 million due to the write-off of $12.7 million of dark fiber included in network infrastructure and $2.8 million of related accumulated
depreciation and a $0.4 million reduction in accrued liabilities from this settlement for charges for network infrastructure that was previously capitalized and impaired. Included in this charge in 2004 was a recovery of $0.1 million due to the
disposition of equipment that was previously impaired.



Impairment of
Goodwill.In June 2004, our settlement agreement with a dark fiber provider required us to record an impairment to property, plant and equipment. Per Statement of Financial Accounting Standards (SFAS) No. 144 (SFAS
No. 144), Impairment and Disposal of Long Lived Assets, this asset impairment required us to perform a test for impairment of goodwill under SFAS No. 142, Goodwill and Other Intangible Assets. As such, we
performed our test for the recoverability of goodwill from the acquisition of Gateway Colocation, and determined that goodwill was impaired and recorded a $2.3 million impairment. For the nine months ended September 30, 2005, we no longer had
any goodwill.



Depreciation and Amortization.Depreciation and
amortization expense for the nine months ended September 30, 2005 and 2004 was $6.6 million and $6.8 million, respectively. The effects of prior period impairments were offset by the additional depreciation on newly acquired property,
plant and equipment.



Interest Income.Interest income for the nine
months ended September 30, 2005 was approximately $62,000, compared to approximately $37,000 for the nine months ended September 30, 2004. Interest income is generated on our cash and restricted cash balances which are at variable rates of
interest and are invested in short-term, highly liquid investments.



Interest Expense. Interest expense for the nine months ended September 30, 2005 was $1.7 million, compared to $1.5 million for the nine months ended September 30, 2004. As of August 22, 2005, our loans were
converted to a fixed rate of 8.5%, with a 25 basis points increase each quarter starting in January 2006, this interest rate change is included in the eighteenth amendment to the Credit Agreement. In prior periods our indebtedness bore interest at a
floating rate.



Net Loss.We reported a net loss of $11.7 million for
the nine months ended September 30, 2005 compared to a net loss of $15.9 million for the nine months ended September 30, 2004. This change is a result of the changes in our operations as previously disclosed.



8



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##### Table of Contents

Three Months Ended September 30, 2005 Compared to Three Months Ended September 30, 2004



Revenues.Revenues for the quarter ended September 30,
2005 were $8.6 million as compared to $8.1 million for the quarter ended September 30, 2004. We increased the number of our customers from 198 at September 30, 2004 to 225 as of September 30, 2005, primarily with the addition of
domestic subsidiaries of internationally based carriers. We believe that there are greater opportunities to serve domestic subsidiaries of foreign telecommunications companies in our gateway markets, as domestic carriers consolidate and rationalize.



|                          |  |                                          |       |          |   |       |          |   |      |   |  |       |   
|------------------------- |  | ---------------------------------------- | ----- | -------- | - | ----- | -------- | - | ---- | - |  | ----- | --
|                          |  | For the three months ended September 30, |       | $ Change |   |       | % Change |  
|                          |  | 2005                                     |       | 2004     |   |      
|On-net transport revenue  |  | $                                        | 5,176 |          | $ | 4,826 |          | $ | 350  |   |  | 7.3   | % 
|Off-net transport revenue |  |                                          | 1,305 |          |   | 1,045 |          |   | 260  |   |  | 24.9  | % 
|Colocation revenue        |  |                                          | 1,949 |          |   | 1,657 |          |   | 292  |   |  | 17.6  | % 
|Access revenue            |  |                                          | 204   |          |   | 621   |          |   | (417 | ) |  | (67.2 | )%
|                          |  |                                          |       |          |   |       |          |   |      |   |  |       |   
|Total Revenue             |  | $                                        | 8,634 |          | $ | 8,149 |          | $ | 485  |   |  | 5.9   | % 
|                          |  |                                          |       |          |   |       |          |   |      |   |  |       |   



Revenues were generated by providing
transport, colocation and communications access management services to our customers. We recognized $5.2 million in on-net transport service revenues for the quarter ended September 30, 2005, up from $4.8 million for the quarter ended
September 30, 2004. Off-net transport service revenues for the quarter ended September 30, 2005 were $1.3 million, up from $1.0 million for the quarter ended September 30, 2004. Revenues from colocation and other services were $1.9
million for the quarter ended September 30, 2005 compared to $1.7 million for the quarter ended September 30, 2004, and revenues from communications access management services declined to $0.2 million for the quarter ended
September 30, 2005 from $0.6 million for the quarter ended September 30, 2004.



The vast majority of our transport and colocation services are provided within and between our carrier point facilities in the New York/New Jersey market. On-net transport revenues increased slightly as we provided a
greater number of lower-bandwidth circuits to our customers, offsetting the disconnections and price decreases that we have been experiencing. Off-net transport revenues increased over the same period last year as we continue to leverage our current
customer base. Colocation revenues were generated as we leased additional caged space, cabinets and racks in our facilities. Since we are approaching capacity at some of our colocation facilities, we may have to invest in expanding these facilities
to offer additional space to our customers across a broader addressable market. We expect transport services to grow at a faster rate than colocation. Our network infrastructure has significant capacity to provide additional broadband transport
connectivity, and our colocation facilities are approaching more stabilized utilization rates. Our access management services business has been steadily declining, and we expect that trend to continue. The revenues that we are generating from this
type of service are from long-term contracts entered into in prior years. We have experienced a significant decline in these services during 2005. The remaining terms of our existing access management service contracts range from month-to-month to
expiration in 2008. We do not expect to sell any additional access services, and we believe our existing contracts for access services may not be renewed when they expire.



For the quarters ended September 30, 2005 and 2004, there were no individual customers that accounted for over 10.0% of our revenues.
Reciprocal agreements accounted for $0.1 million, or 1.4%, of revenues for the quarter ended September 30, 2005, and compared to $0.1 million, or 1.5%, of revenues for the quarter ended September 30, 2004.



Cost of Services.Cost of services, associated with the operation of our networks and
facilities, were $4.3 million for the quarter ended September 30, 2005, compared to $3.7 million for the quarter ended September 30, 2004. The majority of our cost of services is occupancy expenses, consisting of rent, license fees, and
utility costs, for our carrier hotel facilities, on-net buildings and off-net buildings. Other cost of services includes off-net connectivity charges and maintenance and repair costs.



|                                       |  |                                          |       |          |   |          |  |     |  |      |  
|-------------------------------------- |  | ---------------------------------------- | ----- | -------- | - | -------- |  | --- |  | ---- | -
|                                       |  | For the three months ended September 30, |       | $ Change |   | % Change | 
|                                       |  | 2005                                     |       | 2004     |   |         
|Occupancy expenses                     |  | $                                        | 2,993 |          | $ | 2,777    |  | 216 |  | 7.8  | %
|Off-net connectivity charges           |  |                                          | 1,099 |          |   | 738      |  | 361 |  | 48.8 | %
|Maintenance and repair and other costs |  |                                          | 168   |          |   | 160      |  | 8   |  | 5.2  | %
|                                       |  |                                          |       |          |   |          |  |     |  |      |  
|Total Cost of Services                 |  | $                                        | 4,260 |          | $ | 3,675    |  | 585 |  | 15.9 | %
|                                       |  |                                          |       |          |   |          |  |     |  |      |  



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##### Table of Contents

Occupancy expenses were $3.0 million for the quarter ended September 30, 2005, an increase from $2.8 million over
the quarter ended September 30, 2004. This increase was expected, as we incurred more colocation and cross-connection charges and an increase in utility usage.



Off-net connectivity charges were 25.8% of cost of services or $1.1 million for the quarter ended September 30, 2005, versus 20.1% of
the cost of services or $0.7 million for the quarter ended September 30, 2004. We expect these connectivity charges to increase commensurately with our increase in revenues from off-net transport. Maintenance and repair costs were 3.9% or $0.2
million of cost of services for the quarter ended September 30, 2005, compared to 4.3% or $0.2 million from the quarter ended September 30, 2004; they will continue to represent a relatively small and fixed component of cost of services.



Reciprocal agreements accounted for $0.1 million of our cost of services for
each of the quarters ended September 30, 2005 and 2004.



Selling,
General and Administrative Expenses. Selling, general and administrative expenses for the quarter ended September 30, 2005 were $4.0 million compared to $3.9 million for the quarter ended September 30, 2004. Personnel costs represented
59.5%, or $2.4 million, of selling, general and administrative expenses for the quarter ended September 30, 2005 compared to 65.4%, or $2.5 million, for the quarter ended September 30, 2004. Professional fees for each of the quarters ended
September 30, 2005 and 2004 were $0.4 million. During the quarter ended September 30, 2005, we expensed $0.2 million for fees related to the eighteenth amendment of our credit agreement under the guidelines set forth in Emerging Issues
Task Force Issue (EITF) 96-19, Debtors Accounting for a Modification or Exchange of Debt Instruments. This charge was required as the recent amendment modified the debt in terms of its interest rate and amortization
schedule. We anticipate selling, general and administrative expenses to increase modestly throughout 2005 with the general growth of our business.



Stock Related Expense. Stock related expense for the quarters ended September 30, 2005 and 2004 was $0.1 million. This non-cash expense relates to the
amortization of restricted stock granted to our employees. The restricted shares that have been granted vest on the tenth anniversary of the grant date, and the related expenses are amortized on a straight-line basis over the ten-year period.



Impairment of Property, Plant and Equipment.During the three months
ended September 30, 2004, we did not renew two of our off-net property leases. As a result, we abandoned the assets associated with these two properties. We recorded an impairment of $0.1 million due to the write-off of $0.2 million of network
infrastructure and $0.1 million of related accumulated depreciation. We did not record an impairment of property, plant and equipment during the three months ended September 30, 2005.



Depreciation and Amortization.Depreciation and amortization expenses for the
quarters ended September 30, 2005 and 2004 were $2.2 million. The effects of prior period impairments were offset by the additional depreciation on newly acquired property, plant and equipment.



Interest Income.Interest income for the quarter ended September 30, 2005
was approximately $21,000, compared to approximately $18,000 for the quarter ended September 30, 2004. Interest income is generated on our cash and restricted cash balances, which are at variable rates of interest and are invested in
short-term, highly liquid investments.



Interest Expense.Interest
expense for each of the quarters ended September 30, 2005 and 2004 was $0.7 million and $0.5 million respectively. As of August 22, 2005, our loans were converted to a fixed rate of 8.5%, with a 25 basis points increase each quarter
starting in January 2006, this interest rate change is included in the eighteenth amendment to the Credit Agreement.



Net Loss.We reported net loss of $2.5 million for the quarter ended September 30, 2005 compared to a net loss of $2.3 million for the quarter ended
September 30, 2004. This change is a result of the aforementioned changes in our operations.



Liquidity and Capital Resources



To
date, we have financed our operations through revenues collected from our customers, direct equity investments from our stockholders, the issuance of additional debt and equity securities in private transactions and by arranging a credit facility
with a group of lenders. We had a loss from operations and a net loss for the nine months ended September 30, 2005 of $10.1 million and $11.7 million, respectively, compared to a loss from operations and a net loss of $14.5 million and $15.9
million, respectively, for the nine months ended September 30, 2004. During the nine months ended September 30, 2005, cash provided by operating activities was approximately $0.9 million, and cash purchases of property, plant and equipment
were $1.9 million, compared to cash provided by operating activity and cash purchases of property, plant and equipment of $3.9 million and $2.3 million, respectively, for the nine months ended September 30, 2004.



For the nine months ended September 30, 2005, we used $1.4 million in net cash for
financing related activities. For the nine months ended September 30, 2004, we used approximately $42 thousand in net cash for financing activities. We believe we will be able to generate sufficient cash flows from operations in order to
sustain our current and long term operations.



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On January 30, 2004, we acquired the operating assets of gateway.realty.new jersey.llc, also known as Gateway
Colocation. The purchase agreement includes an earn-out payment based upon the achievement of certain financial objectives with respect to the revenues generated by the facility. More specifically, the earn-out payment will
be based on the gross revenues, on an annualized basis, for a particular month designated by Gateway Colocation during the twenty-four month period immediately subsequent to closing. The earn-out payment, if payable, will be paid in
shares of our common stock. However, the issuance of such additional shares, in the aggregate with the shares of common stock issued on January 30, 2004, will not exceed 19.9% of the issued and outstanding shares of our common stock as of the
closing date without first receiving stockholder approval. We filed a registration statement with the Securities and Exchange Commission covering the resale of the shares issued at closing and have agreed to file a registration statement with
respect to the resale of shares issued, if any, pursuant to the terms of the earn-out provision. As of September 30, 2005, there were no additional shares required under the earn-out provision.



As previously disclosed in our Annual Report on Form 10-K for 2004, on December 10,
2004, we entered into a stock purchase agreement with Consolidated Edison, Inc. (the Con Ed Agreement) for the purchase of all of the issued and outstanding shares of Consolidated Edison Communications Holding Company, Inc.
(CEC), a wholly-owned subsidiary, for $37.0 million. In order to finance the acquisition of CEC, we entered into a securities purchase agreement (as amended, the Investor Purchase Agreement), with certain investors for the
sale of up to $37.0 million in shares of a newly issued convertible preferred stock and common stock warrants. See below as to the mutual release and termination of this agreement.



In connection with the execution of both the Con Ed Agreement and the Investor Purchase Agreement described above, we entered into certain
transactions with Deutsche Bank AG New York Branch, Wachovia Investors, Inc. and IBM Credit LLC, the lenders under our senior secured credit facility (the Lenders). We, together with our wholly-owned subsidiaries, FiberNet Operations,
Inc. and Devnet L.L.C., executed with the Lenders a thirteenth amendment to the Amended and Restated Credit Agreement, dated as of February 9, 2001, as amended, pursuant to which, among other things, the Lenders consented to the
above-referenced transactions, however, as a result of the termination described below, the thirteenth amendment was also terminated by its terms.



On May 4, 2005, we entered into a Mutual Termination and Release Agreement (the Termination Agreement), with Consolidated Edison, Inc., which terminated
the Con Ed Agreement. The Con Ed Agreement was terminated because of the parties inability to resolve certain contractual issues. As a result of the termination of the Con Ed Agreement, on May 4, 2005, the Investor Purchase Agreement,
which we entered into to finance the acquisition of CEC, terminated pursuant to its terms. The Termination Agreement contains mutual releases of liability. We did not incur any early termination penalties in connection with the termination of the
Con Ed Agreement or the Investor Purchase Agreement. As a result of the termination, we expensed a total of $1.1 million of transaction costs related to the Con Ed Agreement and the Investor Purchase Agreement during the nine months ended
September 30, 2005.



On March 22, 2005, we, together with our
wholly-owned subsidiaries, FiberNet Operations, Inc. and Devnet L.L.C., executed with our Lenders a fourteenth amendment to the Amended and Restated Credit Agreement, dated as of February 9, 2001, as amended, pursuant to which, the amortization
payments for 2005 were deferred until March 2006, and financial covenant levels were changed. This amendment required us to raise a minimum of $6.5 million of additional equity capital by June 30, 2005. As a condition to the Lenders entering
into the fourteenth amendment, we agreed to reduce the exercise price of certain previously issued outstanding warrants held by the lenders to purchase 49,623 shares of common stock from $36.00 per share to $0.10 per share, which were subsequently
exercised in April 2005 by the Lenders. We compared the value of the warrants prior to repricing with the value of the warrants after the repricing using the Black-Scholes option pricing model and determined that there was no difference in value.
Therefore, the repricing of warrants had no impact on our condensed consolidated interim financial statements.



On May 25, 2005, we completed our 1-for 10 reverse stock split, which was approved by the stockholders at our annual meeting on May 24, 2005. As a result of the reverse stock split, on June 9, 2005,
NASDAQ notified us that we had regained compliance with Marketplace Rule 4310 (c)(4). The earning per share information and all share amounts as presented in these condensed consolidated interim financials statements have been adjusted to reflect
the reverse stock split.



On June 21, 2005, we entered into the fifteenth
amendment, which extended the date by which we must issue securities in an amount sufficient to result in net proceeds of at least $6.5 million pursuant to a purchase agreement in form and substance satisfactory to the Lenders, from June 23,
2005 to July 15, 2005. On July 11, 2005, we entered into the sixteenth amendment extended the date from July 15, 2005 to July 22, 2005. On July 22, 2005, we entered into the seventeenth amendment, which further extended the
date July 22, 2005 to August 23, 2005. In connection with the execution of the seventeenth amendment on July 22, 2005, we paid an amendment fee to the Lenders in an amount equal to fifty basis points of the total commitments of the
Lenders under the credit facility, approximately $0.1 million. On August 5, 2005, we paid an extension fee to the Lenders in an amount equal to one hundred basis points of the commitments to the Lenders, approximately $0.3 million.



On August 22, 2005, we entered into the eighteenth amendment with our Lenders, which
waived the requirement that we issue securities in an amount sufficient to result in net proceeds of at least $6.5 million. The Lenders have also agreed to extend the amortization schedule under the Credit Agreement such that we have until August
2006 to prepay $3.0 million under the Credit Agreement, with the balance due in February 2007 and no other principal payments required until such time. As a condition to the Lenders entering into the eighteenth amendment, we agreed to reduce the
exercise price of certain previously issued outstanding



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##### Table of Contents

warrants held by the Lenders to purchase 49,623 shares of common stock from $36.00 per share to $0.001 per share, which were subsequently exercised in
September 2005 by the Lenders. We compared the value of the warrants prior to repricing with the value of the warrants after the repricing using the Black-Scholes option pricing model and determined that there was no difference in value. Therefore,
the repricing of warrants had no impact on our condensed consolidated interim financial statements. Additionally, the Amendment changes the interest rate on the loans to a fixed rate of 8.5%, which will increase by 25 basis points on a quarterly
basis beginning January 1, 2006 until the date of maturity. We have also agreed to permit a representative of the Lenders to attend and observe our Board of Directors meetings. The Amendment requires that we deliver to the Lenders a strategic
plan on or before November 20, 2005 and a business plan on or before March 31, 2006. In addition, the Amendment provides that Jon A. DeLuca, our President and Chief Executive Officer, is deemed a key employee under the Credit
Agreement, such that his failure to serve in those offices would be considered an event of default. In conjunction with the execution of the eighteenth amendment the Lenders released our restricted cash of $1.9 million, which was then used to reduce
the outstanding principle on the credit facility.



There can be no assurance
that we will be able to raise additional capital or obtain additional amendments to our Credit Agreement. If we are able to raise additional capital, there can be no assurance that such issuance will be in an amount sufficient to satisfy our
obligations under our Credit Agreement, or will be on terms that are satisfactory to the Lenders.



As of September 30, 2005, we had $14.2 million of indebtedness outstanding under our credit facility and $4.8 million of outstanding letters of credit. In addition, we had $0.8 million of availability to issue
letters of credit under the credit facility, subject to compliance with the terms of the credit agreement. The interest rate on our outstanding borrowings under the facility was fixed at 8.5%. We were in full compliance with all of the covenants
contained in the Credit Agreement as of September 30, 2005. Our financial covenants include minimum consolidated revenue, minimum consolidated EBITDA (as defined in the Credit Agreement underlying the credit facility), maximum cumulative
capital expenditures, a maximum consolidated leverage ratio, and a minimum consolidated interest coverage ratio. The compliance levels and calculation of such levels with respect to those covenants are as defined in the credit agreement, as amended,
which is on file with the Securities and Exchange Commission. Non-compliance with any of the covenants, requirements, or other terms and conditions under the Credit Agreement constitutes an event of default and potentially accelerates the
outstanding balance of the credit facility for immediate payment.



We spent
$1.9 million in capital expenditures during the nine months ended September 30, 2005, primarily for the implementation of customer orders, including the purchase of networking equipment to increase capacity and to interconnect with new
customers. Our capital expenditures totaled $2.3 million for the nine months ended September 30, 2004. We have substantially completed the deployment of our FINs, carrier hotel facilities and metropolitan transport networks. In 2005, we expect
to invest a total of $2.5 million to $3.5 million in capital expenditures, primarily for customer order activity and expansion of the 60 Hudson Street Meet-Me-Room facility in New York City. We also intend to upgrade certain information technology
systems and key operating systems at our carrier point facilities. We may expend additional capital for the selected expansion of our network infrastructure, depending upon market conditions, customer demand and our liquidity and capital resources.



During the nine months ended September 30, 2005, there were no options
granted or warrants issued. During the nine months ended September 30, 2005, warrants to purchase 182,577 shares of common stock were exercised at an average exercise price of $0.07. During the nine months ended September 30, 2005, the
Company granted 2,500 shares of restricted stock with a weighted average price of $2.37 to employees. During the nine months ended September 30, 2005, 3,098 shares of restricted stock were returned to the Company as the result of employee
terminations prior to vesting.



As of November 9, 2005, we had
approximately 5.3 million shares of common stock outstanding, or approximately 6.1 million shares of common stock outstanding on a fully diluted basis, assuming the exercise of all outstanding options and warrants.



From time to time, we may consider private or public sales of additional equity or debt
securities and other financings, depending upon market conditions, in order to provide additional working capital or finance the continued operations of our business, although there can be no assurance that we would be able to successfully
consummate any such financing on acceptable terms, if at all. For additional disclosure and risks regarding future financings and funding of our ongoing operations, please see Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2004 as filed on March 30, 2005. We do not have any off-balance sheet financing arrangements, nor do we anticipate entering
into any.



Recent Accounting Pronouncements



In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 153, Exchanges of Nonmonetary Assets, which eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial
substance. SFAS No. 153 will be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We do not believe the adoption of SFAS No. 153 will have a material impact on our condensed
consolidated interim financial statements.



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In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which establishes standards for
transactions in which an entity exchanges its equity instruments for goods or services. This standard requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date
fair value of the award. This eliminates the exception to account for such awards using the intrinsic method previously allowable under APB Opinion No. 25. On April 14, 2005, the compliance date for SFAS 123(R) was extended. We will be
required to comply with SFAS No. 123(R) for the three months ended March 31, 2006. We are currently evaluating the impact that the adoption of SFAS No. 123(R) will have on its condensed consolidated interim financial statements.



In March 2005, the Securities and Exchange Commission (the SEC)
issued Staff Accounting Bulletin (SAB) No. 107, Share-Based Payment, which provides interpretive guidance related to the interaction between SFAS No. 123(R) and certain SEC rules and regulations, as well as provides
the SEC staffs views regarding the valuation of share-based payment arrangements. We are currently assessing the impact of SAB No. 107 on our implementation and adoption of SFAS 123(R).



In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections. SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It requires retrospective application to the prior periods financial statements of voluntary changes in accounting
principle and changes required by an accounting pronouncement in the event the pronouncement does not include specific transition provisions. The provision of this Statement shall be effective for accounting changes made in fiscal years beginning
after December 15, 2005.



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------



Our exposure to financial market risk, including changes in interest rates, relates primarily to our marketable security investments. We generally place our marketable
security investments in high credit quality instruments, primarily U.S. government obligations and corporate obligations with contractual maturities of less than one year. We operate only in the United States, and all sales have been made in U.S.
dollars. We do not have any material exposure to changes in foreign currency exchange rates.



|Item 4. | Controls and Procedures
|------- | -----------------------



Evaluation of Disclosure Controls and Procedures.Our principal executive officer and principal financial officer, after evaluating the effectiveness of our
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that, based on such evaluation, our disclosure controls and
procedures were adequate and effective to ensure that material information relating to FiberNet, including our consolidated subsidiaries, was made known to them by others within those entities, particularly during the period in which this Quarterly
Report on Form 10-Q was being prepared.



Changes in Internal Controls.There were no changes in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the
registrants internal control over financial reporting.



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##### Table of Contents

PART II



OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------



None.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------



None.



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------



None.



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



None.



|Item 5. | Other Information
|------- | -----------------



None.



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##### Table of Contents

|Item 6. | Exhibits
|------- | --------



The following documents
are filed herewith as part of this Form 10-Q:



Exhibit 10.1 
Eighteenth Amendment to the Amended and Restated Credit Agreement, dated as of August 22, 2005, by and among FiberNet Operations, Inc. and Devnet L.L.C. and the lenders identified therein.



Exhibit 10.2  Amended and Restated 2005 Board of Directors Compensation Plan



Exhibit 31.1  Section 302

Certification of Chief Executive Officer



Exhibit 31.2  Section 302

Certification of Chief Financial
Officer



Exhibit 32  Section 906 Certification



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##### Table of Contents

SIGNATURES



In accordance with the requirements 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.



|                             |  |                                                       
|---------------------------- |  | ------------------------------------------------------
|Date: November 10, 2005     
|                            
|FIBERNET TELECOM GROUP, INC.
|                             | 
|By:                          |  | /s/    EDWARD J.
GRANAGHAN                            
|Name:                        |  | Edward J. Granaghan                                   
|Title:                       |  | Senior Vice PresidentFinance Chief Financial Officer*



|* | The Chief Financial Officer is signing this quarterly report on Form 10-Q as both the principal financial officer and authorized officer.
|- | -----------------------------------------------------------------------------------------------------------------------------------------



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FIBERNET TELECOM GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(DOLLARS IN 000S)



|                                                                                                                                                                                    |  |                    |          |   |                   |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | -------- | - | ----------------- | - | -------- | -
|                                                                                                                                                                                    |  | September 30, 2005 |          |   | December 31, 2004 |  
|ASSETS                                                                                                                                                                              |  |                    |          |   |                   |   |          |  
|Current Assets:                                                                                                                                                                     |  |                    |          |   |                   |   |          |  
|Cash and cash equivalents                                                                                                                                                           |  | $                  | 2,349    |   |                   | $ | 2,909    |  
|Restricted cash                                                                                                                                                                     |  |                    |         |   |                   |   | 1,881    |  
|Accounts receivable, net of allowance of $508 and $749 at September 30, 2005 and December 31, 2004, respectively                                                                    |  |                    | 1,989    |   |                   |   | 4,275    |  
|Prepaid expenses                                                                                                                                                                    |  |                    | 685      |   |                   |   | 676      |  
|                                                                                                                                                                                    |  |                    |          |   |                   |   |          |  
|Total current assets                                                                                                                                                                |  |                    | 5,023    |   |                   |   | 9,741    |  
|Property, plant and equipment, net                                                                                                                                                  |  |                    | 67,412   |   |                   |   | 74,123   |  
|Other Assets:                                                                                                                                                                       |  |                    |          |   |                   |   |          |  
|Deferred charges, net of accumulated amortization of $1,889 and $1,860 at September 30, 2005 and December 31, 2004,
respectively                                                    |  |                    | 1,011    |   |                   |   | 2,292    |  
|Other assets                                                                                                                                                                        |  |                    | 1,488    |   |                   |   | 1,569    |  
|                                                                                                                                                                                    |  |                    |          |   |                   |   |          |  
|Total other assets                                                                                                                                                                  |  |                    | 2,499    |   |                   |   | 3,861    |  
|                                                                                                                                                                                    |  |                    |          |   |                   |   |          |  
|TOTAL ASSETS                                                                                                                                                                        |  | $                  | 74,934   |   |                   | $ | 87,725   |  
|                                                                                                                                                                                    |  |                    |          |   |                   |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                |  |                    |          |   |                   |   |          |  
|Current Liabilities:                                                                                                                                                                |  |                    |          |   |                   |   |          |  
|Accounts payable                                                                                                                                                                    |  | $                  | 4,013    |   |                   | $ | 4,409    |  
|Accrued expenses                                                                                                                                                                    |  |                    | 4,565    |   |                   |   | 3,805    |  
|Deferred revenuescurrent portion                                                                                                                                                   |  |                    | 1,510    |   |                   |   | 3,427    |  
|Notes payablecurrent portion                                                                                                                                                       |  |                    | 3,000    |   |                   |   | 6,182    |  
|                                                                                                                                                                                    |  |                    |          |   |                   |   |          |  
|Total current liabilities                                                                                                                                                           |  |                    | 13,088   |   |                   |   | 17,823   |  
|Long-Term Liabilities:                                                                                                                                                              |  |                    |          |   |                   |   |          |  
|Notes payable, less original issue discount of $1,065 and $1,598 at September 30, 2005 and December 31, 2004,
respectively                                                          |  |                    | 10,126   |   |                   |   | 7,405    |  
|Deferred revenues                                                                                                                                                                   |  |                    | 3,687    |   |                   |   | 3,261    |  
|                                                                                                                                                                                    |  |                    |          |   |                   |   |          |  
|Total Long Term Liabilities                                                                                                                                                         |  |                    | 13,813   |   |                   |   | 10,666   |  
|                                                                                                                                                                                    |  |                    |          |   |                   |   |          |  
|Total Liabilities                                                                                                                                                                   |  |                    | 26,901   |   |                   |   | 28,489   |  
|Stockholders Equity:                                                                                                                                                               |  |                    |          |   |                   |   |          |  
|Common stock, $0.001 par value, 2,000,000,000 shares authorized and 5,280,850 and 5,098,957 shares issued and outstanding at
September 30, 2005 and December 31, 2004, respectively |  |                    | 5        |   |                   |   | 5        |  
|Additional paid-in-capital                                                                                                                                                          |  |                    | 444,463  |   |                   |   | 444,475  |  
|Deferred compensation                                                                                                                                                               |  |                    | (4,034   | ) |                   |   | (4,443   | )
|Deferred rent (warrants)                                                                                                                                                            |  |                    | (1,776   | ) |                   |   | (1,906   | )
|Accumulated deficit                                                                                                                                                                 |  |                    | (390,625 | ) |                   |   | (378,895 | )
|                                                                                                                                                                                    |  |                    |          |   |                   |   |          |  
|Total stockholders equity                                                                                                                                                          |  |                    | 48,033   |   |                   |   | 59,236   |  
|                                                                                                                                                                                    |  |                    |          |   |                   |   |          |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                          |  | $                  | 74,934   |   |                   | $ | 87,725   |  
|                                                                                                                                                                                    |  |                    |          |   |                   |   |          |  



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



17



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##### Table of Contents

FIBERNET TELECOM GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(DOLLARS IN 000S,
EXCEPT PER SHARE AMOUNTS)



|                                                                            |  |                                 |         |   |      |   |         |  
|--------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                            |  | Nine Months Ended September 30, |        
|                                                                            |  | 2005                            |         |   | 2004 |  
|Revenues                                                                    |  | $                               | 24,951  |   |      | $ | 26,379  |  
|Operating expenses:                                                         |  |                                 |         |   |      |   |         |  
|Cost of services (exclusive of items shown separately below)                |  |                                 | 12,202  |   |      |   | 9,999   |  
|Selling, general and administrative expense excluding stock related expense |  |                                 | 12,982  |   |      |   | 11,732  |  
|Stock related expense for selling, general, and administrative matters      |  |                                 | 386     |   |      |   | 389     |  
|Impairment of property, plant and equipment                                 |  |                                 | 2,812   |   |      |   | 9,603   |  
|Impairment of goodwill                                                      |  |                                 |        |   |      |   | 2,309   |  
|Depreciation and amortization                                               |  |                                 | 6,644   |   |      |   | 6,800   |  
|                                                                            |  |                                 |         |   |      |   |         |  
|Total operating expenses                                                    |  |                                 | 35,026  |   |      |   | 40,832  |  
|                                                                            |  |                                 |         |   |      |   |         |  
|Loss from operations                                                        |  |                                 | (10,075 | ) |      |   | (14,453 | )
|Interest income                                                             |  |                                 | 62      |   |      |   | 37      |  
|Interest expense                                                            |  |                                 | (1,717  | ) |      |   | (1,486  | )
|                                                                            |  |                                 |         |   |      |   |         |  
|Net loss                                                                    |  | $                               | (11,730 | ) |      | $ | (15,902 | )
|                                                                            |  |                                 |         |   |      |   |         |  
|Net loss per sharebasic and diluted                                        |  | $                               | (2.28   | ) |      | $ | (3.19   | )
|Weighted average common shares outstandingbasic and diluted                |  |                                 | 5,139   |   |      |   | 4,990   |  



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



18



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##### Table of Contents

FIBERNET TELECOM GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(DOLLARS IN 000S,
EXCEPT PER SHARE AMOUNTS)



|                                                                            |  |                                  |        |   |      |   |        |  
|--------------------------------------------------------------------------- |  | -------------------------------- | ------ | - | ---- | - | ------ | -
|                                                                            |  | Three Months Ended September 30, |       
|                                                                            |  | 2005                             |        |   | 2004 |  
|Revenues                                                                    |  | $                                | 8,634  |   |      | $ | 8,149  |  
|Operating expenses:                                                         |  |                                  |        |   |      |   |        |  
|Cost of services (exclusive of items shown separately below)                |  |                                  | 4,260  |   |      |   | 3,675  |  
|Selling, general and administrative expense excluding stock related expense |  |                                  | 3,976  |   |      |   | 3,872  |  
|Stock related expense for selling, general, and administrative matters      |  |                                  | 128    |   |      |   | 130    |  
|Impairment of property, plant and equipment                                 |  |                                  |       |   |      |   | 129    |  
|Depreciation and amortization                                               |  |                                  | 2,153  |   |      |   | 2,192  |  
|                                                                            |  |                                  |        |   |      |   |        |  
|Total operating expenses                                                    |  |                                  | 10,517 |   |      |   | 9,998  |  
|                                                                            |  |                                  |        |   |      |   |        |  
|Loss from operations                                                        |  |                                  | (1,883 | ) |      |   | (1,849 | )
|Interest income                                                             |  |                                  | 21     |   |      |   | 18     |  
|Interest expense                                                            |  |                                  | (650   | ) |      |   | (462   | )
|                                                                            |  |                                  |        |   |      |   |        |  
|Net loss                                                                    |  | $                                | (2,512 | ) |      | $ | (2,293 | )
|                                                                            |  |                                  |        |   |      |   |        |  
|Net loss per sharebasic and diluted                                        |  | $                                | (0.49  | ) |      | $ | (0.45  | )
|Weighted average common shares outstandingbasic and diluted                |  |                                  | 5,179  |   |      |   | 5,102  |  



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



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##### Table of Contents

FIBERNET TELECOM GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(DOLLARS IN 000S)



|                                                                            |  |                                 |         |   |      |   |         |  
|--------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                            |  | Nine Months Ended September 30, |        
|                                                                            |  | 2005                            |         |   | 2004 |  
|Cash flows from operating activities:                                       |  |                                 |         |   |      |   |         |  
|Net loss                                                                    |  | $                               | (11,730 | ) |      | $ | (15,902 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                 |         |   |      |   |         |  
|Depreciation and amortization                                               |  |                                 | 6,644   |   |      |   | 6,800   |  
|Stock related expense                                                       |  |                                 | 386     |   |      |   | 389     |  
|Deferred rent expense                                                       |  |                                 | 130     |   |      |   |        |  
|Impairment of property, plant and equipment                                 |  |                                 | 2,812   |   |      |   | 9,603   |  
|Impairment of goodwill                                                      |  |                                 |        |   |      |   | 2,309   |  
|Other non-cash items                                                        |  |                                 | 930     |   |      |   | 802     |  
|Change in assets and liabilities:                                           |  |                                 |         |   |      |   |         |  
|Decrease (increase) in accounts receivable                                  |  |                                 | 2,286   |   |      |   | (246    | )
|(Increase) decrease in prepaid expenses                                     |  |                                 | (9      | ) |      |   | 103     |  
|Decrease in deferred charges                                                |  |                                 | 525     |   |      |   |        |  
|Increase in other assets                                                    |  |                                 |        |   |      |   | (1,003  | )
|(Decrease) increase in accounts payable                                     |  |                                 | (348    | ) |      |   | 1,201   |  
|Increase (decrease) in accrued expenses                                     |  |                                 | 760     |   |      |   | (1,124  | )
|(Decrease) increase in deferred revenues                                    |  |                                 | (1,491  | ) |      |   | 942     |  
|                                                                            |  |                                 |         |   |      |   |         |  
|Cash provided by operating activities                                       |  |                                 | 895     |   |      |   | 3,874   |  
|Cash flows from investing activities:                                       |  |                                 |         |   |      |   |         |  
|Decrease in restricted cash                                                 |  |                                 | 1,881   |   |      |   | 463     |  
|Acquisition of Gateway Colocation                                           |  |                                 |        |   |      |   | (382    | )
|Capital expenditures                                                        |  |                                 | (1,934  | ) |      |   | (2,250  | )
|                                                                            |  |                                 |         |   |      |   |         |  
|Cash used in investing activities                                           |  |                                 | (53     | ) |      |   | (2,169  | )
|Cash flows from financing activities:                                       |  |                                 |         |   |      |   |         |  
|Proceeds from debt financings                                               |  |                                 | 1,000   |   |      |   |        |  
|Payment of financing costs of debt financings                               |  |                                 | (427    | ) |      |   | (297    | )
|Payment of financing costs of equity financings                             |  |                                 |        |   |      |   | (520    | )
|Repayment of notes payable                                                  |  |                                 | (1,975  | ) |      |   | (7,225  | )
|Proceeds from issuance of equity securities                                 |  |                                 |        |   |      |   | 8,000   |  
|                                                                            |  |                                 |         |   |      |   |         |  
|Cash used in financing activities                                           |  |                                 | (1,402  | ) |      |   | (42     | )
|                                                                            |  |                                 |         |   |      |   |         |  
|Net (decrease) increase in cash and cash equivalents                        |  |                                 | (560    | ) |      |   | 1,663   |  
|Cash and cash equivalents at beginning of period                            |  |                                 | 2,909   |   |      |   | 3,488   |  
|                                                                            |  |                                 |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                  |  | $                               | 2,349   |   |      | $ | 5,151   |  
|                                                                            |  |                                 |         |   |      |   |         |  
|Supplemental disclosures of cash flow information:                          |  |                                 |         |   |      |   |         |  
|Interest paid                                                               |  | $                               | 871     |   |      | $ | 580     |  
|Non-cash financing activities:                                              |  |                                 |         |   |      |   |         |  
|Common stock issued for acquisition of Gateway Colocation                   |  | $                               |        |   |      | $ | 4,565   |  
|Warrants issued for lease amendments                                        |  |                                 |        |   |      |   | 1,963   |  



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



20



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##### Table of Contents

FIBERNET TELECOM GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(UNAUDITED)



1. ORGANIZATION AND OPERATIONS



FiberNet Telecom Group, Inc. (hereinafter referred to as the Company or FiberNet) is a communications service provider focused on providing
broadband connectivity for data, voice and video transmission on its fiber optic networks in major metropolitan areas. The Company offers an advanced high-bandwidth, fiber-optic solution to support the demand for network capacity in the intra-city
market, or local loop. The Company has established its primary operations in the New York and Los Angeles metropolitan areas.



FiberNet is a holding company that owns all of the outstanding common stock of FiberNet Operations, Inc., a Delaware corporation and an intermediate level holding
company, and 96% of the outstanding membership interests of Devnet L.L.C., a Delaware limited liability company (Devnet). FiberNet Operations, Inc. owns all of the outstanding common stock of FiberNet Telecom, Inc., a Delaware
corporation, and the remaining 4% of Devnet. FiberNet Telecom, Inc. owns all of the outstanding membership interests of Local Fiber, LLC, a New York limited liability company (Local Fiber), and all of the outstanding membership interests
of FiberNet Equal Access, LLC, also a New York limited liability company (Equal Access). The Company conducts its primary business operations through its operating subsidiaries, Devnet, Local Fiber and Equal Access.



The Company has agreements with other entities, including telecommunications license
agreements with building landlords, interconnection agreements with other telecommunications service providers and leases with carrier hotel property owners. FiberNet has also entered into contracts with suppliers for the components of its
telecommunications networks. These contracts and agreements are critical to the Companys ability to execute its business strategy and operating plan.



The Companys operations and ability to grow may be affected by numerous factors, including the state of the telecommunications industry; the difficulty inherent in
operating a company in a rapidly evolving market; its history of operating losses and cash flow deficits; its limited financial resources and uncertainty as to the availability of additional capital to fund its operations on acceptable terms, if at
all; its success in maintaining carrier hotel lease agreements and license agreements with building owners and in obtaining additional agreements; the financial difficulties and instability that some of its customers and vendors are experiencing;
the lack of growth in demand for its services or the failure to manage the growth of its operations; the frequency of service interruptions on its networks and the scalability and reliability of its networks; the potential occurrence of a natural
disaster or act of terrorism that could impact its networks; the potential loss of key personnel, information support systems or key software licenses; the potential for litigation from stockholders, customers, vendors or other third parties;
continued pricing pressure and price competition for its services; the potential development by competitors of competing products and technologies; restrictions imposed on it as a result of its debt; and changes in the regulatory environment.



The Company does not have any off-balance sheet financing arrangements, nor
does it anticipate entering into any.



2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES



Basis of Presentation



The condensed consolidated interim financial statements include the accounts of the Company
and its wholly-owned subsidiaries, FiberNet Operations, Inc., Devnet, FiberNet Telecom, Inc., Equal Access and Local Fiber. The accompanying unaudited condensed consolidated interim financial statements have been prepared in accordance with the
instructions to Form 10-Q and, therefore, do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the
United States of America. However, in the opinion of management, all adjustments consisting of normal recurring accruals necessary for a fair presentation of the operating results have been included in the condensed consolidated interim financial
statements.



These condensed consolidated interim financial statements should
be read in conjunction with the audited consolidated interim financial statements and accompanying notes included in the Companys Annual Report on Form 10-K for the year ended December 31, 2004, as filed with the Securities and Exchange
Commission on March 30, 2005.



All significant inter-company balances and
transactions have been eliminated.



Use of Estimates



The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America



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##### Table of Contents

requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.



Cash and Cash Equivalents



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



Restricted Cash



Restricted cash is invested in highly liquid investments with an original
maturity of three months or less when purchased. The carrying amount approximates fair value because of the short maturity of the instruments. The Company had a restricted cash account for collateral to secure the funding obligations for its
outstanding letters of credit, which are in lieu of cash security deposits for its facilities. As of September 30, 2005, the Company no longer has restricted cash.



Property, Plant and Equipment



Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives
of the assets, once placed in service. The estimated lives are as follows:



|                               |  |                                                          
|------------------------------ |  | ---------------------------------------------------------
|Computer software              |  | 3 Years                                                  
|Computer equipment             |  | 3 Years                                                  
|Office equipment and furniture |  | 5 Years                                                  
|Leasehold improvements         |  | 15 Years or remaining life of lease, whichever is earlier
|Network equipment              |  | 10 Years                                                 
|Network infrastructure         |  | 20 Years                                                 



Maintenance and repairs are expensed
as incurred. Long-term improvements are capitalized as additions to property, plant and equipment.



Impairment of Long-Lived Assets



The
Company reviews the carrying value of long-lived assets for impairment whenever events and circumstances indicate the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual
disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss would be recognized equal to an amount by which the carrying value exceeds the fair value of the assets.



Revenue Recognition



FiberNet generates revenues from selling network capacity and related services to other communications service providers. The Company
recognizes revenues when earned as services are provided throughout the life of each sales order with a customer. The majority of the Companys revenues are generated on a monthly recurring basis under contracts of various lengths, ranging from
one month to fifteen years. Most of the Companys contracts are to provide services for a period of one year. Revenue is recognized over the service contract period for all general services. Deferred revenues consist primarily of payments
received in advance of revenue being earned under the service contracts.



As of
September 30, 2005 and 2004, the Company had one reciprocal agreement. The services provided and obtained through this agreement were priced at fair market value as of the date of the agreement and are included in revenues and cost of services
in the accompanying condensed consolidated statements of operations. The Company recorded revenues from this reciprocal agreement for transport services of approximately $0.4 million for each of the nine months ended September 30, 2005 and
2004. The Company recorded revenues from this reciprocal agreement for transport services of approximately $0.1 million for each of the three months ended September 30, 2005 and 2004. The Company leased colocation facilities under this
agreement. The total amount expensed for services rendered under the reciprocal agreement for each of the nine months ended September 30, 2005 and 2004 was approximately $0.4 million. The total amount expensed for services rendered under the
reciprocal agreement for each of the three months ended September 30, 2005 and 2004 was approximately $0.1 million.



Fair Value of Financial Instruments



The Company estimates that the carrying value of its financial instruments approximates fair value, as all financial instruments are short term in nature or bear interest
at variable rates. The Company estimates that the carrying value of its notes payable approximates fair value.



22



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##### Table of Contents

Goodwill



Cost in excess of net assets of an acquired business, principally goodwill, is accounted for under Statement of Financial Accounting Standards (SFAS)
No. 142, Goodwill and Other Intangible Assets requires goodwill and certain intangible assets no longer be amortized, but instead be reviewed for recoverability. The Company performs its annual impairment test in December. The
Company also tests for impairment if an event occurs that is more likely than not to reduce the fair value of the Company below its book value. The Company had no goodwill as of September 30, 2005.



Deferred Charges



Deferred charges include the cost to access buildings and deferred financing costs. Costs to access buildings are amortized over the term of
the related contracts, which was initially 15 years. Deferred financing costs are amortized over the term of the related credit facility.



Earnings Per Share



Basic earnings per share have been computed using the weighted average number of shares outstanding during the period. Diluted earnings per share are computed by including the dilutive effect of common stock that
would be issued assuming conversion of stock options, warrants and other dilutive securities. Dilutive options, warrants and other securities did not have an effect on the computation of diluted earnings per share for the nine months and the three
months ended September 30, 2005 and September 30, 2004, as they were anti-dilutive due to the fact that the Company was in a loss position for the respective periods.



On May 25, 2005, the Company completed its 1-for 10 reverse stock split, which was approved by the stockholders at the Companys
annual meeting on May 24, 2005. As a result of the reverse stock split, on June 9, 2005, NASDAQ notified the Company that it had regained compliance with Marketplace Rule 4310 (c)(4). The earning per share information and all share amounts
as presented in these financials statements have been adjusted to reflect the reverse stock split.



Concentration of Credit Risk



The
Company may have concentration of credit risk among its customer base. The Company performs ongoing credit evaluations of its customers financial conditions. As of September 30, 2005, one customer accounted for 15.0% of the Companys
total accounts receivable. As of December 31, 2004, no customer accounted for over 10% of the Companys total accounts receivable.



For the nine months ended September 30, 2005 and 2004, there was no individual customer that accounted for over 10% of the Companys total revenue, excluding
revenues recognized in connection with the Companys arbitration award during the nine months ended September 30, 2004. For the three months ended September 30, 2005 and 2004, there was no individual customer that accounted for over
10% of the Companys total revenue.



The Company continuously monitors
collections and payments from its customers and maintains allowances for doubtful accounts based upon its historical experience and any specific customer collection issues that are identified. While such credit losses have historically been within
the Companys expectations, there can be no assurance that the Company will continue to experience the same level of credit losses that it has in the past. A significant change in the liquidity or financial position of any one of these
customers or a further deterioration in the economic environment or telecommunications industry, in general, could have a material adverse impact on the collectability of the Companys accounts receivable and its future operating results,
including a reduction in future revenues and additional allowances for doubtful accounts.



As of September 30, 2005, the Company had an allowance for doubtful accounts of $0.5 million. During the nine months ended September 30, 2005, the Company wrote off approximately $0.2 million in the
allowance for doubtful accounts, and there were no charges to bad debt expense. As of September 30, 2004, the Company had an allowance for doubtful accounts of $0.7 million. During the nine months ended September 30, 2004, the Company
wrote off approximately $28,000 in the allowance for doubtful accounts and recovered approximately $24,000 due to the sale of securities received as a result of the bankruptcy of a former customer, and there were no charges to bad debt expense.



Equity Incentive Plan



The Company accounts for stock-based employee compensation arrangements in accordance with
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), and complies with the disclosure provisions of SFAS No. 123, Accounting
for Stock-Based Compensation (SFAS No. 123) as amended by SFAS No. 148. Under APB No. 25, compensation expense is based on the difference, if any, on the date of grant, between the fair value of the Companys
stock and the exercise price. The Company accounts for stock options issued to non-employees in accordance with the provisions of SFAS No. 123. The resulting expense is charged against operations ratably over the vesting period of the options.



23



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##### Table of Contents

During the nine months ended September 30, 2005, the Company granted 2,500 shares of restricted stock with a
weighted average price of $2.37 and no stock options to employees. During the nine months ended September 30, 2004, the Company granted 14,596 shares of restricted stock to employees with a weighted average price of $17.00 per share and 1,250
stock options with a weighted average exercise price of $14.60 per share. The Company issued its options in 2004 at fair market value.



During the nine months ended September 30, 2005, 3,098 shares of restricted stock were returned to the Company as the result of employee terminations prior to
vesting, and during the nine months ended September 30, 2004, 7,880 shares of restricted stock were returned. All shares of restricted stock vest on the tenth anniversary of the grant date, and the stock options vest in three equal annual
installments, commencing on the issuance date, subject to the terms and conditions of the Equity Incentive Plan. In accordance with FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation
(FIN No. 44), the deferred compensation is being amortized on a straight-line basis over the vesting period.



The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to
stock-based employee compensation:



|                                                                                                                             |  |                                |         |   |                                 |   |         |      |  |   |        |   |  |   |        |  
|---------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ------------------------------- | - | ------- | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                                                             |  | Nine Months EndedSeptember 30, |         |   | Three Months EndedSeptember 30, |  
|(in thousands, except per share data) (unaudited)                                                                            |  | 2005                           |         |   | 2004                            |   |         | 2005 |  |   | 2004   |  
|Net loss, as reported                                                                                                        |  | $                              | (11,730 | ) |                                 | $ | (15,902 | )    |  | $ | (2,512 | ) |  | $ | (2,293 | )
|Deduct: Total stock-based employee compensation expense determined under fair value based method, net of related tax effects |  |                                | (111    | ) |                                 |   | (404    | )    |  |   | (37    | ) |  |   | (134   | )
|                                                                                                                             |  |                                |         |   |                                 |   |         |      |  |   |        |   |  |   |        |  
|Pro forma net loss                                                                                                           |  | $                              | (11,841 | ) |                                 | $ | (16,306 | )    |  | $ | (2,549 | ) |  | $ | (2,427 | )
|Net loss per share:                                                                                                          |  |                                |         |   |                                 |   |         |      |  |   |        |   |  |   |        |  
|As reported: Basic and diluted                                                                                               |  | $                              | (2.28   | ) |                                 | $ | (3.19   | )    |  | $ | (0.49  | ) |  | $ | (0.45  | )
|Pro forma: Basic and diluted                                                                                                 |  | $                              | (2.30   | ) |                                 | $ | (3.27   | )    |  | $ | (0.49  | ) |  | $ | (0.48  | )



The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in September 30, 2005 and 2004: risk-free interest rates of 4.29%, expected dividend yields of 0%, expected life of nine
years to expiration and expected volatility of 295%.



Accounting for Income
Taxes



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



Accounting for Derivative
Instruments



The Company accounts for derivative instruments in accordance
with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No.133), as amended. SFAS No. 133 establishes standards of accounting and reporting for derivative instruments and hedging
activities, and requires that all derivatives be recognized on the balance sheet at fair value. Changes in the fair value of derivatives that do not meet the hedge accounting criteria are reported in earnings. The Company did not have any derivative
contracts during the nine months ended September 30, 2005 or in the year ended December 31, 2004.



Reclassifications



The Company
corrected the classification of restricted cash in 2004 that had been previously presented as an operating activity to now be reflected as an investing activity in the condensed consolidated statement of cash flows to be consistent with the current
years presentation. As a result of this correction in classification, cash flows provided by operating activities previously reported as $4,337 were reduced to $ 3,874, with a corresponding decrease in cash used in investing activities from
$2,632 to $2,169 in the condensed consolidated statement of cash flows for the nine months ended September 30, 2004.



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Segment Reporting



The Company is a single segment operating company providing telecommunications services. Revenues were generated by providing transport, colocation and communications
access management services to customers, as summarized below.



|                          |  |                                              |        |                                               |   |      
|------------------------- |  | -------------------------------------------- | ------ | --------------------------------------------- | - | -----
|                          |  | For the nine months ended September 30, 2005 |        | For the three months ended September 30, 2005
|On-net transport revenue  |  | $                                            | 14,916 |                                               | $ | 5,176
|Off-net transport revenue |  |                                              | 3,933  |                                               |   | 1,305
|Colocation revenue        |  |                                              | 5,417  |                                               |   | 1,949
|Access revenue            |  |                                              | 685    |                                               |   | 204  
|                          |  |                                              |        |                                               |   |      
|Total Revenue             |  | $                                            | 24,951 |                                               | $ | 8,634
|                          |  |                                              |        |                                               |   |      



Recent Accounting Pronouncements



In December 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 153, Exchanges of Nonmonetary Assets, which eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary
assets that do not have commercial substance. SFAS No. 153 will be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not believe the adoption of SFAS No. 153 will
have a material impact on its condensed consolidated interim financial statements.



In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which establishes standards for transactions in which an entity exchanges its equity instruments for goods or services. This standard requires a public
entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. This eliminates the exception to account for such awards using the intrinsic method previously
allowable under APB Opinion No. 25. On April 14, 2005, the compliance date for SFAS 123(R) was extended. The Company will be required to comply with SFAS No. 123(R) for the three months ended March 31, 2006. The Company is
currently evaluating the impact that the adoption of SFAS No. 123(R) will have on its condensed consolidated interim financial statements.



In March 2005, the Securities and Exchange Commission (the SEC) issued Staff Accounting Bulletin (SAB) No. 107, Share-Based
Payment, which provides interpretive guidance related to the interaction between SFAS No. 123(R) and certain SEC rules and regulations, as well as provides the SEC staffs views regarding the valuation of share-based payment
arrangements. The Company is currently assessing the impact of SAB No. 107 on our implementation and adoption of SFAS 123(R).



In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. SFAS 154 provides guidance on the accounting for and reporting of
accounting changes and error corrections. It requires retrospective application to the prior periods financial statements of voluntary changes in accounting principle and changes required by an accounting pronouncement in the event the
pronouncement does not include specific transition provisions. The provision of this Statement shall be effective for accounting changes made in fiscal years beginning after December 15, 2005.



3. PROPERTY, PLANT AND EQUIPMENT



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



|                                     |  |                    |         |   |                   |   |         |  
|------------------------------------ |  | ------------------ | ------- | - | ----------------- | - | ------- | -
|                                     |  | September 30, 2005 |         |   | December 31, 2004 |  
|                                     |  | (unaudited)        |         |   |                   |  
|Computer software                    |  | $                  | 278     |   |                   | $ | 229     |  
|Computer equipment                   |  |                    | 493     |   |                   |   | 418     |  
|Leasehold improvements               |  |                    | 30      |   |                   |   | 30      |  
|Office equipment and furniture       |  |                    | 146     |   |                   |   | 146     |  
|Network equipment and infrastructure |  |                    | 104,818 |   |                   |   | 106,675 |  
|                                     |  |                    |         |   |                   |   |         |  
|Subtotal                             |  |                    | 105,765 |   |                   |   | 107,498 |  
|Accumulated depreciation             |  |                    | (38,353 | ) |                   |   | (33,375 | )
|                                     |  |                    |         |   |                   |   |         |  
|Property, plant and equipment, net   |  | $                  | 67,412  |   |                   | $ | 74,123  |  
|                                     |  |                    |         |   |                   |   |         |  



Depreciation expense on property,
plant and equipment was $6.5 million and $6.7 million for the nine months ended September 30, 2005 and 2004, respectively. Depreciation expense on property, plant and equipment was $2.1 million and $2.2 million for the three months ended
September 30, 2005 and 2004, respectively.



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4. ACQUISITION OF GATEWAY COLOCATION



On January 30, 2004, the Company acquired the operating assets of gateway.realty.new jersey.llc, also known as Gateway Colocation. The
purchase agreement includes an earn-out payment based upon the achievement of certain financial objectives with respect to the revenues generated by the facility. More specifically, the earn-out payment will be based on the
gross revenues, on an annualized basis, for a particular month designated by Gateway Colocation during the twenty-four month period immediately subsequent to closing. The earn-out payment, if payable, will be paid in shares of our common
stock. However, the issuance of such additional shares, in the aggregate with the shares of common stock issued on January 30, 2004, will not exceed 19.9% of the issued and outstanding shares of our common stock as of the closing date without
first receiving stockholder approval. The Company filed a registration statement with the Securities and Exchange Commission covering the resale of the shares issued at closing and have agreed to file a registration statement with respect to the
resale of shares issued, if any, pursuant to the terms of the earn-out provision. As of September 30, 2005, there were no additional shares required under the earn-out provision.



5. TERMINATION OF CONSOLIDATED EDISON COMMUNICATIONS STOCK PURCHASE AGREEMENT



As previously disclosed in our 2004 Form 10-K, on December 10, 2004,
the Company entered into a stock purchase agreement with Consolidated Edison, Inc. (the Con Ed Agreement) for the purchase of all of the issued and outstanding shares of Consolidated Edison Communications Holding Company, Inc.
(CEC), a wholly-owned subsidiary, for $37.0 million. In order to finance the acquisition of CEC, the Company entered into a securities purchase agreement (as amended, the Investor Purchase Agreement), with certain investors
for the sale of up to $37.0 million in shares of a newly issued convertible preferred stock and common stock warrants.



In connection with the execution of both the Con Ed Agreement and the Investor Purchase Agreement described above, the Company entered into certain transactions with
Deutsche Bank AG New York Branch, Wachovia Investors, Inc. and IBM Credit LLC, the lenders under its senior secured credit facility (the Lenders). The Company, together with its wholly-owned subsidiaries, FiberNet Operations, Inc. and
Devnet L.L.C., executed with the Lenders a thirteenth amendment to the Amended and Restated Credit Agreement, dated as of February 9, 2001, as amended, pursuant to which, among other things, the Lenders consented to the above-referenced
transactions, however, as a result of the termination described below, the thirteenth amendment was also terminated pursuant to its terms.



On May 4, 2005, the Company entered into a Mutual Termination and Release Agreement (the Termination Agreement), with Consolidated Edison, Inc., which
terminated the Con Ed Agreement. The Con Ed Agreement was terminated because of the parties inability to resolve certain contractual issues.



As a result of the termination of the Con Ed Agreement, on May 4, 2005, the Investor Purchase Agreement, which the Company entered into to finance the acquisition of
CEC, terminated pursuant to its terms.



The Termination Agreement contains
mutual releases of liability. The Company does not expect to incur any early termination penalties in connection with the termination of the Con Ed Agreement or the Investor Purchase Agreement. As a result of the termination, the Company expensed a
total of $1.1 million of transaction costs related to the Con Ed Agreement and the Investor Purchase Agreement. The condensed consolidated interim financial statements for the nine months ended September 30, 2005 reflect this adjustment in
selling, general and administrative expenses.



6. SIGNIFICANT EVENTS



During the nine months ended September 30, 2005, the Company
recorded an impairment of $2.8 million to reflect its revised business plan and forecast of revenues due to the early termination of a significant access agreement as well other renegotiated building access service orders with other customers, which
significantly reduced its future revenues from access services.



On
June 21, 2005, the Company entered into the fifteenth amendment, which extended the date by which the Company must issue securities in an amount sufficient to result in net proceeds of at least $6.5 million pursuant to a purchase agreement in
form and substance satisfactory to the Administrative Agent and the Lenders, from June 23, 2005 to July 15, 2005. On July 11, 2005, the Company entered into the sixteenth amendment, which extended the deadline from July 15, 2005
to July 22, 2005. On July 22, 2005, the Company entered into the seventeenth amendment, which further extended the deadline from July 22, 2005 to August 23, 2005.



In connection with the execution of the seventeenth amendment on July 22, 2005, the Company paid an amendment fee to the Lenders in an
amount equal to fifty basis points of the total commitments of the Lenders under the credit facility, approximately $0.1 million. On August 5, 2005, the Company paid an extension fee to the Lenders in an amount equal to one hundred basis points
of the commitments to the Lenders, approximately $0.3 million.



On
August 22, 2005, the Company entered into the eighteenth amendment, which waived the requirement that it issue securities in an amount sufficient to result in net proceeds of at least $6.5 million. The Lenders have also agreed to extend the
amortization schedule under the Credit Agreement such that the Company has until August 2006 to prepay $3.0 million under the Credit Agreement, with the balance due in February 2007 and no other principal payments required. As a condition to the
Lenders entering into the eighteenth



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amendment, the Company agreed to reduce the exercise price of certain previously issued outstanding warrants held by the Lenders to purchase 49,623 shares of
common stock from $36.00 per share to $0.001 per share, which were subsequently exercised in September 2005 by the Lenders. The Company compared the value of the warrants prior to repricing with the value of the warrants after the repricing using
the Black-Scholes option pricing model and determined that there was no difference in value. Therefore, the repricing of warrants had no impact on its condensed consolidated interim financial statements. Additionally, the Amendment changes the
interest rate on the loans to a fixed rate of 8.5%, which rate will increase by 25 basis points on a quarterly basis beginning January 1, 2006 until the date of maturity. The Company has also agreed to permit a representative of the Lenders to
attend and observe our Board of Directors meetings. The Amendment requires that the Company deliver to the Lenders a strategic plan on or before November 20, 2005 and a business plan on or before March 31, 2006. In addition, the Amendment
provides that Jon A. DeLuca, the Companys President and Chief Executive Officer, is deemed a key employee under the Credit Agreement, such that his failure to serve in those offices would be considered an event of default.



In conjunction with the eighteenth amendment, the Company expensed
approximately $0.2 million in professional fees under the guidelines set forth in Emerging Issues Task Force Issue (EITF) 96-19, Debtors Accounting for a Modification or Exchange of Debt Instruments. This charge was
required as the recent amendment modified the debt in terms of its interest rate and amortization schedule.



There can be no assurance that the Company will be able to raise additional capital or obtain additional amendments to its Credit Agreement. If the Company is able to raise additional capital, there can be no
assurance that such issuance will be in an amount sufficient to satisfy the Companys obligations under its Credit Agreement, or will be on terms that are satisfactory to the Lenders.



7. SUBSEQUENT EVENTS



On October 31, 2005, the Company amended and restated its 2005 Board of Directors Compensation Plan (the Plan). The
amendment permits either the Chief Executive Officer or Chief Financial Officer to engage directors in providing consulting services that are outside of the scope of their normal board duties. Directors will be compensated with a $1,000 per diem fee
(pro rated as necessary). The terms of the Plan expressly prohibit any such services or compensation from superseding satisfaction of the board independence requirements promulgated by the Securities and Exchange Commission and NASDAQ.



On October 31, 2005, the Consulting Agreement dated as of February 1, 2005
between Michael S. Liss, Chairman of the Board of Directors, and the Company was terminated by mutual agreement of the parties. The Company did not incur any early termination penalties in connection with this event.



On October 31, 2005, the Consulting Agreement dated as of June 12, 2003 between Richard E.
Sayers, Vice Chairman of the Board of Directors, and the Company was terminated by mutual agreement of the parties. The Company did not incur any early termination penalties in connection with this event.



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